UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2002
---------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------
Commission File Number: 0-22992
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THE SHAW GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1106167
- ------------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
8545 United Plaza Boulevard, Baton Rouge, Louisiana 70809
- ---------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(225) 932-2500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date, is as follows:
Common stock, no par value, 40,152,191 shares outstanding as
of April 8, 2002.
FORM 10-Q
TABLE OF CONTENTS
<Table>
Part I - Financial Information
Item 1. - Financial Statements
Condensed Consolidated Balance Sheets - February 28, 2002
and August 31, 2001 3-4
Condensed Consolidated Statements of Income - For the Three
Months and Six Months Ended February 28, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows - For the Six
Months Ended February 28, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-30
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 31
Part II - Other Information
Item 2. - Changes in Securities 31
Item 4. - Submission of Matters to a Vote of Security Holders 31
Item 6. - Exhibits and Reports on Form 8-K 31-32
Signature Page 33
Exhibit Index 34
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<Table>
<Caption>
February 28, August 31,
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 389,276 $ 443,304
Escrowed cash 96,500 --
Marketable securities, held to maturity 15,925 45,630
Accounts receivable, including retainage, net 325,736 341,833
Accounts receivable from unconsolidated entity 7,936 4,848
Inventories 100,359 91,155
Costs and estimated earnings in excess of billings
on uncompleted contracts 143,477 95,012
Prepaid expenses 16,316 10,660
Deferred income taxes 34,028 54,351
Assets held for sale 3,478 3,491
DIP loan 44,000 --
Other current assets 5,833 5,757
------------ ------------
Total current assets 1,182,864 1,096,041
Investment in and advances to unconsolidated entities, joint ventures
and limited partnerships 25,549 24,314
Investment in securities available for sale 10,397 10,490
Property and equipment, less accumulated depreciation
of $71,922 at February 28, 2002 and $61,959 at
August 31, 2001, respectively 158,459 135,202
Goodwill 370,364 368,872
Other assets 74,462 66,935
------------ ------------
$ 1,822,095 $ 1,701,854
============ ============
</Table>
(Continued)
The accompanying notes are an integral part of these statements.
3
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<Table>
<Caption>
February 28, August 31,
2002 2001
------------ ------------
Current liabilities:
Accounts payable $ 273,870 $ 181,936
Accrued liabilities 72,864 81,660
Current maturities of long-term debt 391 2,365
Short-term revolving lines of credit 9,179 3,909
Current portion of obligations under capital leases 2,318 2,313
Deferred revenue - prebilled 13,067 7,976
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 275,409 244,131
Accrued contract losses and reserves 34,680 50,707
------------ ------------
Total current liabilities 681,778 574,997
Long-term debt, less current maturities 515,307 509,684
Obligations under capital leases, less current obligations 1,551 3,183
Deferred income taxes 8,051 8,247
Other liabilities 3,381 7,350
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, no shares issued and outstanding -- --
Common stock, no par value,
41,263,591 and 41,012,292 shares outstanding, respectively 440,357 437,015
Retained earnings 207,870 167,578
Accumulated other comprehensive income (loss) (9,069) (6,200)
Treasury stock, 1,111,400 shares at February 28, 2002 (27,131) --
------------ ------------
Total shareholders' equity 612,027 598,393
------------ ------------
$ 1,822,095 $ 1,701,854
============ ============
</Table>
The accompanying notes are an integral part of these statements.
4
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income:
Sales $ 566,227 $ 340,283 $ 1,019,836 $ 759,040
Cost of sales 498,485 286,765 889,384 641,454
------------ ------------ ------------ ------------
Gross profit 67,742 53,518 130,452 117,586
General and administrative expenses 33,026 29,451 63,934 63,653
Goodwill amortization -- 4,040 -- 7,876
------------ ------------ ------------ ------------
Total general and administrative expenses 33,026 33,491 63,934 71,529
Operating income 34,716 20,027 66,518 46,057
Interest expense (5,431) (1,169) (11,236) (7,801)
Interest income 2,399 467 5,421 1,058
Other income, net 77 111 444 170
------------ ------------ ------------ ------------
(2,955) (591) (5,371) (6,573)
Income before income taxes, earnings (losses) from
unconsolidated entities, and extraordinary item 31,761 19,436 61,147 39,484
Provision for income taxes 11,434 7,518 22,019 15,319
------------ ------------ ------------ ------------
Income before earnings (losses) from unconsolidated entities
and extraordinary item 20,327 11,918 39,128 24,165
Earnings (losses) from unconsolidated entities, net of taxes 1,013 (98) 1,164 (184)
------------ ------------ ------------ ------------
Income before extraordinary item 21,340 11,820 40,292 23,981
Extraordinary item for early extinguishment of debt, net of taxes -- (203) -- (203)
------------ ------------ ------------ ------------
Net income $ 21,340 $ 11,617 40,292 $ 23,778
============ ============ ============ ============
Net income per common share:
Basic income per common share $ .53 $ 0.29 $ .99 $ 0.61
============ ============ ============ ============
Diluted income per common share $ .51 $ 0.28 $ .95 $ 0.58
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
5
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<Table>
<Caption>
Six Months Ended
February 28,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 40,292 $ 23,778
Deferred income taxes 20,323 14,706
Depreciation and amortization 12,185 17,854
Utilization of gross margin reserves (14,055) (47,244)
Accretion of interest on discounted convertible long-term debt 5,724 --
Amortization of deferred debt issue costs 4,433 947
Other (1,176) (540)
Changes in assets and liabilities (excluding cash and
those relating to investing and financing activities) 61,277 (46,961)
------------ ------------
Net cash provided by (used in) operating activities 129,003 (37,460)
Cash flows from investing activities:
Maturities of marketable securities held to maturity 71,898 --
Purchases of marketable securities held to maturity (42,193) --
Investment in DIP loan - IT Group (44,000) --
Purchases of property and equipment (34,921) (7,670)
Purchase of real estate option (12,183) --
Investment in joint ventures and unconsolidated subsidiaries 74 (4,021)
Acquisitions, return of funds -- 22,750
Proceeds from sale of assets 102 119,152
------------ ------------
Net cash provided by (used in) investing activities (61,223) 130,211
Cash flows from financing activities:
Purchase of treasury stock (27,131) --
Net borrowings (repayments) on revolving credit agreements 5,437 (219,850)
Proceeds from issuance of debt -- 1,407
Repayment of debt and leases (3,701) (31,327)
Issuance of common stock 1,045 147,693
Deferred credit costs (190) --
------------ ------------
Net cash used in financing activities (24,540) (102,077)
Effect of exchange rate changes on cash (768) (7)
------------ ------------
Net increase (decrease) in cash and cash equivalents 42,472 (9,333)
Cash and cash equivalents - beginning of period 443,304 21,768
------------ ------------
Cash and cash equivalents - end of period $ 485,776 $ 12,435
============ ============
Supplemental disclosure:
Noncash investing and financing activities:
Common stock issued as additional consideration for PPM acquisition
completed in fiscal 2000 $ 1,971 $ --
============ ============
Investment in securities available for sale acquired in lieu of
interest payment $ 273 $ 566
============ ============
Payment of liability with securities available for sale $ -- $ 7,000
============ ============
Property and equipment acquired through issuance of debt $ -- $ 2,422
============ ============
</Table>
The accompanying notes are an integral part of these statements.
6
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Information
The accompanying condensed consolidated financial statements and financial
information included herein have been prepared pursuant to the interim reporting
requirements of Form 10-Q. Consequently, certain information and note
disclosures normally included in financial statements prepared annually in
accordance with generally accepted accounting principles have been condensed or
omitted. Readers of this report should refer to the consolidated financial
statements and the notes thereto included in the Annual Report on Form 10-K for
the fiscal year ended August 31, 2001 of The Shaw Group Inc.
The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") for the three-month and
six-month periods ended February 28, 2002 and 2001 and as of February 28, 2002
and August 31, 2001 included herein is unaudited. However, the Company's
management believes it has made all adjustments (consisting of normal recurring
adjustments) which are necessary to fairly present the results of operations for
such periods. Results of operations for the interim periods are not necessarily
indicative of results of operations that will be realized for the fiscal year
ending August 31, 2002.
The Company's foreign subsidiaries maintain their accounting records in their
local currency (primarily British pounds, Australian and Canadian dollars,
Venezuelan Bolivars, the Euro, and prior to January 1, 2002, Dutch guilders).
All of the assets and liabilities of these subsidiaries (including long-term
assets, such as goodwill) are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income (loss)," a component of shareholders' equity, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52 - "Foreign Currency
Translation" and SFAS No. 130 - "Reporting Comprehensive Income." Foreign
currency transaction gains or losses are credited or charged to income.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
Note 2 - Capital Stock Transactions
In September 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase shares of its no par value common stock
("Common Stock"), depending on market conditions, up to a limit of $100,000,000.
As of April 11, 2002, the Company had purchased 1,111,400 shares at a cost of
approximately $27,131,000 under this program.
Note 3 - Escrowed Cash for Performance Bond
In connection with a performance bond on a foreign project, the Company agreed
to deposit in escrow with the issuer of the bond primarily advance payments
received from the Company's customer. During the three months ended February 28,
2002, the Company deposited $96,500,000 into escrow pursuant to this agreement.
This deposit is recorded as escrowed cash. As a result of the performance bond,
the Company's customer agreed not to withhold retentions on the Company's
billings. The Company believes that based on current contract terms and scope,
its initial $96,5000,000 deposit represents its maximum escrow requirement for
the project. The Company expects that the maximum balance will be retained in
escrow until early to mid calendar 2003, at which time escrow funds will be
released to the Company as the Company completes certain contract milestones. A
final escrow amount of approximately $18,000,000 will be released to the Company
upon initial contract acceptance as defined in the agreement, which is currently
projected to occur in calendar 2005. The bonding company (or "surety") may draw
7
on the escrow funds only to secure the surety from a defined loss. The escrowed
funds are invested in short-term, high quality investments and investment income
is remitted to the Company on a quarterly basis. The Company may request the
surety to allow the Company to substitute a letter of credit for all or part of
the cash escrow requirements.
Note 4 - Acquisitions
Acquisitions completed by the Company have generally been accounted for under
the purchase method of accounting. Under the purchase method, the cost of each
acquired operation is allocated to the assets acquired and liabilities assumed
based on their estimated fair values. These estimates are revised during the
allocation period as necessary when, and if, information becomes available to
further define and quantify the value of the assets acquired and liabilities
assumed. The allocation period ("allocation period") does not exceed beyond one
year from the date of the acquisition. To the extent additional information to
refine the original allocation becomes available during the allocation period,
the allocation of the purchase price is adjusted. Likewise, to the extent such
information becomes available after the allocation period, such items are
included in the Company's operating results in the period that the settlement
occurs or information is available to adjust the original allocation to a better
estimate. These future adjustments, if any, that may arise from these
acquisitions may materially favorably or unfavorably impact the Company's future
consolidated financial position or results of operations. The Company will
account for future business combinations under SFAS No. 141 - "Business
Combinations" (see Note 11 of Notes to Condensed Consolidated Financial
Statements).
In connection with potential acquisitions, the Company incurs and capitalizes
certain transaction costs, which include legal, accounting, consulting and other
direct costs. When an acquisition is completed, these costs are capitalized as
part of the acquisition price. The Company routinely evaluates capitalized
transaction costs and expenses those costs related to acquisitions that are not
likely to occur. Indirect acquisition costs, such as salaries, corporate
overhead and other corporate services are expensed as incurred.
The operating results of the acquisitions accounted for as a purchase are
included in the Company's condensed consolidated financial statements from the
applicable date of the transaction.
Stone & Webster Acquisition
On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster, Incorporated ("Stone & Webster"), a global provider
of engineering, procurement, construction, consulting and environmental services
to the power, process, environmental and infrastructure markets. The acquisition
was concluded as part of a proceeding under Chapter 11 of the Bankruptcy Code
for Stone & Webster. This transaction was accounted for under the purchase
method of accounting.
The Company believes that, pursuant to the terms of the Stone & Webster
acquisition agreement, it assumed only certain specified liabilities, which the
Company has estimated to be approximately $740,000,000. The Company believes
that liabilities excluded from this acquisition include liabilities associated
with certain contracts in progress, completed contracts, claims or litigation
that relate to acts or events occurring prior to the acquisition date, and
certain employee benefit obligations, including Stone & Webster's U.S. defined
benefit plan (collectively, the excluded items). The Company, however, cannot
provide assurance that it has no exposure with respect to the excluded items
because, among other things, the bankruptcy court has not finalized its
validation of claims filed with the court. The final amount of assumed
liabilities may change as a result of the validation of claims process; however,
the Company believes, based on its review of claims filed, that any such
adjustment to the assumed liabilities and future operating results will not be
material.
8
The Company acquired a large number of contracts with either inherent losses or
lower than market rate margins primarily because Stone & Webster's previous
financial difficulties had negatively affected the negotiation and execution of
the contracts. These contracts were adjusted to their estimated fair value as of
acquisition date (July 14, 2000) and a liability (gross margin reserve) of
$121,815,000 was established, including adjustments of $38,118,000 recorded
during the allocation period. The amount of the accrued future cash losses on
assumed contracts with inherent losses (contract loss reserve) was estimated to
be approximately $41,700,000 (including approximately $5,400,000 of allocation
period adjustments), and a liability of such amount was established. The
adjustments to these reserves during the allocation period resulted from a more
accurate determination of the actual contract status at acquisition date.
Commencing with the initial recording of these reserves in the year ended August
31, 2000, the reserves have been reduced as work is performed on the contracts
and such reduction in the reserve balances results in a reduction in cost of
sales and a corresponding increase in gross profit. The reserve adjustments, as
well as the decreases in the cost of sales for the periods indicated, are as
follows (in thousands):
<Table>
<Caption>
NOVEMBER 30, FEBRUARY 28,
2001 RESERVE COST OF SALES 2002
Three months ended February 28, 2002 BALANCE INCREASE (DECREASE) BALANCE
- ------------------------------------ ------------ ------------ ------------- ------------
Gross margin reserves $ 35,743 $ -- $ (5,997) $ 29,746
Contract loss reserves 5,703 -- (769) 4,934
------------ ------------ ------------ ------------
Total $ 41,446 $ -- $ (6,766) $ 34,680
============ ============ ============ ============
</Table>
<Table>
<Caption>
AUGUST 31, FEBRUARY 28,
2001 RESERVE COST OF SALES 2002
Six months ended February 28, 2002 BALANCE INCREASE (DECREASE) BALANCE
- ---------------------------------- ---------- ------------ ------------- ------------
Gross margin reserves $ 43,801 $ -- $ (14,055) $ 29,746
Contract loss reserves 6,906 -- (1,972) 4,934
------------ ------------ ------------ ------------
Total $ 50,707 $ -- $ (16,027) $ 34,680
============ ============ ============ ============
</Table>
<Table>
<Caption>
NOVEMBER 30, FEBRUARY 28,
2000 RESERVE COST OF SALES 2001
Three months ended February 28, 2001 BALANCE INCREASE (DECREASE) BALANCE
- ------------------------------------ ------------ ------------ ------------- ------------
Gross margin reserves $ 47,390 $ 25,487 $ (18,870) $ 54,007
Contract loss reserves 25,561 18,497 (7,924) 36,134
------------ ------------ ------------ ------------
Total $ 72,951 $ 43,984 $ (26,794) $ 90,141
============ ============ ============ ============
</Table>
<Table>
<Caption>
AUGUST 31, FEBRUARY 28,
2000 RESERVE COST OF SALES 2001
Six months ended February 28, 2001 BALANCE INCREASE (DECREASE) BALANCE
- ---------------------------------- ------------ ------------ ------------- ------------
Gross margin reserves $ 75,764 $ 25,487 $ (47,244) $ 54,007
Contract loss reserves 30,725 26,310 (20,901) 36,134
------------ ------------ ------------ ------------
Total $ 106,489 $ 51,797 $ (68,145) $ 90,141
============ ============ ============ ============
</Table>
The increases to the contract loss reserves and gross margin reserves during the
three and six month periods ended February 28, 2001 were recorded during the
allocation period.
The Company acquired several contracts under which Stone & Webster was
contractually obligated to pay liquidated damages or for which the scheduled
project completion date was beyond the contract completion date agreed to with
the customer, which would require the Company to pay liquidated damages upon
completion of the project. In addition, several acquired contracts contain
warranty provisions requiring achievement of acceptance and performance testing
levels or payment of filed liens or claims on the project. The Company recorded
reserves of approximately $42,000,000 at acquisition date related to these
contracts. During the three months ended
9
February 28, 2002, the Company paid approximately $1,000,000 with respect to
these liabilities, representing the Company's first payment against these
amounts. Additional payments are anticipated toward the completion of the
contracts or during the warranty periods. The ultimate amount of these payments
may vary depending upon the actual completion date compared to the current
scheduled completion date, the amount needed to resolve the performance
requirements, and final negotiations with the customers or lien holders. To the
extent the final settlement or payment amount is different than the reserve
established, the difference will be reflected in results of operations in the
period the difference is known.
PPM Acquisition
In connection with its acquisition of PPM Contractors, Inc. in July 2000, the
Company determined that PPM achieved certain target sales levels as of December
31, 2001, and as a result, the Company owed additional consideration to PPM of
approximately $2,000,000 pursuant to the terms of the acquisition agreement.
Accordingly, the Company issued 83,859 shares of Common Stock to cover its
obligation under the agreement. The entire cost of approximately $2,000,000
associated with the issuance of these shares is recorded as of February 28, 2002
as an increase to goodwill for the PPM acquisition.
Note 5 - Inventories
The major components of inventories consist of the following (in thousands) as
of the dates indicated:
<Table>
<Caption>
February 28, 2002 August 31, 2001
------------------------------------------ ------------------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Finished Goods $ 34,007 $ -- $ 34,007 $ 33,126 $ -- $ 33,126
Raw Materials 2,425 57,623 60,048 2,380 46,511 48,891
Work In Process 706 5,598 6,304 948 8,190 9,138
------------ ------------ ------------ ------------ ------------ ------------
$ 37,138 $ 63,221 $ 100,359 $ 36,454 $ 54,701 $ 91,155
============ ============ ============ ============ ============ ============
</Table>
Note 6 - Investment in Unconsolidated Entities
During the three and six months ended February 28, 2002, the Company recognized
no earnings from Shaw-Nass Middle East, W.L.L., the Company's Bahrain joint
venture ("Shaw-Nass"). As of February 28, 2002 and August 31, 2001, the Company
had outstanding receivables from Shaw-Nass totaling $6,104,000 and $6,178,000,
respectively. These receivables relate primarily to inventory and equipment sold
to Shaw-Nass.
During the three and six months ended February 28, 2002, the Company recognized
earnings of approximately $1,013,000 and $1,164,000, respectively, from the
operations of its EntergyShaw joint venture. The Company had outstanding trade
accounts receivable from EntergyShaw totaling approximately $7,936,000 and
$4,848,000 at February 28, 2002 and August 31, 2001, respectively.
As is common in the engineering, procurement and construction industries, the
Company executed certain contracts jointly with third parties through joint
ventures, limited partnerships and limited liability companies. The investments
included on the accompanying Condensed Consolidated Balance Sheets as of
February 28, 2002 and August 31, 2001 are $10,457,000 and $10,966,000,
respectively, which generally represents the Company's cash contributions and
earnings from these investments.
10
Note 7 - Debt
Revolving Lines of Credit
The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350,000,000 from $300,000,000 and to eliminate the previous
$150,000,000 limit on letters of credit. The Company also has the option to
further increase the Credit Facility under existing terms to $400,000,000, if
certain conditions are satisfied, including the successful solicitation of
additional lenders or increased participation of existing lenders. The amended
Credit Facility allows the Company to borrow either at interest rates (i) in a
range of 1.50% to 2.25% over the London Interbank Offered Rate ("LIBOR") or (ii)
from the prime rate to 0.75% over the prime rate. The Company selects the
interest rate index and the spread over the index is dependent upon certain
financial ratios of the Company. The Credit Facility is secured by, among other
things, (i) guarantees by the Company's domestic subsidiaries; (ii) a pledge of
all of the capital stock in the Company's domestic subsidiaries and 66% of the
capital stock in certain of the Company's foreign subsidiaries; and (iii) a
security interest in all property of the Company and its domestic subsidiaries
(except real estate and equipment). The Credit Facility also contains
restrictive covenants and other restrictions, which include but are not limited
to the maintenance of specified ratios and minimum capital levels and limits on
other borrowings, capital expenditures and investments. Additionally, the Credit
Facility established a $25,000,000 aggregate limit on the amount of the
Company's Treasury Stock purchases and/or LYONs repurchases to be made
subsequent to February 28, 2002, without prior consent. As of February 28, 2002,
the Company was in compliance with these covenants or had obtained the necessary
waivers. At February 28, 2002, letters of credit of approximately $70,600,000
and no revolving credit loans were outstanding under the Credit Facility. The
Company's total availability under the Credit Facility at February 28, 2002 was
approximately $279,400,000.
At February 28, 2002, the Company's foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately
$16,200,000. These subsidiaries had outstanding borrowings under these lines of
approximately $9,179,000 at February 28, 2002.
LYONs Convertible Securities
Effective May 1, 2001, the Company issued and sold $790,000,000 (including
$200,000,000 to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The debt is senior
unsecured obligations of the Company and is convertible into the Company's
Common Stock at a fixed ratio of 8.2988 per $1,000 maturity value or an
effective conversion price of $77.03 at the date of issuance. Under the terms of
the issue, the conversion rate may be adjusted for certain factors as defined in
the agreement including but not limited to dividends or distributions payable on
Common Stock, but will not be adjusted for accrued original issue discount. The
Company realized net proceeds, after expenses, from the issuance of these
securities of approximately $490,000,000. The Company used these proceeds to
retire outstanding indebtedness and for general corporate purposes, including
investment in AAA rated, short-term marketable securities held until maturity
and cash equivalents.
The holders of the debt have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the then
accreted value. The Company has the right to fund such repurchases with shares
of its Common Stock, cash, or a combination of Common Stock (at the then current
market value) and cash. The debt holders also have the right to require the
Company to repurchase the debt for cash, at the accreted value, if there is a
change in control of the Company, as defined, occurring on or before May 1,
2006. The Company may redeem all or a portion of the debt at the accreted value,
through cash payments, at any time after May 1, 2006.
11
Note 8 - Comprehensive Income
Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than from transactions with the company's owners.
Comprehensive income was comprised of the following (in thousands) for the
periods indicated:
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 21,340 $ 11,617 $ 40,292 $ 23,778
Foreign currency translation adjustments (1,516) 1,213 (2,543) (813)
Cumulative effect of adoption of FAS 133 on September 1, 2000 -- (23) -- (23)
Unrealized net gains (losses) on hedging activities, net of taxes (88) 82 (177) 32
Unrealized net losses on securities available for sale, net of taxes (1) (885) (149) (885)
---------- ---------- ---------- ----------
Total comprehensive income $ 19,735 $ 12,004 $ 37,423 $ 22,089
========== ========== ========== ==========
</Table>
The foreign currency translation adjustments primarily relate to the varying
strength of the U.S. dollar in relation to the British pound, Australian and
Canadian dollars, Venezuelan Bolivars, and the Euro (Dutch guilder prior to
January 1, 2002).
The Company's hedging activities (which are generally limited to foreign
exchange transactions) during the three and six months ended February 28, 2002
and 2001 were not material.
12
Note 9 - Business Segments
The Company has segregated its business activities into two operating segments:
integrated EPC services segment and manufacturing and distribution segment. The
following table presents information about segment profits and assets (in
thousands) for the periods indicated:
<Table>
<Caption>
INTEGRATED EPC MANUFACTURING
SERVICES AND DISTRIBUTION CORPORATE TOTAL
--------------- ---------------- --------------- ---------------
Three Months ended February 28, 2002
- ------------------------------------
Sales to external customers $ 547,283 $ 18,944 $ -- $ 566,227
Intersegment sales 2,041 3,895 -- 5,936
Net income 18,625 1,928 787 21,340
Goodwill 370,364 -- -- 370,364
Total assets 1,124,769 64,924 632,402 1,822,095
Three Months ended February 28, 2001
- ------------------------------------
Sales to external customers $ 323,550 $ 16,733 $ -- $ 340,283
Intersegment sales 44 3,867 -- 3,911
Net income (loss) 10,990 1,020 (393) 11,617
Goodwill 329,974 -- -- 329,974
Total assets 984,994 65,025 55,330 1,105,349
Six Months ended February 28, 2002
- ----------------------------------
Sales to external customers $ 983,369 $ 36,467 $ -- $ 1,019,836
Intersegment sales 3,100 8,378 -- 11,478
Net income 34,663 3,706 1,923 40,292
Six Months ended February 28, 2001
- ----------------------------------
Sales to external customers $ 725,385 $ 33,655 $ -- $ 759,040
Intersegment sales 53 9,050 -- 9,103
Net income (loss) 26,841 1,857 (4,920) 23,778
</Table>
13
Note 10 - Earnings Per Common Share
Computations of basic and diluted earnings per share are presented below.
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
BASIC:
Income available to common shareholders before
extraordinary item $ 21,340 $ 11,820 $ 40,292 $ 23,981
Extraordinary item, net of taxes -- (203) -- (203)
------------ ------------ ------------ ------------
Net income for basic computation $ 21,340 $ 11,617 $ 40,292 $ 23,778
============ ============ ============ ============
Weighted average common shares 40,299 40,615 40,610 39,287
============ ============ ============ ============
Basic earnings per common share
Income before extraordinary item $ 0.53 $ 0.29 $ 0.99 $ 0.61
Extraordinary item, net of taxes -- -- -- --
------------ ------------ ------------ ------------
Net income per common share $ 0.53 $ 0.29 $ 0.99 $ 0.61
============ ============ ============ ============
DILUTIVE:
Income available to common shareholders before
extraordinary item $ 21,340 $ 11,820 $ 40,292 $ 23,981
Interest on convertible debt, net of taxes 2,652 -- 5,284 --
------------ ------------ ------------ ------------
Income for diluted computation 23,992 11,820 45,576 23,981
Extraordinary item, net of taxes -- (203) -- (203)
------------ ------------ ------------ ------------
Net income for diluted computation $ 23,992 $ 11,617 $ 45,576 $ 23,778
============ ============ ============ ============
Weighted average common shares (basic) 40,299 40,615 40,610 39,287
Effect of dilutive securities:
Stock options 600 1,571 828 1,564
Convertible debt 6,556 -- 6,556 --
Escrow shares -- -- -- 205
------------ ------------ ------------ ------------
Adjusted weighted average common shares and
assumed conversions 47,455 42,186 47,994 41,056
============ ============ ============ ============
Diluted earnings per common share
Income before extraordinary item $ 0.51 $ 0.28 $ 0.95 $ 0.58
Extraordinary item, net of taxes -- -- -- --
------------ ------------ ------------ ------------
Net income per common share $ 0.51 $ 0.28 $ 0.95 $ 0.58
============ ============ ============ ============
</Table>
For the three and six months periods ended February 28, 2002, the Company had
approximately 614,000 and 542,000 weighted-average incremental shares related to
stock options that were excluded from the calculations of diluted income per
share because they were antidilutive. For the three and six months ended
February 28, 2001, no outstanding stock options were antidilutive.
Note 11 - Goodwill and Other Intangibles
In July 2001, the Financial Accounting Standards Board (FASB) issued two new
accounting standards SFAS No. 141 - "Business Combinations" and SFAS No. 142 -
"Goodwill and Other Intangible Assets." These new standards significantly
changed prior practices by: (i) terminating the use of the pooling-of-interests
method of accounting for future business combinations, (ii) ceasing goodwill
amortization, and (iii) requiring impairment testing of goodwill based on a fair
value concept. SFAS No. 142 requires that impairment testing of the opening
goodwill balances be performed within six months from the start of the fiscal
year in which the standard is adopted and that any impairment be written off and
reported as a cumulative effect of a change in accounting principle. It also
requires that another impairment test be performed during the fiscal year of
adoption of the standard and, that impairment tests should be performed at least
annually thereafter, with interim testing required if circumstances warrant.
14
Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.
Therefore, the Company has ceased to amortize goodwill in fiscal 2002. For the
three months and six months ended February 28, 2001, goodwill amortization was
approximately $4,000,000 and $7,900,000, respectively. Additionally, the Company
has determined that its goodwill balances were not impaired as of September 1,
2001 and accordingly it has made no adjustments to its goodwill balances as a
result of its adoption of SFAS No. 142.
SFAS No. 142 provides that prior year's results should not be restated. The
following table presents the Company's comparative operating results for the
three and six months ended February 28, 2002 and 2001 reflecting the exclusion
of goodwill amortization expense in fiscal 2001.
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Income before extraordinary items:
As reported $ 21,340 $ 11,820 $ 40,292 $ 23,981
Goodwill amortization, net of tax effects -- 3,130 -- 6,193
---------- ---------- ---------- ----------
As adjusted $ 21,340 $ 14,950 $ 40,292 $ 30,174
========== ========== ========== ==========
Net income:
As reported $ 21,340 $ 11,617 $ 40,292 $ 23,778
Goodwill amortization, net of tax effects -- 3,130 -- 6,193
---------- ---------- ---------- ----------
As adjusted $ 21,340 $ 14,747 $ 40,292 $ 29,971
========== ========== ========== ==========
Basic earnings per share:
Net income as reported $ 0.53 $ 0.29 $ 0.99 $ 0.61
Goodwill amortization, net of tax effects -- 0.07 -- 0.15
---------- ---------- ---------- ----------
As adjusted $ 0.53 $ 0.36 $ 0.99 $ 0.76
========== ========== ========== ==========
Diluted earnings per share:
Net income as reported $ 0.51 $ 0.28 $ 0.95 $ 0.58
Goodwill amortization, net of tax effects -- 0.07 -- 0.15
---------- ---------- ---------- ----------
As adjusted $ 0.51 $ 0.35 $ 0.95 $ 0.73
========== ========== ========== ==========
</Table>
The Company's only significant amortizable intangible asset at February 28, 2002
was its proprietary ethelyene technology. At February 28, 2002, the gross
carrying amount included in other assets and accumulated amortization for this
asset was $28,600,00 and $2,860,000, respectively. The Company is amortizing
this asset on a straight-line basis over 15 years and the annual amortization
expense is approximately $1,900,000. This intangible asset is still subject to
impairment testing.
Note 12 - Changes in Accounting Principles
The FASB also recently issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective in 2003, covers the
accounting for closure or removal-type costs that are incurred with respect to
long-lived assets. The nature of the Company's business and long-lived assets is
such that adoption of this new standard should have no significant impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 - "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes FASB No. 121 - "Accounting for
the Impairment of Long-Lived Assets and for
15
Long-Lived Assets to be Disposed of." The new statement also supersedes certain
aspects of APB 30 - "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," with regard to reporting the
effects of a disposal of a segment of a business and will require expected
future operating losses from discontinued operations to be reported in
discontinued operations in the period incurred rather than as of the measurement
date as presently required by APB 30. Additionally, certain dispositions may now
qualify for discontinued operations treatment. The provisions of the statement
are required to be applied for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. The Company has not yet
determined what effect this statement will have on its financial statements.
Note 13 - Potential Acquisition of IT Group
In January 2002, the Company signed a definitive agreement with the The IT
Group, Inc. ("IT Group") to acquire substantially all of IT Group's assets and
businesses for approximately $105,000,000 and the assumption of certain
liabilities. The agreement allows either party to elect to have up to 50% of the
purchase price paid in shares of the Company's Common Stock. IT Group is a
provider of diversified consulting, engineering, and construction, remediation
and facilities management services.
In connection with the Company's agreement to purchase the assets and businesses
of the IT Group, IT Group filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The Company's agreement to purchase IT Group is, therefore,
subject to approval of the U. S. Bankruptcy Court. Additionally, the Company,
with the Bankruptcy Court's approval, has provided IT Group with a secured
revolving debtor-in-possession ("DIP") credit facility of $55,000,000 to provide
IT Group with liquidity for the operation of its businesses until the asset sale
is finalized. The interest rate on the DIP credit facility is 3.5% over LIBOR.
At February 28, 2002, the Company had provided IT Group with $44,000,000 under
the DIP credit facility.
In March 2002, the Bankruptcy Court determined that IT Group's assets would be
auctioned and established an auction date of April 18, 2002, and related bid
qualification and auction procedures. If the Company is outbid in the auction,
the acquiring company must pay the Company a break up fee of between $4,800,000
and $6,000,000 and repay the DIP loans outstanding. The Company may submit a
revised offer during the auction.
16
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The following discussion summarizes the financial position of The Shaw Group
Inc. and its subsidiaries (hereinafter referred to collectively, unless the
context otherwise requires, as "the Company" or "Shaw") at February 28, 2002,
and the results of their operations for the three-month and six-month periods
then ended and should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The statements contained in this
Quarterly Report on Form 10-Q that are not historical facts (including without
limitation statements to the effect the Company or Shaw or its management
"believes," "expects," "anticipates," "plans," or other similar expressions) are
forward-looking statements. These forward-looking statements are 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.
These forward-looking statements involve significant risks and uncertainties
(some of which are beyond the control of the Company) and assumptions. They 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 services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; changes in investment by the energy,
power and environmental industries; the availability of qualified engineers and
other professional staff needed to execute contracts; the uncertain timing of
awards and contracts; cost overruns on fixed, maximum or unit priced contracts;
cost overruns which negatively affect fees to be earned or cost variances to be
shared on cost plus contracts; changes in trade, monetary and fiscal policies
worldwide; currency fluctuations; the effect of the Company's policies,
including but not limited to the amount and rate of growth of Company expenses;
the continued availability to the Company of adequate funding sources; delays or
difficulties in the production, delivery or installation of products and the
provision of services; the ability of the Company to successfully integrate
acquisitions; the protection and validity of patents and other intellectual
property; and various legal, regulatory and litigation risks. Should one or more
of these risks or uncertainties materialize, or should any of the Company's
assumptions prove incorrect, actual results may vary in material respects from
those projected in the forward-looking statements. 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.
General
- -------
The Company is the world's only vertically-integrated provider of complete
piping systems and comprehensive engineering, procurement and construction
services to the power generation industry. While approximately 76% of Shaw's
backlog at February 28, 2002 was attributable to the power generation industry,
the Company also does work in the process industries and the environmental and
infrastructure sectors. The Company's financial performance is impacted by the
broader economic trends affecting its customers. All of the major industries in
which Shaw operates are cyclical. Because Shaw is able to provide services that
are used in a broad range of industries, the Company's experience has generally
been that downturns in certain of its industry sectors may be mitigated by
opportunities in others.
17
The acquisition by the Company of Stone & Webster in July 2000 (i) more than
doubled the size of the Company, (ii) significantly impacted the Company's
operations by increasing the size and scope of the Company's engineering,
procurement and construction businesses, and (iii) increased its working capital
requirements. For additional information regarding the Stone & Webster
acquisition, see Note 4 of Notes to Condensed Consolidated Financial Statements
and also Item 2 -Liquidity and Capital Resources.
Historically, the Company has used acquisitions to pursue market opportunities
and to augment or increase existing capabilities and plans to continue to do so.
The Company is actively pursuing a plan to acquire most of the assets and
businesses of The IT Group, Inc. ("IT Group"), as is more fully discussed below
(see "Potential Acquisition of IT Group"). Any of the following comments
concerning the Company's expectations for future sales and operating results are
based on the Company's forecasts for its existing operations and does not
include the potential impact of the IT Group acquisition or any other
acquisition.
Critical Accounting Policies and Related Estimates That Have a Material Effect
- ------------------------------------------------------------------------------
on the Company's Consolidated Financial Statements
- --------------------------------------------------
In accordance with recent Securities and Exchange Commission guidance, set forth
below is a discussion of the accounting policies and related estimates that the
Company believes are the most critical to understanding its consolidated
financial statements, financial condition, and results of operations and which
require complex management judgments, uncertainties and/or estimates.
Information regarding the Company's other accounting policies is included in its
Annual Report on Form 10-K for the year ended August 31, 2001.
Contract Revenue Recognition and Profit and Loss Estimates
A substantial portion of the Company's revenue is derived from engineering,
procurement and construction ("EPC") contracts. The contracts may be performed
as stand-alone engineering, procurement or construction contacts or as combined
contracts (i.e., one contract that covers engineering, procurement and
construction or a combination thereof). The Company utilizes accounting
principles set forth in American Institute of Certified Public Accountants
("AICPA") Statement of Position 81-1 - "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and other applicable
accounting standards to account for its long-term EPC contracts. The Company
recognizes revenues for these contracts on the percentage-of-completion method,
usually based on costs incurred to date, compared with total estimated contract
costs. Most of the Company's contracts are cost reimbursable. Revenues from
cost-plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned. Profit incentives are included in revenues when
their realization is reasonably assured.
Provisions for estimated losses for uncompleted EPC contracts are made in the
period in which such losses are identified. The cumulative effect of other
changes to estimated contract profit and loss, including those arising from
contract penalty provisions, final contract settlements and reviews performed by
customers, 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. An amount equal to the
costs attributable to unapproved change orders and claims is included in the
total estimated revenue when realization is probable. Profit from unapproved
change orders and claims are recorded in the year such amounts are resolved.
As is common to the construction industry and inherent in the nature of the
Company's EPC contracts, it is possible that there will be future (and
currently unknown) significant adjustments to the Company's currently estimated
18
contract revenues, costs and gross margins for contracts currently in process,
particularly in the latter stages of the contracts. These future adjustments
could, depending on either the magnitude of the adjustments and/or the number of
contracts being completed, materially (positively or negatively) affect the
Company's operating results in an annual or quarterly reporting period. Such
future adjustments are, in the opinion of the Company's management, most likely
to occur as a result of, or be affected by, the following factors in the
application of the percentage-of-completion accounting method (discussed above)
for the Company's EPC contracts.
A. Revenues and gross margins from cost reimbursable, long-term EPC contracts
---------------------------------------------------------------------------
can be significantly affected by contract incentives/penalties that may not
---------------------------------------------------------------------------
be known or recorded until the latter stages of the contracts.
--------------------------------------------------------------
Substantially all of the Company's revenues from cost-reimbursable EPC
contracts are based on costs incurred plus the fee earned (before
unrealized incentives/penalties). The application of the Company's revenue
recognition practices for these types of contracts usually results in the
Company recognizing revenues ratably with a consistent gross profit margin
with the occurrence of costs and construction progress during most of the
contract term (which may extend for one to five years).
The Company's cost reimbursable contracts are generally structured as
either target cost or cost plus contracts. Target cost contracts contain an
incentive/penalty arrangement in which the Company's fee is adjusted,
within certain limits, for cost underruns/overruns to an established
(target) price, representing the Company's estimated cost and fee for the
project. Cost plus contracts reimburse the Company for all of its costs,
but generally limit the Company's fee to a fixed percentage of costs or to
a certain specified amount. Usually, target-cost contracts are priced with
higher fees than cost plus contracts because of the uncertainties relating
to an adjustable fee arrangement. Additionally, both the target cost and
cost reimbursable contracts frequently have other incentive and penalty
provisions for such matters as liquidated damages and testing or
performance results.
Generally, the penalty provisions for the Company's cost reimbursable
contracts are "capped" to limit the Company's monetary exposure to a
portion of the contract gross margin. Although the Company believes it is
unlikely that it could incur losses or lose all of its gross margin on its
cost reimbursable contracts, it is possible for penalties to reduce or
eliminate previously recorded profits. The incentive/penalty provisions are
usually finalized as contract change orders either subsequent to
negotiation with or verification by, the Company's customers.
In most situations, the amount and impact of incentives/penalties are not,
or cannot be, determined until the latter or completion stages of the
contract, at which time the Company will record the adjustment amounts on a
cumulative, catch-up basis.
B. The accuracy of gross margins from fixed-price EPC contracts is dependent
---------------------------------------------------------------------------
on the accuracy of cost estimates and other factors. The Company has a
----------------------------------------------------
limited number of fixed price contracts, most of which were entered into on
a negotiated basis. The Company has very few fixed price contacts that were
awarded based on competitive bids.
The accuracy of the gross margins the Company reports for fixed-price EPC
contracts is dependent upon various judgments it makes with respect to its
contract performance, its cost estimates, and its ability to recover
additional contract costs through change orders or claims. Further, many of
these contracts also have incentive/penalty provisions, which are not
finalized until the latter or completion stages of the contract.
The Company recognizes adjustments to the gross margin on fixed-priced EPC
contracts for changes in its cost estimates, finalization of
incentives/penalties, etc on a cumulative, catch-up method, when such
adjustments are known or probable.
19
The revenue recognition policies related to the Company's fabrication contracts,
consulting services, and pipe fittings and manufacturing operations are
described in the Company's latest Form 10-K filed as of August 31, 2001. Because
of the nature of the contracts and related work, estimates and judgments usually
do not play as important a role in the determination of revenue and profit and
loss for these services as they do for EPC contracts.
Acquisitions - Fair Value Accounting and Goodwill Impairment
Goodwill represents the excess of the cost of acquired businesses over the fair
market value of their identifiable net assets. The Company's goodwill balance as
of February 28, 2002 was approximately $370 million, most of which related to
the Stone & Webster acquisition (see Note 4 of Notes to Condensed Consolidated
Financial Statements).
In the first quarter of fiscal 2002, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standard ("SFAS")
No. 142 - "Goodwill and Other Intangible Assets," which was issued in July 2001.
SFAS No. 142 deals with, among other matters, the accounting for goodwill. SFAS
No. 142 requires that goodwill no longer be amortized, but that impairment of
goodwill assets must be reviewed on a regular basis based on a fair value
concept. SFAS No. 142 also removed certain differences between book and tax
expense, which has resulted in a reduction of the Company's effective tax rate.
If SFAS No. 142 had been in effect during fiscal 2001, the Company estimates
that its fiscal 2001 diluted earnings per share would have been increased by
approximately $0.07 per share and $0.15 per share for the three and six months
ended February 28, 2001, respectively. This increase in diluted earnings per
share would have resulted from the cessation of goodwill amortization and a
lower effective tax rate.
The Company has completed the impairment tests required with the adoption of
SFAS No. 142 and determined that its goodwill was not impaired. Further, there
is no current indication that its goodwill is or will be impaired. However, the
Company's businesses are cyclical and subject to competitive pressures.
Therefore, it is possible that the goodwill values of the Company's businesses
could be adversely impacted in the future by these or other factors and that a
significant impairment adjustment could possibly be required in such
circumstances.
Additionally, the Company's estimates of the fair values of the assets and
liabilities it acquires in acquisitions are determined by reference to various
internal and external data and judgments, including the use of third party
experts. These estimates can and do differ from the basis or value (generally
representing the acquired entity's actual or amortized cost) previously recorded
by the acquired entity for its assets and liabilities.
Accordingly, the Company's post acquisition financial statements are materially
impacted by and dependent on the accuracy of management's fair value estimates
and adjustments. These estimates can also have a positive or negative material
affect on future reported operating results. Further, the Company's future
operating results may also be positively or negatively materially impacted if
the final values for the assets acquired or liabilities assumed in its
acquisitions are materially different from the fair value estimates which the
Company recorded for the acquisition.
Earnings Per Share and Potential Equity Effect of Convertible Debt (Lyons)
Effective May 1, 2001, the Company issued and sold $790 million (including $200
million to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The Company realized
net proceeds after expenses from the issuance of this debt of approximately $490
million. The debt is senior unsecured obligations of the Company and is
convertible into the Company's Common Stock at a fixed ratio of 8.2988 shares
per $1,000 maturity value ("contract conversion rate") or an effective
conversion price of $77.03 at the date of issuance.
20
In addition to the above conversion feature, the holders of the debt have the
right to require the Company to repurchase the debt on the third, fifth, tenth,
and fifteenth anniversaries of issuance at the then accreted value. The Company
has the right to fund such repurchases with shares of its Common Stock (at the
current market value), or cash, or a combination of Common Stock (valued at the
current market value) and cash.
The Company has, in accordance with SFAS No. 128 - "Earnings per Share",
computed its diluted earnings per share using the "if converted method"
assumption that the LYONs would be converted at the contract rate of 8.2988
shares per $1,000 maturity value (or an approximate equivalent conversion price
of approximately $78.50 at February 28, 2002). Under this method the Company has
reported diluted earnings per share to reflect approximately 6,556,000
additional shares on the basis that the debt would be converted into common
stock at a rate of $8.2988 shares per $1,000 maturity value, if the effect was
dilutive. Additionally, the Company has presented the debt as long-term debt (as
opposed to equity) on its balance sheet.
It is the Company's plan to use cash to repurchase some, or all, of the
convertible debt that may be submitted for repurchase. Therefore, pursuant to
SFAS No. 128, the Company's financial statements do not reflect the effect on
diluted earnings per share that could result from the issuance of additional
shares of its Common Stock resulting from the submission by the holders of the
convertible debt for repurchase on the specified anniversary dates. The Company
believes, however, that depending on the magnitude of repurchase requests, it is
possible that it could issue shares to satisfy a portion of any repurchase
requirements. Further, it is possible that in adverse circumstances, such as a
combination of a large number of repurchase requests, low stock price and/or
liquidity or financing restraints, the Company could be required to issue a
significant number of shares to satisfy its repurchase obligations and the
number of shares actually issued could exceed the number of shares presently
being utilized by the Company to compute diluted earnings per share. See Note 10
of Notes to Condensed Consolidated Financial Statements. The issuance of a large
number of shares could significantly dilute the value of the Company's Common
Stock and materially affect its diluted earnings per share calculations.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the percentages of
the Company's net sales that certain income and expense items represent:
21
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income:
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.0 84.3 87.2 84.5
---------- ---------- ---------- ----------
Gross profit 12.0 15.7 12.8 15.5
General and administrative expenses 5.9 9.8 6.3 9.4
---------- ---------- ---------- ----------
Operating income 6.1 5.9 6.5 6.1
Interest expense (0.9) (0.3) (1.0) (1.0)
Interest income 0.4 0.1 0.5 0.1
Other income, net -- -- -- --
---------- ---------- ---------- ----------
(0.5) (0.2) (0.5) (0.9)
Income before income taxes, earnings (losses) from unconsolidated
entities, and extraordinary item 5.6 5.7 6.0 5.2
Provision for income taxes 2.0 2.2 2.2 2.0
---------- ---------- ---------- ----------
Income before earnings (losses) from unconsolidated entities
and extraordinary item 3.6 3.5 3.8 3.2
Earnings (losses) from unconsolidated entities 0.2 -- 0.1 --
---------- ---------- ---------- ----------
Income before extraordinary item 3.8 3.5 3.9 3.2
Extraordinary item, net of taxes -- (0.1) -- --
---------- ---------- ---------- ----------
Net income 3.8% 3.4% 3.9% 3.2%
========== ========== ========== ==========
</Table>
Sales increased 66% to $566.2 million for the three months ended February 28,
2002 as compared to $340.3 million for the same period in the prior year. Sales
increased 34% to $1,019.8 million for the six months ended February 28, 2002 as
compared to $759.0 million for the same period in the prior year. Sales for the
remaining two quarters of fiscal 2002 are expected to increase over the sales
achieved in the three months and six months ended February 28, 2002, due to the
work-off of some of the Company's backlog of approximately $4.5 billion as of
February 28, 2002. The future sales increases will be partly attributable to EPC
contracts requiring the procurement of large equipment items. Sales for the
remainder of fiscal 2002 are also anticipated to be higher than the last two
quarters of fiscal 2001. Because of the financial difficulties Stone & Webster
incurred prior to its acquisition by the Company in the fourth quarter of fiscal
2000, Stone & Webster's backlog was negatively impacted. The Company's sales
declined in the last three quarters of fiscal 2001 from the first quarter level
at least partially as a result of the work-off and completion in the first
quarter of 2001 of some of the projects assumed in the Stone and Webster
acquisition. Revenues from both of the Company's business segments increased for
both the three and six months ending February 28, 2002 with the integrated EPC
services segment reflecting sales of $547.3 million and $983.4 million,
respectively. Revenues from the manufacturing and distribution segment increased
$2.2 million and $2.8 million for the quarter and six-month periods ended
February 28, 2002, respectively. See Note 9 of Notes to Condensed Consolidated
Financial Statements.
22
The Company's sales to customers in the following geographic regions
approximated the following for the periods indicated:
<Table>
<Caption>
Three Months Ended February 28,
2002 2001
---------------------------- ----------------------------
Geographic Region (in millions) % (in millions) %
- ----------------- ------------ ------------ ------------ ------------
United States $ 454.5 80 $ 260.7 77
Asia/Pacific Rim 44.2 8 22.8 7
Other North America 27.3 5 27.7 8
Europe 24.0 4 19.0 5
South America 8.3 2 2.6 1
Other 5.4 1 7.3 2
Middle East 2.5 -- 0.2 --
------------ ------------ ------------ ------------
$ 566.2 100% $ 340.3 100%
============ ============ ============ ============
</Table>
<Table>
<Caption>
Six Months Ended February 28,
2002 2001
---------------------------- ----------------------------
Geographic Region (in millions) % (in millions) %
- ----------------- ------------ ------------ ------------ ------------
United States $ 818.9 80 $ 612.3 81
Asia/Pacific Rim 73.4 7 46.3 6
Europe 51.2 5 38.5 5
Other North America 49.4 5 42.2 6
South America 12.7 1 11.0 1
Other 8.2 1 8.0 1
Middle East 6.0 1 0.7 --
------------ ------------ ------------ ------------
$ 1,019.8 100% $ 759.0 100%
============ ============ ============ ============
</Table>
Other North America includes Canada, Mexico and Bermuda. The February 2001
totals for the United States, Other North America and Other have been adjusted
to reflect the current set of geographic regions.
United States (Domestic) Sales
Sales for domestic projects increased $193.8 million, or 74%, to $454.5 million
for the three months ended February 28, 2002 from $260.7 million for the three
months ended February 28, 2001. For the six months ended February 28, 2002,
sales for domestic projects increased $206.7 million, or 34%, to $818.9 million
from $612.3 million for the six months ended February 28, 2001. Domestic power
generation sales increased $208.6 million and $266.5 million for the three and
six months ended February 28, 2002, respectively, as compared with the same
periods in fiscal 2001. The power generation sales increases were offset by
sales decreases to the environmental and infrastructure industries and the
process industries. Environmental and infrastructure sales for the three and six
months ended February 28, 2002 decreased by $7.4 million and $27.4 million,
respectively, as compared with the same periods in fiscal 2001. Process
industries sales for the three and six months ended February 28, 2002, were
approximately $12.2 million and $41.9 million, respectively, less than such
sales for the same periods in fiscal 2001. These decreases were attributable to
industry trends and the Company's decision not to pursue low margin projects
such as those it assumed in the Stone & Webster acquisition. Domestic sales to
other industries increased by approximately $4.8 million and $9.5 million for
the three and six months periods ended February 28, 2002 as compared with the
same periods in fiscal 2001.
International Sales
Sales for international projects increased $32.1 million, or 40%, to $111.7
million for the three months ended February 28, 2002 from $79.6 million for the
same period of the prior year. Sales for international projects increased $54.2
million, or 37%, to $200.9 million for the six months ended February 28, 2002
from $146.7 million for the same period of the prior year. The sales increase in
the Asia/Pacific Rim region was primarily a result of the work performed on a
600,000 tons per year ethylene plant in China that is scheduled for completion
in fiscal 2005. Sales in Europe increased due to more power generation projects
in those regions. Sales in Other North America were flat in the three months
period ended February 28, 2002 but increased $7.2 million in the six months
ended February 28, 2002 due to power generation projects which commenced in
fiscal 2001. The Company sales in the Middle East have increased as a result of
process industry sales. Sales in South America remain sluggish partly as a
result of the political situation in Venezuela.
23
The Company's sales to customers in the following industry sectors approximated
the following for the periods indicated:
<Table>
<Caption>
Three Months Ended February 28,
2002 2001
---------------------------- ----------------------------
Industry Sector (in millions) % (in millions) %
- --------------- ------------ ------------ ------------ ------------
Power Generation $ 423.7 75 $ 203.8 60
Process Industries 67.6 12 66.7 20
Environmental and Infrastructure 35.3 6 42.7 12
Other Industries 39.6 7 27.1 8
------------ ------------ ------------ ------------
$ 566.2 100% $ 340.3 100%
============ ============ ============ ============
</Table>
<Table>
<Caption>
Six Months Ended February 28,
2002 2001
---------------------------- ----------------------------
Industry Sector (in millions) % (in millions) %
- --------------- ------------ ------------ ------------ ------------
Power Generation $ 742.7 73 $ 452.5 60
Process Industries 124.6 12 150.2 20
Environmental and Infrastructure 72.6 7 99.9 13
Other Industries 79.9 8 56.4 7
------------ ------------ ------------ ------------
$ 1,019.8 100% $ 759.0 100%
============ ============ ============ ============
</Table>
Revenues from both domestic and international power generation projects for the
three and six-month periods ended February 28, 2002 increased by a total of
$219.9 million and $290.3 million, respectively, as compared with the three and
six-month periods ended February 28, 2001. Revenues from United States and
European operations were responsible for most of this increase. Process
industries and environmental and infrastructure had sales decreases in the
domestic markets. These domestic decreases were attributable to industry trends
and the Company's decision not to pursue low margin projects such as those it
assumed in the Stone & Webster acquisition. The increase in other industry
sales, which includes the oil and gas exploration and production industry, was
primarily attributable to foreign sales.
Gross profit increased 27% to $67.7 million in the three months ended February
28, 2002 from $53.5 million in the three months ended February 28, 2001 and
increased 11% to $130.5 million in the six months ended February 28, 2002 from
$117.6 million in the six months ended February 28, 2001. The gross profit
margin percentage for the three-month period ended February 28, 2002 decreased
to 12.0% from 15.7% for the same period the prior year. For the six-month period
ended February 28, 2002, the gross profit margin percentage decreased to 12.8%
from 15.5% for the same period of the prior year.
The Company is involved in numerous projects, and, as a result, the Company's
consolidated gross profit margin percentages can be affected by many factors.
These include matters, such as product mix (e.g., engineering and consulting
versus construction and procurement), pricing strategies, foreign versus
domestic work (profit margin percentages differ, sometimes substantially,
depending on the location of the work) and adjustments to project profit
estimates during the project term.
As a result of the Stone & Webster acquisition, additions to the Company's
backlog in fiscal 2001 included a higher percentage over prior periods of (i)
EPC contracts and (ii) EPC contracts that require the procurement of large
equipment items. Accordingly, the percentage of the Company's sales related to
EPC contracts and EPC contracts with large equipment purchases has increased
during the first six months of fiscal 2002. Typically EPC contracts
(particularly those with large equipment purchases) have lower gross profit
margin percentages than the Company's prior historical gross profit margin
percentages associated with pipe fabrication work.
24
Additionally, during fiscal 2001, as compared with prior periods, the Company
entered into more cost reimbursable contracts as opposed to fixed price
projects, many of which commenced in the latter part of fiscal 2001 and which
impacted gross margins in the first six months of fiscal 2002. Cost reimbursable
contracts generally allow the Company to recover any cost overruns. Therefore,
cost reimbursable contracts are frequently priced with lower gross margin
percentages than fixed price contracts (such as some of the contracts assumed in
the Stone & Webster acquisition) because fixed priced contracts are usually bid
with higher margins to compensate for cost overrun risks. The Company expects
that a substantial portion of its work in the final six months of fiscal 2002
and fiscal 2003 will be performed pursuant to cost reimbursable contracts.
Because the Company has increased the number of (i) EPC contracts and EPC
contracts requiring the procurement of large pieces of equipment and (ii) cost
reimbursable contracts, the Company's gross profit margin percentages were lower
in the first two quarters of fiscal 2002, compared with the same periods in
fiscal 2001. Additionally, the Company expects that gross margin percentages
will continue to be lower throughout fiscal 2002 versus fiscal 2001 as a result
of these factors.
General and administrative expenses, exclusive of goodwill recorded in fiscal
2001, increased to approximately $33 million and $63.9 million for the three
months and six months ended February 28, 2002 as compared with $29.5 million and
$63.7 million for the similar periods ended February 28, 2001. The increase in
general and administrative costs is a result of substantially increased sales in
fiscal 2002 as compared with fiscal 2001. However, as a percentage of sales,
general and administrative expenses, exclusive of goodwill recorded in fiscal
2001, decreased to 5.9% and 6.3% for the three months and six months ended
February 28, 2002 compared with 8.7% and 8.4% for the same periods in fiscal
2001. The decrease in general and administrative costs as a percentage of sales
is primarily attributable to cost savings realized from the integration of Stone
& Webster and the Company's ability to limit general and administrative costs
increases as sales volume has increased. The Company anticipates that total
general and administrative expenses will continue to increase in the remaining
quarters of fiscal 2002 over its first and second quarter 2002 levels, but that
such expenses will also continue to decrease as a percentage of sales during
these periods as a result of anticipated increases in sales.
In May 2001, the Company received approximately $490 million from the sale of
2.25% yield to maturity, 20-year zero coupon, unsecured, convertible debt Liquid
Yield Option(TM) Notes (LYONs). The proceeds from this debt issue were used to
pay off most of the Company's outstanding borrowings, including the Company's
Credit Facility on which the Company had been paying an interest rate of
approximately 10% for the quarter ended February 28, 2001. Interest expense for
the quarter ended February 28, 2002 was $5.4 million, compared to $1.2 million
for the same period of the prior fiscal year. For the six-month periods ended
February 28, 2002 and 2001, interest expense was $11.2 million and $7.8 million,
respectively. The Company's interest expense for the periods ended February 28,
2002 was higher than its interest expense for the same periods in fiscal 2001
because of interest costs associated with the LYONs borrowings and low levels of
borrowings in fiscal 2001. In the quarter ended February 28, 2001, the Company
had reduced its borrowings on its Credit Facility as a result of the receipt of
funds in December 2000 from (i) its Common Stock offering and (ii) the sales of
certain assets which were purchased in the Stone & Webster acquisition. The
Company's interest costs include the amortization of loan fees associated with
the LYONs and the Credit Facility, and therefore, the Company's interest expense
is higher than would be expected based on its borrowing levels. The primary
components (accretion of zero coupon discount interest and amortization of loan
fees) of the Company's interest expense are non-cash charges.
Interest income for the three and six months ended February 28, 2002 was $2.4
million and $5.4 million, respectively, compared to $0.5 million and $1.1
million for the same periods of the prior fiscal year. The increase in interest
income was attributable to the Company's investment of LYONs proceeds that were
not used to reduce debt and/or have not been used for general corporate
purposes.
25
The Company's effective tax rates for the quarters ended February 28, 2002 and
2001 were 36.0% and 38.7%, respectively. The Company's effective tax rates for
the six months ended February 28, 2002 and 2001 were 36.0% and 38.8%,
respectively. The tax rates for each period usually vary primarily due to the
mix of foreign (including foreign export sales) versus domestic work. However,
the Company's tax rate for the periods ended February 28, 2002 was less than
2001 tax rates primarily due to the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 (see Financial Accounting Standards Board
Statements). As a result of the Company's adoption of SFAS No. 142, it no longer
recognizes goodwill amortization expense in its financial statements, a portion
of which is not deductible for tax purposes.
Total backlog at February 28, 2002 and August 31, 2001 was approximately $4.5
billion at each period and represents a $1.4 billion increase over the $3.1
billion backlog reported at February 28, 2001. Approximately 86% of the backlog
relates to domestic projects, and roughly 60% of the backlog relates to work
currently anticipated to be completed during the 12 months following February
28, 2002. The Company's backlog is affected by the broader economic trends that
impact the Company's customers and is important in anticipating operational
needs.
In fiscal 2002, there has been a slowdown in construction activity and new
construction awards for power generation projects, primarily as a result of less
activity by certain Independent Power Producers ("IPPs") who have encountered
financing or liquidity problems. However, only a limited number of these IPPs
are customers of the Company. Therefore, the Company has been less impacted than
some of its competitors in obtaining new power generation work and the Company's
$3.4 billion backlog for power generation projects as of February 28, 2002 is
comparable with its $3.5 billion power generation backlog at August 31, 2001.
Additionally, the planning for new projects by the power generation industry has
been affected by recent economic forecasts which indicate the possibility that
growth rates in the United States may be less than previously anticipated. In
this regard, certain of the Company's customers are reviewing their future
construction plans, with a focus on power generation projects that have not
progressed beyond the planning stage, but the Company is not aware, however, of
any plans by its customers to either cancel or terminate any projects in the
Company's backlog. However, in March 2002, the owner of a 510 MW simple-cycle
power plant to be located in the state of Tennessee gave Shaw notice of its
intent to suspend the project. Shaw is executing the engineering, procurement
and construction services for this project. It is expected that this project
will restart in early calendar year 2003. Suspension of this project will not
have a material impact on the future operations of the Company.
Although there has been a recent decline in construction awards for new power
plants, and although no assurances can be given, the Company continues to
believe that, on a long-term basis, there is a need for a substantial increase
in power generation capacity in the United States.
The Company's backlog as of February 28, 2002 includes approximately $115
million of new environmental and infrastructure work which was awarded to the
Company by sureties for IT Group, after IT Group filed for Bankruptcy protection
in January 2002 and defaulted on the projects (see "Potential Acquisition of IT
Group" below).
Backlog at February 28, 2002 by industry sector is as follows (in millions):
<Table>
Power Generation $ 3,424
Process Industries 593
Environmental and Infrastructure 323
Other Industries 138
-----------
$ 4,478
===========
</Table>
Backlog is not a measure defined in generally accepted accounting principles and
the Company's backlog may not be comparable to backlog of other companies. The
Company cannot provide any assurance that revenues projected in its backlog will
be realized, or if realized, will result in profits.
26
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations was $129.0 million for six months ended February
28, 2002 compared with $37.5 million of net cash used in operations for the same
period of fiscal 2001. For the six months ended February 28, 2002, cash was
increased by (i) net income of $40.3 million, (ii) deferred tax expense of $20.3
million, (iii) depreciation and amortization of $12.2 million and (iv) interest
accretion and loan fee amortization of $10.2 million. Additionally, net cash was
increased by changes in certain assets and liabilities of $61.3 million,
comprised primarily of a decrease in receivables and increases in accounts
payable, and advance billings and billings in excess of costs and estimated
earnings on uncompleted contracts. These sources of cash were partially offset
by an increase in inventories, prepaid expenses and excess of costs and
estimated earnings in excess of billings on uncompleted contracts and a decrease
in accrued liabilities. The net cash realized from the changes in the assets and
liabilities were substantially attributable to the timing of collection of
project revenues and billings and the payment of project costs and general and
administrative expenses. The Company does not anticipate sustaining this level
of cash provided from operations for the remainder of the fiscal year; however,
it expects positive cash from operations for the year.
Additionally, the Company acquired a large number of contracts in the Stone &
Webster acquisition with either inherent losses or lower than market rate
margins due to the effect of the financial difficulties experienced by Stone &
Webster on negotiating and executing contracts prior to the acquisition. These
contracts were adjusted to their fair value at acquisition date by establishing
a gross margin reserve that reduces cost of sales for contracts as they are
completed. Cost of sales was reduced by approximately $14.1 million and $47.2
million during the six months ended February 28, 2002 and 2001, respectively,
through the utilization of this reserve, which is a non-cash component of
income. The utilization of these reserves resulted in a corresponding increase
in gross profit during the six months ended February 28, 2002 and 2001. See Note
4 of Notes to Condensed Consolidated Financial Statements.
Net cash used in investing activities was $61.2 million for the first six months
of fiscal 2002, compared to net cash provided of $130.2 million for the same
period of the prior fiscal year. During the first six months of fiscal 2002, the
Company purchased $34.9 million of property and equipment that included upgrades
of corporate information systems and software programs and additions to the
Company's equipment and facilities. The Company anticipates that property and
equipment purchases for the remainder of fiscal 2002 will be substantially
higher than historical levels due to the continuation of upgrading these systems
and facilities. Further, as discussed below under "Potential Acquisition of IT
Group " the Company provided a secured $44.0 million Debtor-in-Possession
("DIP") loan to IT Group. Maturities of marketable securities exceeded the
purchase of new marketable securities by approximately $29.7 million.
Additionally, the Company acquired an option, which expires in 2010, at a cost
of approximately $12.2 million, to acquire additional office building space in
the Baton Rouge area. This option was purchased to assure that the Company will
have adequate office facilities to support future growth of its operations and
the needs of its key vendors and customers in the Baton Rouge area.
Net cash used in financing activities totaled $24.5 million for the six months
ended February 28, 2002, compared to $102.1 million of net cash provided in the
first six months of fiscal 2001. During the six months ended February 28, 2002,
the Company purchased approximately $27.1 million of treasury stock (1,111,400
shares) in accordance with a plan authorized by the Company's Board of Directors
(see Note 2 of Notes to Condensed Consolidated Financial Statements and the
following paragraph). Additionally, the Company made payments on debt and leases
of approximately $3.7 million. The Company received proceeds from borrowings on
foreign revolving credit lines of approximately $5.4 million that were incurred
to support increases in foreign sales activity. The Company also received
approximately $1.0 million from employees upon the exercise of stock options
during the six months ended February 28, 2002.
The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350 million from $300 million and to eliminate the previous
$150 million limit on letters of credit. The Company also
27
has the option to further increase the Credit Facility under existing terms to
$400 million, if certain conditions are satisfied, including the successful
solicitation of additional lenders or increased participation of existing
lenders. The amended Credit Facility allows the Company to borrow either at
interest rates (i) in a range of 1.50% to 2.25% over the London Interbank
Offered Rate ("LIBOR") or (ii) from the prime rate to 0.75% over the prime rate.
The Company selects the interest rate index and the spread over the index is
dependent upon certain financial ratios of the Company. The Credit Facility is
secured by, among other things, (i) guarantees by the Company's domestic
subsidiaries; (ii) a pledge of all of the capital stock in the Company's
domestic subsidiaries and 66% of the capital stock in certain of the Company's
foreign subsidiaries; and (iii) a security interest in all property of the
Company and its domestic subsidiaries (except real estate and equipment). The
Credit Facility also contains restrictive covenants and other restrictions,
which include but are not limited to the maintenance of specified ratios and
minimum capital levels and limits on other borrowings, capital expenditures and
investments. Additionally, the Credit Facility established a $25 million
aggregate limit on the amount of the Company's Treasury Stock purchases and/or
LYONs repurchases to be made subsequent to February 28, 2002 without prior
consent. As of February 28, 2002, the Company was in compliance with these
covenants or had obtained the necessary waivers. At February 28, 2002, letters
of credit of approximately $70.6 million and no revolving credit loans were
outstanding under this facility. The Company's total availability under the
Credit Facility at February 28, 2002 was approximately $279.4 million.
Although the Company had no borrowings outstanding under the Credit Facility as
of February 28, 2002, the Credit Facility is still fully available to the
Company. As of February 28, 2002, the Credit Facility was being used to provide
letters of credit to satisfy various project guarantee requirements. The Company
has also previously used this Credit Facility to provide working capital and to
fund fixed asset purchases and subsidiary acquisitions, including the
acquisition of substantially all of the operating assets of Stone & Webster.
At February 28, 2002, the Company had working capital of approximately $501
million and unutilized borrowing capacity under its credit facilities of
approximately $279 million. Additionally the Company anticipates having positive
cash flow from operations over the next twelve months. If the Company's bid to
acquire substantially all IT Group assets and businesses is successful, the
Company could utilize more than $160 million of its working capital to fund this
acquisition. The Company's future working capital requirements will also be
impacted by such factors as (i) the amount of increased working capital
necessary to support IT Group's operations, if the acquisition is completed,
(ii) the timing and negotiated payment terms of its projects, and (iii) its
capital expenditures program. Accordingly, if the IT Group acquisition is
completed, it is probable that the Company's working capital position will
decrease during the next twelve months. However, the Company believes that its
current working capital balance is in excess of its identified working capital
needs, (based on its normal operations and IT Group acquisition) and that it
will have sufficient working capital and borrowing capacity to fund its
operations for the next twelve months.
Financial Accounting Standards Board Statements
- -----------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued two new
accounting standards SFAS No. 141 - "Business Combinations" and SFAS No. 142 -
"Goodwill and Other Intangible Assets." The new standards have significantly
changed prior practices by: (i) terminating the use of the pooling-of-interests
method of accounting for future business combinations, (ii) ceasing goodwill
amortization, and (iii) requiring impairment testing of goodwill based on a fair
value concept. SFAS No. 142 requires that impairment testing of the opening
goodwill balances be performed within six months from the start of the fiscal
year in which the standard is adopted and that any impairment be written off and
reported as a cumulative effect of a change in accounting principle. It also
requires that another impairment test be performed during the fiscal year of
adoption of the standard and, that impairment tests should be performed at least
annually thereafter, with interim testing required if circumstances warrant.
28
Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.
Therefore, the Company has ceased to amortize goodwill in fiscal 2002. For the
three months and six months ended February 28, 2001 goodwill amortization was
approximately $4.0 million and $7.9 million, respectively. Additionally, the
Company has determined that its goodwill balances were not impaired as of
September 1, 2001, and accordingly, it has made no adjustments to its goodwill
balances as a result of its adoption of SFAS No. 142.
The FASB also recently issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective in 2003, covers the
accounting for closure or removal-type costs that are incurred with respect to
long-lived assets. The nature of the Company's business and long-lived assets is
such that adoption of this new standard should have no significant impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 - "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes FASB No. 121 - "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The new statement also supersedes certain aspects of APB 30 - "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company has not yet determined what effect this statement will have
on its financial statements.
Potential Acquisition of IT Group
- ---------------------------------
In January 2002, the Company signed a definitive agreement with the The IT
Group, Inc. ("IT Group") to acquire substantially all of IT Group's assets and
businesses for approximately $105 million and the assumption of certain
liabilities. The agreement allows either party to elect to have up to 50% of the
purchase price paid in shares of the Company's Common Stock. IT Group is a
provider of diversified consulting, engineering, and construction, remediation
and facilities management services.
In connection with the Company's agreement to purchase the assets and businesses
of the IT Group, IT Group filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The Company's agreement to purchase IT Group is, therefore,
subject to approval of the U. S. Bankruptcy Court. Additionally, the Company,
with the Bankruptcy Court's approval, has provided IT Group with a secured
revolving debtor-in-possession ("DIP") credit facility of $55 million to provide
IT Group with liquidity for the operation of its businesses until the asset sale
is finalized. The interest rate on the DIP credit facility is 3.5% over LIBOR.
At February 28, 2002, the Company had provided IT Group with $44 million under
the DIP credit facility.
In March 2002, the Bankruptcy Court determined that IT Group assets would be
auctioned and established an auction date of April 18, 2002, and related bid
qualification and auction procedures. If the Company is outbid in the auction,
the acquiring company must pay the Company a break up fee of between $4.8
million and $6.0 million and repay the DIP loans outstanding. The Company may
submit a revised offer during the auction.
29
ITEM 3. 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 and fixed rate
short-term investments. The Company currently does not use any derivative
financial instruments to manage its exposure to interest rate risk.
As discussed in Note 7 of Notes to Condensed Consolidated Financial Statements,
on May 1, 2001, the Company issued $790 million (face value) 20-year, 2.25%,
zero-coupon, unsecured, convertible debt for which it received net proceeds of
approximately $490 million. After paying off approximately $67 million of
outstanding debt, the remaining proceeds were invested in short term, AAA debt
instruments and were used for general corporate purposes.
As of February 28, 2002, the Company had a $350 million credit facility ("Credit
Facility") that permits both revolving credit loans and letters of credit. As of
February 28, 2002, the Company had no outstanding revolving credit loans under
the Credit Facility. The interest rate on this credit facility was either 4.75%
(if the prime rate index had been chosen) or approximately 3.37% (if the LIBOR
rate index had been chosen). The Company's total availability under the Credit
Facility at February 28, 2002 was approximately $279.4 million. See Note 7 of
Notes to Condensed Consolidated Financial Statements for further discussion of
this line of credit.
Foreign Currency Risks
- ----------------------
The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's subsidiaries conduct their operations in various foreign
currencies. Currently, the Company, when considered appropriate, uses
off-balance sheet hedging instruments to manage its risks associated with its
operating activities when an operation enters into a transaction in a currency
which is different than its local currency. In these circumstances, the Company
will frequently utilize forward exchange contracts to hedge the anticipated
purchases and/or sales. 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 February 28, 2002, the Company had a minimal number of
forward exchange contracts outstanding that were hedges of certain commitments
of foreign subsidiaries. The exposure from the commitments is not material to
the Company's results of operations or financial position.
30
PART II - OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES
Effective March 23, 2001, the Company completed the acquisition of the assets of
Scott, Sevin, & Schaffer, Inc. and Technicomp, Inc. in exchange for 157,710
shares of the Company's Common Stock. In connection with certain price
protection covenants made by the Company in the acquisition agreement, the
Company delivered an additional 12,973 shares of Common Stock.
Also, in connection with the acquisition of assets by the Company from PPM
Contractors, Inc. ("PPM") effective as of July 14, 2000, the Company issued
83,859 additional shares as a result of certain target sales levels reached by
the PPM businesses as of December 31, 2001.
The issuances of the shares of Common Stock in the foregoing acquisitions were
not registered under the Securities Act of 1933, as amended (the "Act"), in
reliance upon exemption for non-public offerings contained in Section 4(2) of
the Act and Rule 506 promulgated by the Securities and Exchange Commission
thereunder. Both of the acquisitions were private, negotiated transactions among
the sellers of the business and the Company.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 2002, the Company held its 2002 Annual Meeting of Shareholders.
One proposal was submitted to a vote at the meeting. The proposal and the
results of the vote on the proposal were as follows:
PROPOSAL NO. 1 - Election of Directors:
<Table>
<Caption>
Name For Withheld
---- --- --------
J. M. Bernhard, Jr. 23,082,076 8,464,465
William H. Grigg 31,292,777 253,764
L. Lane Grigsby 31,293,971 252,570
David W. Hoyle 31,293,153 253,388
Albert McAlister 31,292,523 254,018
John W. Sinders, Jr. 31,229,593 316,948
</Table>
There were no broker non-votes with respect to the election of directors.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
2.1 Asset Purchase Agreement by and among The IT Group, Inc.,
Certain Subsidiaries of The IT Group, Inc. and The Shaw Group
Inc. dated as of January 23, 2002 (filed herewith). Pursuant
to Item 601(b)(2) of Regulation S-K, the exhibits and
schedules referred to in the Asset Purchase Agreement are
omitted. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or exhibit to
the Commission upon request.
31
2.2 Amendment No. 1 dated January 24, 2002 to the Asset Purchase
Agreement dated as of January 23, 2002, by and among The Shaw
Group Inc. and The IT Group, Inc. (filed herewith).
2.3 Amendment No. 2 dated January 29, 2002 to the Asset Purchase
Agreement dated as of January 23, 2002, by and among The Shaw
Group Inc. and The IT Group, Inc. (filed herewith).
10.1 Second Amended and Restated Credit Agreement Among The Shaw
Group Inc., Banc One Capital Markets, Inc., Bank One, NA, and
Firstar Bank, N.A., Credit Lyonnais New York Branch, and Union
Planters Bank, N.A. dated as of February 28, 2002 (filed
herewith).
B. Reports on Form 8-K
1. On January 16, 2002, the Company filed a Form 8-K, attaching a
press release dated January 16, 2002 announcing that the
Company and The IT Group, Inc. had signed a Letter of Intent
for the Company to purchase substantially all of the assets of
The IT Group, Inc.
2. On January 29, 2002, the Company filed a Form 8-K, attaching a
press release dated January 25, 2002 announcing that the
Company and The IT Group, Inc. had signed a definitive
purchase agreement for the Company to purchase substantially
all of the assets of The IT Group, Inc.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SHAW GROUP INC.
Dated: April 15, 2002 /s/ Robert L. Belk
-------------------------------
Chief Financial Officer
(Duly Authorized Officer)
33
THE SHAW GROUP INC.
EXHIBIT INDEX
Form 10-Q Quarterly Report for the Quarterly Period ended February 28, 2002.
A. Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Asset Purchase Agreement by and among The IT Group, Inc.,
Certain Subsidiaries of The IT Group, Inc. and The Shaw Group
Inc. dated as of January 23, 2002 (filed herewith). Pursuant
to Item 601(b)(2) of Regulation S-K, the exhibits and
schedules referred to in the Asset Purchase Agreement are
omitted. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or exhibit to
the Commission upon request.
2.2 Amendment No. 1 dated January 24, 2002 to the Asset Purchase
Agreement dated as of January 23, 2002, by and among The Shaw
Group Inc. and The IT Group, Inc. (filed herewith).
2.3 Amendment No. 2 dated January 29, 2002 to the Asset Purchase
Agreement dated as of January 23, 2002, by and among The Shaw
Group Inc. and The IT Group, Inc. (filed herewith).
10.1 Second Amended and Restated Credit Agreement Among The Shaw
Group Inc., Banc One Capital Markets, Inc., Bank One, NA, and
Firstar Bank, N.A., Credit Lyonnais New York Branch, and Union
Planters Bank, N.A. dated as of February 28, 2002 (filed
herewith).
</Table>
34