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, 2003
----------------------------------------
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
-----------------------------------------------
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)
4171 Essen Lane, 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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
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, 37,742,716 shares outstanding as of April 11, 2003.
FORM 10-Q
TABLE OF CONTENTS
<Table>
Part I - Financial Information
Item 1. - Financial Statements
Condensed Consolidated Balance Sheets - February 28, 2003
and August 31, 2002 3-4
Condensed Consolidated Statements of Operations - For the Three
and Six Months Ended February 28, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows - For the Six
Months Ended February 28, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-21
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 22-34
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. - Controls and Procedures 36
Part II - Other Information
Item 1. - Legal Proceedings 37
Item 4. - Submission of Matters to a Vote of Security Holders 38
Item 6. - Exhibits and Reports on Form 8-K 38-39
Signature Page 40
Certifications 41-42
Exhibit Index 43
</Table>
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,
2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 193,893 $ 401,764
Escrowed cash 96,500 96,500
Marketable securities, held to maturity 58,084 54,952
Accounts receivable, including retainage, net 425,295 436,747
Accounts receivable from unconsolidated entity 1,018 32
Inventories 95,603 99,009
Cost and estimated earnings in excess of billings
on uncompleted contracts 201,183 248,360
Deferred income taxes 67,594 73,903
Prepaid expenses and other current assets 34,917 39,087
------------ ------------
Total current assets 1,174,087 1,450,354
Investments in and advances to unconsolidated entities, joint ventures
and limited partnerships 28,605 37,729
Investments in securities available for sale 7,442 7,235
Property and equipment, less accumulated depreciation
of $103,079 at February 28, 2003 and $84,055 at
August 31, 2002, respectively 201,413 206,225
Goodwill 501,363 499,004
Other assets 102,883 103,653
------------ ------------
$ 2,015,793 $ 2,304,200
============ ============
</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,
2003 2002
------------ ------------
Accounts payable $ 324,071 $ 390,165
Accrued liabilities 125,577 159,182
Current maturities of long-term debt 2,074 3,102
Short-term revolving lines of credit -- 1,052
Current portion of obligations under capital leases 1,601 2,200
Deferred revenue - prebilled 15,726 11,503
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 275,348 424,724
Contract liability adjustments 42,307 69,140
Accrued contract losses and reserves 24,338 11,402
------------ ------------
Total current liabilities 811,042 1,072,470
Long-term debt, less current maturities 528,694 521,190
Obligations under capital leases, less current obligations 1,455 957
Deferred income taxes 12,657 15,452
Other liabilities 12,686 1,874
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value, no shares issued and outstanding -- --
Common stock, no par value,
37,742,716 and 40,841,627 shares outstanding, respectively 494,882 494,581
Retained earnings 274,526 265,945
Accumulated other comprehensive income (loss) (20,236) (16,193)
Treasury stock, 5,331,655 and 2,161,050 shares, respectively (99,913) (52,076)
------------ ------------
Total shareholders' equity 649,259 692,257
------------ ------------
$ 2,015,793 $ 2,304,200
============ ============
</Table>
The accompanying notes are an integral part of these statements.
4
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
---------- ---------- ---------- -----------
Income:
Revenues $ 720,458 $ 566,227 $1,717,364 $ 1,019,836
Cost of revenues 678,605 498,485 1,593,085 889,384
---------- ---------- ---------- -----------
Gross profit 41,853 67,742 124,279 130,452
General and administrative expenses 49,230 33,026 99,122 63,934
---------- ---------- ---------- -----------
Operating income (loss) (7,377) 34,716 25,157 66,518
Interest expense (5,759) (5,431) (11,533) (11,236)
Interest income 2,065 2,399 3,604 5,421
Other income, net 132 77 33 444
---------- ---------- ---------- -----------
(3,562) (2,955) (7,896) (5,371)
Income (loss) before income taxes and earnings (losses) from
unconsolidated entities (10,939) 31,761 17,261 61,147
Provision for income taxes (benefit) (4,456) 11,434 5,696 22,019
---------- ---------- ---------- -----------
Income (loss) before earnings (losses) from unconsolidated entities (6,483) 20,327 11,565 39,128
Earnings (losses) from unconsolidated entities, net of taxes (1,389) 1,013 (2,984) 1,164
---------- ---------- ---------- -----------
Net income (loss) $ (7,872) $ 21,340 $ 8,581 $ 40,292
========== ========== ========== ===========
Net income (loss) per common share:
Basic income (loss) per common share $ (0.21) $ 0.53 $ 0.23 $ 0.99
========== ========== ========== ===========
Diluted income (loss) per common share $ (0.21) $ 0.51 $ 0.22 $ 0.95
========== ========== ========== ===========
</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,
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 8,581 $ 40,292
Depreciation and amortization 22,908 12,185
Provision for deferred income taxes 5,196 20,323
Amortization of contract adjustments (14,743) (14,055)
Non-cash interest expense 10,329 10,157
Other operating activities, net (173,477) 60,101
---------- ----------
Net cash provided by (used in) operating activities (141,206) 129,003
Cash flows from investing activities:
Purchases of marketable securities held to maturity (94,190) (42,193)
Maturities of marketable securities held to maturity 91,058 71,898
Purchases of property and equipment (16,615) (34,921)
Proceeds from sale of assets 2,948 102
Investment in subsidiaries (1,200) --
Receipts from unconsolidated entities, net of advances 415 74
Proceeds from sale of securities 175 --
Investment in DIP loan - IT Group -- (44,000)
Purchase of real estate option -- (12,183)
---------- ----------
Net cash used in investing activities (17,409) (61,223)
Cash flows from financing activities:
Purchase of treasury stock (47,837) (27,131)
Repayment of debt and leases (1,187) (3,701)
Net proceeds (repayments) on revolving credit agreements (1,052) 5,437
Issuance of common stock 301 1,045
Deferred credit costs -- (190)
---------- ----------
Net cash used in financing activities (49,775) (24,540)
Effect of exchange rate changes on cash 519 (768)
---------- ----------
Net increase (decrease) in cash and cash equivalents (207,871) 42,472
Cash, cash equivalents and escrowed cash- beginning of period 498,264 443,304
---------- ----------
Cash, cash equivalents and escrowed cash- end of period $ 290,393 $ 485,776
========== ==========
Supplemental disclosure:
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ 1,706 $ --
========== ==========
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
========== ==========
</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 in accordance with 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 therefore 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, 2002 of The Shaw Group Inc.
The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") as of February 28, 2003 and
for the three-month and six-month periods ended February 28, 2003 and 2002 and
included herein is was not audited by the Company's independent auditors.
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 period are not necessarily indicative of results of operations that
will be realized for the fiscal year ending August 31, 2003.
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 the Dutch Guilder prior to January 1, 2002.)
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," a component of shareholders' equity, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52 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 with the current year's presentation.
Note 2 - Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies to
account for stock-based compensation by either recognizing an expense for the
fair value of stock-based compensation upon issuance of a grant as presented in
SFAS No. 123 and other SFAS's and interpretations or by the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations.
The Company accounts for its stock-based compensation under APB No. 25 which
provides that no stock compensation expense is recognized if stock options and
grants are issued at the market value of the underlying stock at the date of
grant. However, if the Company had adopted the fair value method of accounting
for stock-based compensation and had determined its stock-based compensation
cost based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per common share would have
approximated the proforma amounts below (in thousands, except per share
amounts):
7
<Table>
<Caption>
Three months ended
February 28
2003 2002
---------- ----------
Net income (loss)
As reported $ (7,872) $ 21,340
Stock based employee compensation, net of taxes (1,688) (1,247)
---------- ----------
Proforma $ (9,560) $ 20,093
========== ==========
Basic earnings (loss) per share:
As reported $ (0.21) $ 0.53
Stock based employee compensation, net of taxes (0.04) (0.03)
---------- ----------
Proforma $ (0.25) $ 0.50
========== ==========
Diluted earnings (loss) per share:
As reported $ (0.21) $ 0.51
Stock based employee compensation, net of taxes (0.04) (0.03)
---------- ----------
Proforma $ (0.25) $ 0.48
========== ==========
</Table>
<Table>
<Caption>
Six months ended
February 28
2003 2002
---------- ----------
Net income :
As reported $ 8,581 $ 40,292
Stock based employee compensation, net of taxes (3,234) (2,577)
---------- ----------
Proforma $ 5,347 $ 37,715
========== ==========
Basic earnings per share:
As reported $ 0.23 $ 0.99
Stock based employee compensation, net of taxes (0.09) (0.06)
---------- ----------
Proforma $ 0.14 $ 0.93
========== ==========
Diluted earnings per share:
As reported $ 0.22 $ 0.95
Stock based employee compensation, net of taxes (0.08) (0.05)
---------- ----------
Proforma $ 0.14 $ 0.90
========== ==========
</Table>
Note 3 - Capital Stock Transactions
In September 2001, the Company's Board of Directors 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. The Company has completed
its purchases under this program by purchasing 5,331,005 shares at a cost of
approximately $99,880,000. This includes 3,170,605 shares purchased at a cost of
approximately $47,837,000 during the six months ended February 28, 2003 and
2,160,400 shares purchased at a cost of approximately $52,043,000 during the
year ended August 31, 2002. Also included in Treasury Stock is 650 shares valued
at approximately $33,000 that were returned in fiscal 2002 in connection with
the finalization of an acquisition.
8
Note 4 - Acquisitions
The operating results of acquisitions are included in the Company's consolidated
financial statements from the applicable date of the transaction.
IT Group Acquisition
During fiscal year 2002, the Company acquired substantially all of the operating
assets and assumed certain liabilities of The IT Group, Inc. ("IT Group") and
its subsidiaries. IT Group and one of its wholly-owned subsidiaries, Beneco,
were subject to separate Chapter 11 bankruptcy reorganization proceedings and
the acquisition was completed pursuant to the bankruptcy proceedings. The
acquisition of the IT Group assets was completed on May 3, 2002 and the
acquisition of Beneco's assets was completed on June 15, 2002.
The Company believes, pursuant to the terms of the acquisition agreements, it
has assumed only certain liabilities ("assumed liabilities") of the IT Group and
Beneco as specified in the acquisition agreements. The Company has estimated
that its total of assumed liabilities is approximately $350,000,000. Further,
the acquisition agreements also provide that certain other liabilities of the IT
Group, including but not limited to, outstanding borrowings, leases, 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, are specifically excluded ("excluded liabilities") from the
Company's transactions. The Company, however, cannot provide assurance that it
does not have any exposure to the excluded liabilities because, among other
matters, the bankruptcy courts have not finalized their validation of the claims
filed with the courts. Additionally, the Company has not completed its review of
liabilities that have been submitted to the Company for payment. Accordingly,
the Company's estimate of the value of the assumed liabilities may change as a
result of the validation of the claims by the bankruptcy courts or other factors
which may be identified during its review of liabilities.
The IT Group acquisition was recorded as a purchase, and accordingly, the
Company's results of operations include those of the acquired IT Group and
Beneco businesses from the respective acquisition dates. The Company has not
completed all necessary appraisals of the property and equipment purchased nor
has the Company completed the process of obtaining information about the fair
value of all of the acquired assets and assumed liabilities. Accordingly, the
Company anticipates that there will be further adjustments to the IT Group
purchase price during the one year allocation period which will end on May 3,
2003.
The Company acquired a large number of contracts in progress and contract
backlog for which the work had not commenced at the acquisition date. Under SFAS
141, "Business Combinations", construction contracts are defined as intangibles
that meet the criteria for recognition apart from goodwill. These intangibles,
like the acquired assets and liabilities, are required to be recorded at their
fair value at the date of acquisition. The Company recorded these contracts at
fair value using a market based discounted cash flow approach by recording
contract asset and liability adjustments to the balance sheet. As of February
28, 2003 related assets of approximately $9,934,000 and liabilities of
$43,908,000 (as adjusted by allocation period adjustments recorded as of
February 28, 2003) have been established that are amortized to contract costs
over the estimated lives of the underlying contracts and related production
backlog. As of February 28, 2003 the amount of the accrued future cash losses on
assumed contracts with inherent losses (accrued contract loss reserves) was
estimated to be approximately $22,110,000 (including allocation period
adjustments). Commencing with the initial recording of these contract
adjustments and reserves in the year ended August 31, 2002, the assets and
liabilities are amortized as work is performed on the contracts. The net
amortization of the contracts adjustments recognized during the three months and
six months ended February 28, 2003 was approximately $7,031,000 and $10,055,000
respectively, and has been reflected as a reduction in the cost of revenues,
which resulted in a corresponding increase in gross profit. The activity related
to these contract assets and liabilities is included in the table at the end of
Note 11.
9
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 the 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.
LFG&E Acquisition
During the six months ended February 28, 2003 the Company's Environmental and
Infrastructure segment acquired the assets of LFG&E, International, Inc. for a
cash payment of approximately $1,200,000. Approximately $355,000 of goodwill was
recognized on this transaction. LFG&E International, Inc. provides gas well
drilling services to landfill owners and operators.
Note 5 - Inventories
The major components of inventories consist of the following as of the dates
indicated (in thousands):
<Table>
<Caption>
February 28, 2003 August 31, 2002
------------------------------ ------------------------------
Weighted Weighted
Average FIFO Total Average FIFO Total
-------- -------- -------- -------- -------- --------
Finished Goods $ 32,583 $ -- $ 32,583 $ 33,583 $ -- $ 33,583
Raw Materials 2,977 52,570 55,547 3,144 51,249 54,393
Work In Process 636 6,837 7,473 878 10,155 11,033
-------- -------- -------- -------- -------- --------
$ 36,196 $ 59,407 $ 95,603 $ 37,605 $ 61,404 $ 99,009
======== ======== ======== ======== ======== ========
</Table>
Note 6 - Investment in Unconsolidated Entities
During the three and six months ended February 28, 2003, the Company recognized
losses of approximately $1,400,000 and $3,000,000, respectively, from operations
of its unconsolidated joint ventures which are accounted for on the equity
method. These losses were primarily attributable to the Entergy/Shaw joint
venture.
Additionally, 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, 2003 and August 31, 2002 are approximately $14,375,000
and $18,255,000 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 $350,000,000 limits of this facility. The
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, while 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 of 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 Common Stock repurchases and/or LYONs repurchases (see below) made
subsequent to February 28, 2002, without prior consent. Subsequent consent was
provided to allow the Company to complete in October 2002 the $100,000,000
Common Stock repurchase program which was authorized by the Company's Board of
Directors in September 2001 (see Note 3 of Notes to Condensed Consolidated
Financial Statements). As of February 28, 2003, the Company was in compliance
with these covenants or had obtained the necessary waivers. At February 28, 2003
the Company did not have any outstanding borrowings under the Credit Facility,
but had outstanding letters of credit of approximately $180,790,000.
The Credit Facility was amended and restated on March 17, 2003 (see Note 13 to
Notes to Condensed Consolidated Financial Statements -"Subsequent Events").
As of February 28, 2003, the Company's foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately
$25,500,000. These subsidiaries did not have any outstanding borrowings under
these lines at February 28, 2003, but had letters of credit outstanding against
these lines of approximately $3,600,000.
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 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 shares 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 holders of the debt have the right to require the Company to repurchase the
debt on May 1, 2004, May 1, 2006, May 1, 2011 and May 1, 2016 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, cash, or a combination of
Common Stock, 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. (On March 31, 2003 the
Company purchased LYONs with an amortized value of approximately $256,700,000
($384,600,000) aggregate principal value) pursuant to a Tender Offer - see Note
13 to Notes to Condensed Consolidated Financial Statements - "Subsequent
Events").
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 for the periods indicated
(in thousands):
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ (7,872) $ 21,340 $ 8,581 $ 40,292
Additional pension liability not yet recognized in periodic
pension expense, net of taxes (6,300) -- (6,300) --
Foreign currency translation adjustments 489 (1,516) 1,785 (2,543)
Unrealized net gains (losses) on hedging activities, net of taxes 43 (88) 226 (177)
Unrealized gains (losses) on securities available for sale, net of taxes (79) (1) 294 (149)
Less: Reclassification adjustments for gains included in net income (48) -- (48) --
-------- -------- -------- --------
Total comprehensive income (loss) $(13,767) $ 19,735 $ 4,538 $ 37,423
======== ======== ======== ========
</Table>
As of February 28, 2003, the Company recorded a $6,300,000 net of tax liability
for one of its United Kingdom (U.K.) defined benefit retirement plans and its
Canadian defined benefit retirement plan. This liability is required to be
recognized on the plan sponsor's balance sheet when the accumulated benefit
obligations of the plan exceed the fair value of the plan's assets. In
accordance with SFAS No. 87 - "Employers Accounting For Pensions" the increase
in the minimum liability is recorded through a direct charge to stockholders'
equity and is, therefore, reflected, net of tax, as a component of accumulated
other comprehensive income (loss) on the Condensed Consolidated Balance Sheet.
This liability will require the Company to increase its future contributions to
the plan.
The foreign currency translation adjustments relate to the varying strength of
the U.S. dollar in relation to the British pound, Venezuelan Bolivar, Australian
and Canadian dollars and the Euro (prior to January 1, 2002, the Dutch guilder).
The Company's hedging activities (which are generally limited to foreign
exchange transactions) during the three months and six months ended February 28,
2003 and 2002 were not material.
Note 9 - Business Segments
During the quarter ended February 28, 2003 the Company reorganized its
operations, which resulted in a change in its operating segments. The Company
has segregated its business activities into three operating segments: ECM
(Engineering, Construction and Maintenance) segment, Environmental and
Infrastructure segment, and Fabrication, Manufacturing and Distribution segment.
The primary change from the Company's previously reported segments is that the
pipe fabrication and related operations were moved from the segment previously
reported as the Integrated EPC Services segment to the segment previously
reported as the Manufacturing and Distribution segment resulting in the new ECM
segment and the Fabrication, Manufacturing and Distribution segment,
respectively.
The following table presents information about segment results of operations and
assets for the periods indicated. Certain reclassifications, primarily related
to the new Environmental and Infrastructure segment established with the
acquisition of the IT Group, Inc. and the changes discussed in the prior
paragraph, have been made to conform the February 2002 information to the
February 28, 2003 presentation basis (in thousands):
12
<Table>
<Caption>
FABRICATION,
ENVIRONMENTAL MANUFACTURING
& AND
ECM INFRASTRUCTURE DISTRIBUTION CORPORATE TOTAL
-------------- -------------- -------------- -------------- --------------
THREE MONTHS ENDED FEBRUARY 28, 2003
Revenues from external customers $ 387,009 $ 269,028 $ 64,421 $ -- $ 720,458
Intersegment revenues 10,287 1,182 2,467 -- 13,936
Net income (loss) before income taxes (21,171) 21,261 3,541 (14,570) (10,939)
Total assets 854,324 512,953 301,841 395,655 2,064,773
THREE MONTHS ENDED FEBRUARY 28, 2002
Revenues from external customers $ 432,651 $ 35,336 $ 98,240 $ -- $ 566,227
Intersegment revenues 29 -- 465 -- 494
Net income before income taxes 26,044 3,444 13,744 (11,471) 31,761
Total assets 906,335 60,159 308,802 614,070 1,889,366
SIX MONTHS ENDED FEBRUARY 28, 2003
Revenues from external customers $ 1,001,430 $ 574,707 $ 141,227 $ -- $ 1,717,364
Intersegment revenues 20,027 3,334 6,226 -- 29,587
Net income (loss) before income taxes (7,513) 44,231 13,283 (32,740) 17,261
SIX MONTHS ENDED FEBRUARY 28, 2002
Revenues from external customers $ 759,472 $ 72,480 $ 187,884 $ -- $ 1,019,836
Intersegment revenues 126 -- 1,991 -- 2,117
Net income before income taxes 50,408 7,106 24,514 (20,881) 61,147
</Table>
Segment net income before income taxes does not include any Corporate management
charges. Corporate had charged $11,589,000 and $22,067,000 to its segments for
the three and six month periods ending February 28, 2002. As previously stated,
the Company has restated prior year's data to conform with the current year
presentation, including the elimination of these management charges. In fiscal
2003, Corporate began allocating certain depreciation to its segments; however,
the assets remain at Corporate. The total depreciation allocated is as follows
(in thousands).
<Table>
<Caption>
FABRICATION,
ENVIRONMENTAL MANUFACTURING
& AND
ECM INFRASTRUCTURE DISTRIBUTION CORPORATE TOTAL
-------------- -------------- -------------- -------------- --------------
THREE MONTHS ENDED FEBRUARY 28, 2003 $ 3,052 $ 11 $ -- $ (3,063) $ --
SIX MONTHS ENDED FEBRUARY 28, 2003 6,104 22 -- (6,126) --
</Table>
A reconciliation of total segment assets to consolidated total assets follows
(in thousands):
<Table>
<Caption>
FEBRUARY 28,
------------------------
2003 2002
---------- ----------
Total segment assets $2,064,773 $1,889,366
Elimination of intercompany payables (30,793) (57,145)
Income tax entries not allocated to segments (15,623) (1,377)
Other consolidation adjustments and eliminations (2,564) (8,749)
---------- ----------
Total consolidated assets $2,015,793 $1,822,095
========== ==========
</Table>
13
Note 10 - Earnings (loss) Per Common Share
Computations of basic and diluted earnings (loss) per share are presented below
(in thousands, except per share amounts).
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
-------- -------- -------- --------
BASIC:
Income (loss) available to common shareholders $ (7,872) $ 21,340 $ 8,581 $ 40,292
======== ======== ======== ========
Weighted average common shares 37,741 40,299 38,081 40,610
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.21) $ 0.53 $ 0.23 $ 0.99
======== ======== ======== ========
DILUTIVE:
Income (loss) available to common shareholders $ (7,872) $ 21,340 $ 8,581 $ 40,292
Interest on convertible debt, net of taxes -- 2,652 -- 5,284
-------- -------- -------- --------
Income (loss) for diluted computation $ (7,872) $ 23,992 $ 8,581 45,576
======== ======== ======== ========
Weighted average common shares (basic) 37,741 40,299 38,081 40,610
Effect of dilutive securities:
Stock options -- 600 426 828
Convertible debt -- 6,556 -- 6,556
======== ======== ======== ========
Adjusted weighted average common shares and
assumed conversions 37,741 47,455 38,507 47,994
======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.21) $ 0.51 $ 0.22 $ 0.95
======== ======== ======== ========
</Table>
For the three months and six months ended February 28, 2003 the Company had
approximately 4,800,000 and 3,500,000 weighted-average incremental shares
related to stock options that were excluded from the calculation of diluted
income per share because they were antidilutive. For the three month and six
months 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 calculation of diluted income per share because they were antidilutive.
Additionally, for the three months and six months ended February 28, 2003, the
effect of the LYONs convertible debt has been excluded from the calculation of
diluted income per share because it is antidilutive.
Note 11 - Goodwill and Other Intangibles
Goodwill
The following table reflects the changes (in thousands) in the carrying value of
goodwill from September 1, 2002 to February 28, 2003. Refer to Note 4 of Notes
to Condensed Consolidated Financial Statements for a more detailed discussion of
the accounting related to these acquisitions.
14
<Table>
Balance at September 1, 2002 $ 499,004
Allocation period adjustments, net - IT Group acquisition 2,590
LFG&E acquisition 355
Allocation period adjustments - Psycor (466)
Currency translation adjustment (120)
---------
Balance at February 28, 2003 $ 501,363
=========
</Table>
Goodwill associated with the IT Group acquisition which was completed in the
year ended August 31, 2002 has been preliminarily calculated as of February 28,
2003. The Company expects to revise these balances during the one year
allocation period as the Company has not obtained all appraisals of the property
and equipment it purchased nor has it completed all of its other review and
valuation procedures of the assets acquired and the liabilities assumed.
Amortizable Intangibles and Accrued Contract Loss Reserves
The Company's intangible assets include construction contract adjustments and
contract loss reserves established in purchase accounting, (related to the
acquisitions of the IT Group and Stone & Webster) and its proprietary ethylene
technology acquired in the Stone & Webster transaction, which is being amortized
over 15 years on a straight-line basis. The Company is still evaluating a
customer relationship intangible acquired in the IT Group acquisition - see Note
4 to Notes to Condensed Consolidated Financial Statements.
The following table presents the additions to and utilization/amortization of
intangible assets and accrued contract loss reserves for the periods indicated
(in thousands):
<Table>
<Caption>
ASSET OR COST OF
DECEMBER 1, LIABILITY REVENUES FEBRUARY 28,
Three months ended February 28, 2003 2002 INCREASE/ INCREASE/ 2003
- ------------------------------------ BALANCE DECREASE (DECREASE) BALANCE
------------ ------------ ------------ ------------
Contract (asset) adjustments $ (7,317) $ (1,020) $ 759 $ (7,578)
Contract liability adjustments 56,812 (4,790) (9,715) 42,307
Accrued contract loss reserves 13,899 11,250 (811) 24,338
------------ ------------ ------------ ------------
Total contract related items 63,394 5,440 (9,767) 59,067
Ethylene technology (24,311) -- 477 (23,834)
------------ ------------ ------------ ------------
Total $ 39,083 $ 5,440 $ (9,290) $ 35,233
============ ============ ============ ============
</Table>
<Table>
<Caption>
ASSET OR COST OF
SEPTEMBER 1, LIABILITY REVENUES FEBRUARY 28,
Six months ended February 28, 2003 2002 INCREASE/ INCREASE/ 2003
- ---------------------------------- BALANCE DECREASE (DECREASE) BALANCE
------------ ------------ ------------ ------------
Contract (asset) adjustments $ (12,150) $ 2,216 $ 2,356 $ (7,578)
Contract liability adjustments 69,140 (9,734) (17,099) 42,307
Accrued contract loss reserves 11,402 14,650 (1,714) 24,338
------------ ------------ ------------ ------------
Total contract related items 68,392 7,132 (16,457) 59,067
Ethylene technology (24,788) -- 954 (23,834)
------------ ------------ ------------ ------------
Total $ 43,604 $ 7,132 $ (15,503) $ 35,233
============ ============ ============ ============
</Table>
15
<Table>
<Caption>
ASSET OR COST OF
DECEMBER 1, LIABILITY REVENUES FEBRUARY 28,
Three months ended February 28, 2002 2001 INCREASE/ INCREASE/ 2002
- ------------------------------------ BALANCE DECREASE (DECREASE) BALANCE
------------ ------------ ------------ ------------
Contract liability adjustments $ 35,743 $ -- $ (5,997) $ 29,746
Accrued contract loss reserves 5,703 -- (769) 4,934
------------ ------------ ------------ ------------
Total contract related items 41,446 -- (6,766) 34,680
Ethylene technology (26,217) -- 477 (25,740)
------------ ------------ ------------ ------------
Total $ 15,229 $ -- $ (6,289) $ 8,940
============ ============ ============ ============
</Table>
<Table>
<Caption>
ASSET OR COST OF
SEPTEMBER 1, LIABILITY REVENUES FEBRUARY 28,
Six months ended February 28, 2002 2001 INCREASE/ INCREASE/ 2002
- ---------------------------------- BALANCE DECREASE (DECREASE) BALANCE
------------ ------------ ------------ ------------
Contract liability adjustments $ 43,801 $ -- $ (14,055) $ 29,746
Accrued contract loss reserves 6,906 -- (1,972) 4,934
------------ ------------ ------------ ------------
Total contract related items 50,707 -- (16,027) 34,680
Ethylene technology (26,694) -- 954 (25,740)
------------ ------------ ------------ ------------
Total $ 24,013 $ -- $ (15,073) $ 8,940
============ ============ ============ ============
</Table>
The Company previously referred to the fair value of the acquired contract
liability adjustments resulting from the Stone & Webster acquisition as gross
margin reserves. The increases/decreases in the contract (asset) and contract
liability adjustments for the six months ended February 28, 2003 represent
allocation period adjustments made with respect to the IT Group acquisition. The
contract (asset) adjustments are included in other current assets in the
accompanying condensed consolidated balance sheets. The $14,650,000 increase in
the accrued contract loss reserves for the six months ended February 28, 2003
was comprised of a $13,650,000 allocation period adjustment for the IT Group
acquisition and a $1,000,000 expense to accrue for anticipated losses on current
contracts not related to purchase accounting. The annual amortization related to
the ethylene technology is $1,906,000.
Note 12- Contingencies
Contingencies and Subsequent Developments Associated with Domestic Power Market
EPC Projects
In fiscal 2002 and 2001 the Company entered into several significant EPC
contracts for new domestic gas-fired combined cycle power plants. During fiscal
2002 and 2001, the Company recognized revenues of approximately $1,500,000,000
and $250,000,000, respectively, related to these contracts. For the three months
and six months ended February 28, 2003 and 2002, the Company recognized revenues
of approximately $223,000,000 and $611,000,000 in fiscal 2003 and $217,000,000
and $329,000,000 in fiscal 2002, respectively, related to these contracts. The
Company's customers for these power plants are major utility companies and
independent power producers ("IPPs"), several of which where wholly or partially
owned subsidiaries of major utilities. In fiscal 2002, demand for new capacity
in the domestic power market significantly decreased, resulting in, among other
things, financial distress among many participants in the domestic power
markets, particularly the IPPs. At the time the Company entered into these
contracts, all of these customers had investment grade credit ratings. During
2002, all of the Company's IPP customers received downgrades to their credit
ratings, reducing their credit ratings below investment grade. The condition of
the national power market, these credit downgrades and other factors resulted in
three projects being canceled or suspended. For one of these projects, Pike,
discussed further below, the Company was notified by the customer of their
intention to not make a scheduled milestone payment on its required due date. As
of February 28, 2003, the Company has approximately $393,000,000 remaining in
backlog related to gas-fired combined cycle power plant projects: $89,000,000
for IPPs on five projects with the remaining $304,000,000 for major utility
companies on
16
three projects. Approximately $52,000,000 of the IPP backlog is with NEG for the
Covert and Harquahala projects that are discussed below. The backlog does not
include amounts that may be received for settlements of claims on the NEG
Contracts.
In addition, under the terms of one contract with an IPP, the customer, at its
option, can pay a portion of the contract price in subordinated notes or cash.
The Company believes that the amount payable in subordinated notes will not
exceed $27,000,000 under the terms of the contract. The subordinated notes, if
issued, would bear interest at prime plus 4% and mature in October 2009.
However, if any amounts under the notes are unpaid 8 months following final
acceptance of the project, the unpaid notes, plus a cash payment of the amounts,
if any, paid on the notes through the conversion date, is convertible at the
option of the Company into a 49.9% equity interest in the related project. The
payments that could be made with these notes would be due in the first half of
calendar 2003 and final acceptance of the project is expected in the first half
of calendar 2003. As of February 28, 2003 the Company had recorded receivables
of approximately $ 13,000,000 related to claims and disputed changes orders with
respect to this contract.
Any potential loss on any of these projects will be recognized (charged to
earnings) in the period when it becomes evident that a loss has occurred and
amount of the loss can be reasonably estimated.
The Pike Project
During the fourth quarter of 2002, one of the Company's customers, LSP-Pike
Energy, LLC ("Pike") notified the Company of its intention to not pay a
scheduled milestone billing on the required due date of August 4, 2002. Pike is
a subsidiary of NRG Energy, Inc. ("NRG"), which is owned by Xcel Energy, Inc.
("Xcel"). In accordance with the terms of the contract, on September 4, 2002,
the Company notified the customer it was in breach of the terms of the contract
for nonpayment and, therefore, the contract was terminated. No amounts are
included in backlog related to this project.
Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.
Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company has entered into
discussions with its vendors and subcontractors to determine the final amounts
owed based on the termination of the project. While the Company believes that,
pursuant to the terms of the contract with Pike, the Company has retained
ownership of a significant amount of equipment that was to be installed on the
project, the project lenders have advised the Company that they may have an
interest in certain of this equipment. Under the terms of the contract between
the Company and Pike, Pike is obligated to reimburse the Company for all of the
costs incurred by the Company, whether before or after the termination, and a
fee for the work performed prior to the termination. The Company believes that
it is owed approximately $130,000,000 in costs and fees over the amounts already
paid under the contract.
The Company is actively pursuing alternatives to collect all amounts owed under
the Pike contract. A lien has been filed on the project. On October 17, 2002,
the Company filed an involuntary petition for liquidation of Pike, under Chapter
7 of the U.S. Bankruptcy Code to protect its rights, claims, and security
interests in and to the assets of Pike. In December 2002, Pike disputed the
bankruptcy petition in court and discovery is currently proceeding. On March 20,
2003 the Court approved an agreed order submitted by the Company, Pike, and its
lenders, which allowed the Company to dispose of the equipment in its
possession, reserving the parties' rights with respect to any proceeds from
disposition. The Company also filed suit against NRG in U.S. District Court in
Mississippi to collect amounts due under a $100 million guarantee, and against
NRG and Xcel, along with certain of their officers for additional damages, and
costs under various legal theories including substantive consolidation,
alter-ego, and piercing the corporate veil. The Company has also joined in an
involuntary bankruptcy proceeding instituted against NRG by former executives in
Bankruptcy Court in Minnesota. In addition to the legal proceedings, the Company
is continuing discussions with Pike and its lenders in an effort to resolve
collection of the amounts owed.
The Company believes it will ultimately recover the costs it incurred and will
incur under the terms of the contract and the profit it had previously
recognized on the project. Because that contract was terminated on September 4,
2002 no
17
revenue or profit related to Pike was recognized for the six months ended
February 28, 2003. The Company will not recognize any additional profit it is
owed under this contract until it is probable it will collect that additional
amount.
Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements), it is also reasonably possible that the
Company will not recover all of its costs and profit recognized on the project;
particularly if NRG's financial condition continues to deteriorate and if (i)
any dispute regarding the ownership of the equipment in the possession of the
Company is resolved adversely to the Company; or (ii) such equipment cannot be
used on another similar project or liquidated by the Company to recover all or a
portion of the amount owed. NRG has announced that it is in default on certain
of its debt facilities, has failed to make certain principal and interest
payments, and is currently working on a comprehensive restructuring plan. Xcel
announced on March 26, 2003 that its Board of Directors had approved a tentative
settlement agreement with holders of NRG's long term notes and the steering
committee representing NRG's lenders. The settlement is subject to certain
conditions, including the approval of a majority of the NRG lenders and
long-term noteholders and definitive documentation. The terms of the settlement
call for Xcel to make payments to NRG over the next 13 months totaling up to
$752 million for the benefit of NRG's creditors in partial consideration for
their waiver of any existing and potential claims against Xcel. The amount, if
any, that the Company may not be able to recover is dependent upon the final
amounts to be expended by the Company related to the project, the amount to be
realized upon disposition of the equipment related to the project, the financial
wherewithal of the customer and NRG in the future, which is dependent upon its
ability to restructure and/or reach agreement with its creditors and or to
obtain additional funding from its parent company.
The Company has, in connection with its evaluation of the Pike project,
estimated that (i) it has or will incur costs of approximately $75,000,000 to
$80,000,000 over the amounts that have been previously collected from Pike and
(ii) equipment that was to be installed on the project could be liquidated for
approximately $40,000,000 to $60,000,000. Although the Company does not believe
a loss has been incurred as of February 28, 2003, based on these estimates, if
the Company is unable to collect additional amounts from its customer (or its
affiliates), the Company's potential future loss on the Pike project could range
from $15,000,000 to $40,000,000. As of February 28, 2003 the Company has
recorded $46,600,000 included in accounts receivable for costs incurred over
amounts received on the projects.
The Covert & Harquahala Projects
On October 10, 2002, the parent company, PG&E Corp. ("PG&E") of a customer, PG&E
National Energy Group, Inc. ("NEG") announced it had notified its lenders it did
not intend to make further equity contributions as required under the credit
facility to fund two projects, Covert and Harquahala, on which the Company is
the EPC contractor. As of February 2003, these two projects were each over 80%
complete.
Three related agreements for each project combine to effect the target price
contracts. One agreement with each NEG project entity provides for a fixed price
subject to increase based on change orders and claims, while the other
agreements provide for payment from NEG of costs in excess of the fixed price.
As of March 31, 2003 the Company's cost estimates indicate total costs for the
two projects will exceed the combined original target prices by approximately
$95 million, a portion of which the Company believes will be recovered through
change orders and claims. Approved change orders and claims are recoverable
under fixed price agreements from the project entities or the lender in the
event of assignment. Any costs in excess of the fixed price as revised for
approved change orders and claims, are nevertheless recoverable from NEG.
Although these costs will remain due from NEG, we may not be able to collect all
these costs from NEG if NEG is unable to pay. During the three months ended
November 30, 2002, the Company reversed $7,700,000 of profit previously
recognized on these projects, due to increases in cost estimates.
On December 13, 2002, the Company filed suit in the U.S. District Court in
Delaware seeking a declaration that NEG had repudiated the contracts and that
the Company was entitled to adequate assurances of performance and payment under
these contracts. The suit further requested that in the event adequate assurance
was not provided, the Company
18
be relieved of its obligation to complete the EPC services on these projects. In
addition, the Company provided a notice of default under the agreements to NEG
and its lenders, and of its right to terminate the contracts as early as January
15, 2003, unless adequate assurance of payment under the contracts was made.
The Company continued discussions with NEG and its lenders towards a mutually
agreeable resolution of contract issues and continued to work on the projects
while in discussions. On March 13, 2003, the Company filed a Notice of Dismissal
of its suit. On March 16, 2003, the Company notified NEG and its
lenders that it had terminated the Covert and Harquahala contracts, although the
Company continued to work on the projects. The Company elected to terminate the
contracts in order to preserve, and better enable the Company to assert certain
legal rights under the contracts.
On March 18, 2003, NEG's lenders filed suit against the Company in the U.S.
District Court for the District of Delaware claiming wrongful termination by the
Company of these projects and seeking damages "expected to be in excess of $100
million." The Company denies the allegations in this suit.
On April 10, 2003, after extensive negotiations with NEG's project entities,
NEG, and the lenders, all parties executed a term sheet that provides for
settlement of claims related to the Covert and Harquahala projects. The proposed
settlement provides for the amendment of the fixed price EPC contracts to
increase the total contract prices for both projects by a total of $65,000,000,
dismissal of the pending suit by the lenders, release by the Company of claims
based on change orders and the incurrence of other additional costs, revises the
schedule for completion of the projects, and generally addresses related issues.
The revised schedule would provide for the Company to complete the Harquahala
project in September 2003, and the Covert project in December 2003. The other
agreements which provided for recovery of costs in excess of the fixed price
contracts would be terminated. While this term sheet is non-binding and subject
to definitive documentation and ultimate approval of the lenders, the parties
are working diligently to that end, and expect this settlement to be consummated
before April 30, 2003. Based on this expected resolution and the Company's
revised estimated total costs to complete these projects, the Company took a
charge to earnings in the second quarter ended February 28, 2003 in the amount
of $30,000,000 to reflect settlement of the Company's claims amd change orders
for completion of the projects.
At March 31, 2003, the Company had recorded a net receivable of approximately
$17,500,000 related to these projects.
The Company believes that it has first lien rights, superior to the primary
lenders, on the partially completed projects. In the event this settlement is
not consummated and the Company stops work on the projects, although no
assurances can be made, the Company believes it will recover all amounts owed to
it under these terminated contracts including amounts related to change orders
and claims previously approved by NEG, through collection from NEG, the project
entities or their lenders or ultimately through its lien rights on the projects.
It is reasonably possible however, that, if the settlement is not consummated,
the Company may not collect all amounts owed to it under these projects, which
could have a material adverse effect on operating results in the period when the
uncollectible amounts would be recognized. Further, in the event termination of
the contracts is determined to have been wrongful, the Company could be subject
to claims for damages for breach of contract by NEG or its lenders, which claims
for damages could include the cost of third parties to complete the projects. As
previously noted, the suit by NEG's lenders claims damages in excess of $100
million. Such claims for damages could exceed our own estimates of the costs to
complete such projects. In such an event, any claims by NEG or its lenders would
likely be determined in a legal proceeding in which our claims against the
project entities, NEG, and its lenders would also be determined. We would also
be subject to the risks inherent in litigation as well as the risks inherent in
collecting any award we receive in litigation.
Guarantees
In November 2002 the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtness of Others" ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. In addition, FIN 45 requires additional disclosures about the
19
guarantees that an entity has issued. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002 and the disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The recognition and measurement provisions of FIN 45 are not
expected to have a material effect on the Company's financial position, results
of operations or cash flows.
The Company's lenders issue letters of credit on its behalf to customers or
sureties in connection with its contract performance and in limited
circumstances certain other obligations of third parties. The Company is
required to reimburse the issuers of these letters of credit for any payments
which they make pursuant to these letters of credit. At February 28, 2003 the
amount of outstanding letters of credit was approximately $180,790,000.
The Company has also provided guarantees to certain of its joint ventures which
are reported under the equity method and are not consolidated on the
accompanying balance sheet. At February 28, 2003 the Company had guaranteed
approximately $12,000,000 of bank debt or letters of credit and $42,000,000 of
performance bonds with respect to its unconsolidated joint ventures.
Note 13 - Subsequent Events
Senior Notes and Tender Offer for LYONs
On March 17, 2003, the Company issued and sold $ 253,029,000, aggregate
principal amount at maturity, of 7-year 10.75% Senior Notes ("Senior Notes" or
"notes"), which mature on March 15, 2010. The Senior Notes were issued at
original discount price of $988.03 per $1,000 maturity value and have a yield to
maturity of 11.00%. The notes have a call (repurchase) feature that allows the
Company to repurchase all or a portion of the notes at the following prices (as
a percentage of maturity value) and dates.
<Table>
<Caption>
Price As Percentage of
Repurchase (Call) Dates Maturity Value
- ------------------------------ ----------------------
March 15, 2007 105.375 %
March 15, 2008 102.688 %
March 15, 2009 until maturity 100.000 %
</Table>
Additionally, prior to March 15, 2006, the Company may, at its option, utilize
the net cash proceeds from one or more specified equity offerings, within ninety
days of the Company's receipt of the equity funds, to repurchase up to 35% of
the then outstanding amount of Senior Notes at a price of 110.75% of the
maturity value of the notes. Prior to March 15, 2007 the Company may, at its
option, repurchase not less than all of the then outstanding notes at a price
equal to the principal amount of the notes plus a specified applicable premium.
Although the notes are unsecured, they are guaranteed by the Company's material
domestic subsidiaries.
On March 31, 2003 the Company completed the purchase of LYONs with an amortized
value of approximately $256,700,000 and an aggregate principal value of
approximately $384,600,000 for a cost of approximately $248,100,000, resulting
in a net gain after expenses and write-off of unamortized debt costs of
approximately $1,700,000. The Company used the total net proceeds, after fees,
from the sale of the Senior Notes of approximately $243,000,000 and internal
funds of approximately $5,100,000 to effect this repurchase. The LYONs were
purchased pursuant to a tender offer which commenced on February 26, 2003.
Amended Credit Facility
On March 17, 2003, concurrent with the closing of the Senior Notes offering, the
Company amended and restated its Credit Facility ("Amended Credit Facility") and
extended its term to March 16, 2006. The Amended Credit Facility
20
has a $250,000,000 credit limit. The Company may, by March 16, 2004, increase
the credit limit to a maximum of $300,000,000 by allowing one or more lenders to
increase their commitment or by adding new lenders.
Under the Amended Credit Facility, interest will be computed, at the Company's
option, using either the defined base rate or the defined LIBOR rate, plus an
applicable margin. The terms "base rate" and "LIBOR rate" have meanings
customary for financings of this type. The applicable margin is adjusted
pursuant to a pricing grid based on ratings by Standard and Poor's Rating
Services and Moody's Investor Services for the Amended Credit Facility or, if
the Amended Credit Facility is not rated, the ratings from these services
applicable to the Company's senior, unsecured long-term indebtedness. The
margins for Credit Facility loans may be in a range of (i) 1.00% to 3.00% over
the LIBOR or (ii) from the base rate to 1.50 % over the base rate.
The Company is required, with certain exceptions, to prepay loans outstanding
under the Amended Credit Facility with (i) the proceeds of new indebtedness;
(ii) net cash proceeds from equity sales to third parties (if not used for
acquisitions or other general corporate purposes within 90 days after receipt),
and (iii) insurance proceeds or condemnation awards in excess of $5,000,000 that
are not used to purchase a similar asset or for a like business purpose.
The collateral requirements did not change significantly as a result of the
amendment and restatement. The Amended Credit Facility contains certain
financial covenants, including a leverage ratio (which changes after May 1, 2004
representing the initial date LYONs may be submitted by LYONs holders for
repurchase by the Company - see Note7 to Notes to Condensed Consolidated
Financial Statements) and a minimum fixed charge coverage ratio, which requires
achievement of levels of defined net worth and EBITDA. Further, the Company is
required to obtain the consent of the lenders to prepay the Senior Notes or
amend the terms of the Senior Notes. The Amended Credit Facility permits the
Company to repurchase $10,000,000 of its LYONs obligations. Additional LYONs
repurchases are also permitted if (after giving effect to the repurchases), the
Company has the availability to borrow up to $50,000,000 million under the
Amended Credit Facility and the Company has the required amounts of cash and
cash equivalents. Prior to May 1, 2004, $100,000,000 of cash and cash
equivalents is required for purposes of this test and thereafter not less than
$75,000,000. Under the Amended Credit Facility, cash and cash equivalents for
purposes of this test consist of balances not otherwise pledged or escrowed
under the Company's Amended Credit Facility and are reduced by amounts borrowed
under the Amended Credit Facility.
At February 28, 2003, the interest rate on the Amended Credit Facility would
have been either 5.25% (if the prime rate index had been chosen) or 3.84% (if
the LIBOR rate index had been chosen).
Envirogen Acquisition
On March 21, 2003 the Company acquired all of the common stock of Envirogen,
Inc. for a cost of approximately $3,600,000. Envirogen, Inc. was a publicly
traded company and is a provider of soil and water remediation services to
commercial customers and specializes in remediating complex contaminants. It is
also a provider of contractual environmental research services to both
commercial and governmental customers.
21
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, 2003,
and the results of their operations for the three month and six month periods
then ended and should be read in conjunction with (i) the unaudited financial
statements and notes thereto included elsewhere in this Quarterly Report on Form
10-Q and (ii) the consolidated financial statements and accompanying notes to
the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.
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 and infrastructure 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 laws and
regulations and 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,
including the ability to recover for changed conditions; 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 "Item 7- Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors" in
the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002, as well as the other reports and registration statements filed by the
Company with the Securities and Exchange Commission and on the Company's website
under "Forward Looking Statements". These documents are available from the
Securities and Exchange Commission or from the Company's Investor Relations
Department. For more information on the Company and the announcements it makes
from time to time, visit its website at www.shawgrp.com
22
General
The Company is a leading global provider of comprehensive services to the power,
process, and environmental and infrastructure industries. Shaw is a
vertically-integrated provider of comprehensive engineering, procurement, pipe
fabrication, construction and maintenance services to the power and process
industries. Shaw is also a leader in the environmental, infrastructure and
homeland defense markets providing consulting, engineering, construction,
remediation and facilities management services to governmental and commercial
customers.
During the quarter ended February 28, 2003, the Company reorganized its
operations which resulted in a change in its operating segments. The Company has
segregated its business activities into three operating segments: ECM
(Engineering, Construction and Maintenance) segment, Environmental and
Infrastructure segment, and Fabrication, Manufacturing and Distribution segment.
The primary change from the Company's previously reported segments is that the
pipe fabrication and related operations were moved from the segment previously
reported as the Integrated EPC Services segment to the segment previously
reported as the Manufacturing and Distribution segment resulting in the new ECM
segment and the Fabrication, Manufacturing and Distribution segment,
respectively.
ECM
The ECM segment provides a range of design and construction related services,
including design, engineering, construction, procurement, maintenance, and
consulting services primarily to the power generation and process industries.
Environmental & Infrastructure
The Environmental & Infrastructure segment provides services which include the
identification of contaminants in soil, air and water and the subsequent design
and execution of remedial solutions. This segment also provides project and
facilities management capabilities and other related services to
non-environmental civil construction, watershed restoration and the outsourcing
privatization markets.
Fabrication, Manufacturing and Distribution
The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants and manufactures and distributes specialty
stainless, alloy and carbon steel pipe fittings.
Comments Regarding Future Operations
Historically, the Company has used acquisitions to pursue market opportunities
and to augment or increase existing capabilities, and plans to continue to do
so. However, all comments concerning the Company's expectations for future
revenue and operating results are based on the Company's forecasts for its
existing operations and do not include the potential impact of any future
acquisitions.
Critical Accounting Policies
Item 7 included in Part II of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2002 presents 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 the Notes to Consolidated Financial Statements in Item 8 of Part II
of the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.
23
Results of Operations
The following table sets forth, for the periods indicated, the percentages of
the Company's net revenues that certain income and expense items represent:
<Table>
<Caption>
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
------ ------ ------ ------
Income:
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 94.2 88.0 92.7 87.2
------ ------ ------ ------
Gross profit 5.8 12.0 7.3 12.8
General and administrative expenses 6.8 5.9 5.8 6.3
------ ------ ------ ------
Operating income (loss) (1.0) 6.1 1.5 6.5
Interest expense (0.8) (0.9) (0.7) (1.0)
Interest income 0.3 0.4 0.2 0.5
Other income, net -- -- -- --
------ ------ ------ ------
(0.5) (0.5) (0.5) (0.5)
Income (loss) before income taxes and earnings (losses)
from unconsolidated entities (1.5) 5.6 1.0 6.0
Provision for income taxes (benefit) (0.6) 2.0 0.3 2.2
------ ------ ------ ------
Income (loss) before earnings (losses) from unconsolidated entities (0.9) 3.6 0.7 3.8
Earnings (losses) from unconsolidated entities (0.2) 0.2 (0.2) 0.1
------ ------ ------ ------
Net income (loss) (1.1)% 3.8% 0.5% 3.9%
====== ====== ====== ======
</Table>
General
The Company's revenues by industry sectors approximated the following for the
periods presented:
<Table>
<Caption>
Three Months Ended February 28,
2003 2002
---------------------- ----------------------
Industry Sector (in millions) % (in millions) %
- --------------- ------------- ----- ------------- -----
Power Generation $ 319.2 45% $ 423.7 75%
Environmental and Infrastructure 269.0 37 35.3 6
Process Industries 107.7 15 67.6 12
Other Industries 24.6 3 39.6 7
------------- ----- ------------- ----
$ 720.5 100% $ 566.2 100%
============= ===== ============= ====
</Table>
24
<Table>
<Caption>
Six Months Ended February 28,
2003 2002
---------------------- ----------------------
Industry Sector (in millions) % (in millions) %
- --------------- ------------- ----- ------------- -----
Power Generation $ 890.9 52% $ 742.7 73%
Environmental and Infrastructure 574.7 33 72.6 7
Process Industries 180.7 11 124.6 12
Other Industries 71.1 4 79.9 8
------------- ---- ------------- ----
$ 1,717.4 100% $ 1,019.8 100%
============= ==== ============= ====
</Table>
The Company's revenues increased to $720.5 million for the three months ended
February 28, 2003 from $566.2 million for the three months ended February 28,
2002 and to $ 1.7 billion for the six months ended February 28, 2003 from $1.0
billion for the six months ended February 28, 2002. The increase in revenue for
the six months ended February 28, 2003 included an approximate $148.2 million
increase in revenues from the power generation industry sector. This increase
was attributable to increased revenue from the ECM segment for contracts for the
construction of new gas-fired power plants, most of which were entered into in
fiscal 2001 and early fiscal 2002. However, as is discussed more fully below for
the ECM segment, revenues from gas-fired power generation contracts began to
decline in the second quarter of fiscal 2003 and will continue to decline for
the remainder of fiscal 2003.
During the third quarter of fiscal 2002, the Company acquired most of the assets
and assumed certain liabilities of the IT Group, a leading provider of
environmental and infrastructure services to governmental and commercial
customers. As a result of this acquisition, the Company formed a new
Environmental & Infrastructure business segment, by combining the acquired IT
Group operations with the Company's existing environmental and infrastructure
businesses. This acquisition increased the Company's revenues from environmental
and infrastructure services to $269.0 million and $574.7 million for the three
months and six months ended February 28, 2003, respectively, from revenues of
$35.3 million and $72.5 million for the three months and six months ended
February 28, 2002. These revenue increases were partially offset by decreases in
revenues from the Fabrication, Manufacturing and Distribution segment, which was
also negatively impacted by the reduction in demand in the power generation
market. The Company anticipates that revenues for the remainder of fiscal 2003
will be lower than revenues for the current quarter due to the downturn in the
domestic power market and a decrease in the rate of contract awards for
significant EPC projects.
The Company's revenues by geographic regions approximated the following for the
periods presented:
<Table>
<Caption>
Three Months Ended February 28,
2003 2002
---------------------- ---------------------
Geographic Region (in millions) % (in millions) %
- ----------------- ------------- ----- ------------- ----
United States $ 597.1 83% $ 454.5 80%
Asia/Pacific Rim 59.7 8 44.2 8
Europe 28.2 4 24.0 4
Other North America 23.6 3 27.3 5
South America 3.2 1 8.3 2
Middle East 2.3 -- 2.5 --
Other 6.4 1 5.4 1
------------- ----- ------------- ----
$ 720.5 100% $ 566.2 100%
============= ===== ============= ====
</Table>
25
<Table>
<Caption>
Six Months Ended February 28,
2003 2002
---------------------- ---------------------
Geographic Region (in millions) % (in millions) %
- ----------------- ------------- ----- ------------- ----
United States $ 1,471.3 86% $ 818.9 80%
Asia/Pacific Rim 107.9 6 73.4 7
Other North America 63.9 3 51.2 5
Europe 50.8 3 49.4 5
South America 9.7 1 12.7 1
Middle East 4.4 -- 6.0 1
Other 9.4 1 8.2 1
------------- ----- ------------- ----
$ 1,717.4 100% $ 1,019.8 100%
============= ==== ============= ====
</Table>
Revenues for domestic projects increased $142.6 million to $597.1 million for
the three months ended February 28, 2003 from $ 454.5 million for the three
months ended February 28, 2002 and increased $652.4 million to $1.5 billion for
the six months ended February 28, 2003 from $818.9 million for the six months
ended February 28, 2002. The increases for the three months ended February 28,
2003 were primarily attributable to revenues associated with the businesses of
the IT Group and were partially offset by declines in power generation revenues.
The increases in domestic revenues for the six months ended February 28, 2003 as
compared with the six months ended February 28, 2002 primarily resulted from an
increase in power generation revenues in the first quarter of fiscal 2003 and
the acquisition of the IT Group.
Revenues for international projects increased to $123.4 million and $246.1
million for the three and six months ended February 28, 2003 from $111.7 million
and $200.9 million for the same periods of the prior year. The revenue increase
in the Asia Pacific Rim region was primarily a result of the work performed by
the Company's ECM segment on a 600,000 tons per year ethylene plant in China
that is scheduled for completion in fiscal 2005.
Total backlog at February 28, 2003 was approximately $5.0 billion as compared
with $5.0 billion at November 30, 2002 and $5.6 billion at August 31, 2002. The
decrease in backlog since August 31, 2002 was attributable to reduction in
demand for gas-fired power generation services. Since November 30, 2002
increases in awards for environmental and infrastructure services and for
services to process industries and for nuclear maintenance have been offset by a
decline in power generation backlog. Approximately 90% of the backlog relates to
domestic projects, and roughly 40% of the backlog relates to work currently
anticipated to be completed during the 12 months following February 28, 2003.
The backlog is largely a reflection of the broader economic trends being
experienced by the Company's customers and is important in anticipating
operational needs.
Backlog at February 28, 2003 by industry sector is as follows (in millions):
<Table>
Environmental and Infrastructure $ 2,543.4 50%
Power Generation 1,778.5 35
Process Industries 645.3 13
Other Industries 75.7 2
--------- ----
$ 5,042.9 100%
========= ====
</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.
The Company expects that fiscal 2003 revenues will be in the range of
approximately $3.1 to $3.3 billion, 39% of which represents projects for our
environmental and infrastructure services, 52% for our engineering
26
construction and maintenance services and 9% for our pipe fabrication,
manufacturing and distribution services. Quarterly revenues for the remainder of
fiscal 2003 are expected to be in a range between $725 million to $800 million
for the third quarter and between $600 million to $670 million for the fourth
quarter. Fiscal 2004 revenues are expected to range between $2.4 billion to $2.8
billion, approximately 50% of which is expected to be derived from our
environmental and infrastructure segment, approximately 40% from our
engineering, construction and maintenance segment and 10% from our pipe
fabrication, manufacturing and distribution segment.
The following presents a comparison of the Company's operating results from the
three and six months ended February 28, 2003 as compared with the three and six
months ended February 28, 2002 for the Company's three business segments.
ECM Segment
ECM revenues from customers in the following industry sectors approximated the
following for the periods indicated:
<Table>
<Caption>
Three Months Ended February 28,
2003 2002
---------------------- ---------------------
Industry Sector (in millions) % (in millions) %
- ----------------- ------------- ----- ------------- ----
Power Generation $ 292.2 76% $ 365.3 84%
Process Industries 82.1 21 50.4 12
Other Industries 12.7 3 17.0 4
------------- ----- ------------- ----
$ 387.0 100% $ 432.7 100%
============= ===== ============= ====
</Table>
<Table>
<Caption>
Six Months Ended February 28,
2003 2002
---------------------- ---------------------
Industry Sector (in millions) % (in millions) %
- ----------------- ------------- ----- ------------- ----
Power Generation $ 823.9 82% $ 633.7 83%
Process Industries 131.7 13 90.3 12
Other Industries 45.8 5 35.5 5
------------- ----- ------------- ----
$ 1,001.4 100% $ 759.5 100%
============= ===== ============= ====
</Table>
Revenues for the three months ended February 28, 2003 decreased to $387.0
million from $432.7 million from the three months ended February 28, 2002. This
decrease was due primarily to a decrease in gas-fired power generation projects,
offset by an increase in revenue for process projects. Process industry revenues
increased primarily due to work on an ethylene plant in China that is scheduled
to continue into fiscal 2005. Revenues for the six months ended February 28,
2003 increased to approximately $1.0 billion from approximately $760 million for
the same period in the prior year. The increase in revenues for the six months
ended February 28, 2003 was due to increased revenue from contracts for the
construction of new gas fired-power plants, most of which were entered into
fiscal 2001 and early fiscal 2002. Due to the downturn in the market for the
construction of new gas-fired power plants, management anticipates that the ECM
segments revenues will decline in each of the last two quarters of fiscal 2003
as compared with the first two quarters of fiscal 2003 as remaining in-process
EPC projects booked in 2001 and early 2002 are completed.
Gross profit (loss) for the ECM segment for the three months and six months
ended February 28, 2003 of a loss of $2.1 million and a profit of $31.9 million,
respectively, includes a $30.0 million charge related to the Covert and
Harquahala projects (the NEG projects) that negatively impacted gross margin by
7.8% and 3.0% (as a percentage of sales) for the three and six month periods
ended February 28, 2003. This charge is a result of increased estimated costs to
complete these projects combined with a proposed agreement with the owners of
these projects and their lenders. The proposed agreement would increase the
contract prices by a total of $65.0 million, amend the contracts from target
price to fixed price
27
contracts, extend the required completion dates and resolve outstanding claims,
suits and change orders between these parties. See Note 12 of Notes to the
Condensed Consolidated Financial Statements for additional discussion of the
Covert and Harquahala projects.
Gross profit for the ECM segment, before charges related to the NEG projects
discussed above of $30.0 million, decreased to $27.9 million and to $61.9
million in the three and six months ended February 28, 2003, respectively, from
a gross profit of $37.9 million and $72.6 million in the three months and six
months ended February 28, 2002, respectively, primarily due to reduction in
estimated gross margins on certain gas-fired power generation projects, offset
by increases in gross margin in nuclear maintenance projects and the ethylene
plant project in China. The gross profit margin percentage before charges
related to the NEG projects, decreased to 7.2% and 6.2% for the three and six
months ended February 28, 2003, respectively as compared with 8.8% and 9.6% for
the same periods in the prior year, due primarily to a reduction in gross
margins in gas-fired power generation projects.
In addition for the six months period February 28, 2003 a higher percentage of
segment revenues were derived from lower margin revenue sources including
revenues from large equipment purchases that carry a very low gross margin due
to the "pass through" nature of their underlying costs, which revenues were
approximately $13.9 million and $ 147.3 million (approximately 3% and 15% of
segment revenues) for the three months and six months ended February 28, 2003 as
compared with approximately $ 18.7 million and $ 54.6 million (approximately 4%
and 7% of segment revenues) for the three and six months ended February 28,
2002.
Gross profit in the three months and six months ended February 28, 2003 was
increased (cost of revenues decreased) by approximately $2.0 million and $4.7
million, respectively, and by approximately $6.0 million and $14.1 million in
the same periods in fiscal 2002 for the amortization of contract liability
adjustments related to contracts acquired in the Stone &Webster acquisition.
(See Note 11 of Notes to the Condensed Consolidated Financial Statements.)
Segment backlog at February 28, 2003 was approximately $2.4 billion as compared
with approximately $ 2.5 billion at November 30, 2002 and $3.1 billion at August
31, 2002, and was comprised of the following:
<Table>
<Caption>
February 28, 2003
--------------------
Industry Sector (in millions) %
--------------- ------------- ----
Power Generation
Nuclear Power $ 1,228.4 52%
Fossil Fuel EPC 406.6 17
Other 77.4 3
------------- ----
Total Power Generation 1,712.4 72
Process Industries 600.5 26
Other Industries 41.4 2
------------- ----
Total ECM $ 2,354.3 100%
============= ====
</Table>
The segment's backlog declined from August 31, 2002 because the amount of work
performed on power generation contracts was not fully replaced with new orders
due to the downturn in demand for power generation services.
The Company anticipates that in the future, the ECM segment will continue to
derive a significant portion of its revenues from the power industry (including
fossil fuel and nuclear) and the segment expects to increase its revenues from
other sectors of the domestic power industry through contracts to re-power,
refurbish or maintain existing power plants and to provide and install emission
control equipment. Further, although management anticipates that award levels
will be less than in prior years, the Company will continue to design and
construct new power plants , primarily for regulated utilities. Further, the
Company has seen increases in bid and proposal activity in various foreign
process and power industry sectors. See Note 12 of Notes to Condensed
Consolidated Financial Statements for a discussion of the contingencies related
to certain cancelled and active ECM projects.
28
Environmental and Infrastructure Segment
Environmental & Infrastructure segment revenues for the three and six months
ended February 28, 2003 were $269.0 million and $574.7 million, respectively, as
compared with revenues of $35.3 million and $72.5 million, respectively, in the
same periods of the prior fiscal year. This increase was entirely attributable
to the Company's acquisition of the IT Group assets (see Note 4 of Notes to
Condensed Consolidated Financial Statements).
Gross margin for the three months and six months ended February 28, 2003 was
$31.8 million and $63.7 million as compared with $8.0 million and $16.7 million
for the same period of the prior year. Gross profit in the three months and six
months ended February 28, 2003 was increased (cost of revenues decreased) by
approximately $7.0 million and $10.1 million for the net amortization of
asset/liability adjustments to the fair value of contracts acquired in the IT
Group acquisition. See Note 4 and Note 12 of Notes to the Condensed Consolidated
Financial Statements.
The gross margin percentage was approximately 11.8% and 11.1% for the three
months and six months ended February 28, 2003 and 22.6% and 23.1% approximately
for the three months and six months ended February 28, 2002. The reduction in
the gross margin percentage for the three months and six months ended February
28, 2003 as compared with the three and six months ended February 28, 2002 was
attributable to lower margin contracts associated with the businesses acquired
in the IT Group transaction. The Company anticipates that for the remainder of
fiscal 2003 the gross margin percentage for the Environmental & Infrastructure
segment will approximate the gross margins realized during the six months ended
February 28, 2003. The difference in the gross margin percentages between the
Company's pre-IT Group environmental and infrastructure operations (primarily
infrastructure and hazardous material clean up and disposal) and those acquired
in the IT Group asset acquisition (environmental clean-up, landfills and
facilities management) is primarily attributable to such factors as different
customers, competition and mix of services.
Backlog in this segment increased to approximately $2.5 billion as of February
28, 2003 from approximately $2.3 billion as of November 30, 2002 and as of
August 31, 2002. The Company believes the Environmental & Infrastructure segment
revenues will increase over the next several years, as a result of a combination
of factors, such as market opportunities in various environmental clean-up,
homeland defense and infrastructure markets and the Company's belief that it
will be able to re-gain market share which the IT Group lost while it was
experiencing financial difficulties, including the period in which it was in
bankruptcy during the first four months of calendar 2002. The Company
anticipates that segment revenue will increase due to seasonal factors in the
third and fourth quarters of fiscal 2003 as compared with revenues in the second
quarter of fiscal 2003.
Fabrication, Manufacturing and Distribution Segment
Revenues decreased to $64.4 million and $141.2 million for the three and six
months ended February 28, 2003 from $98.2 million and $187.9 million for the
three and six months ended February 28, 2002. Additionally, segment gross profit
decreased to $11.9 million and $28.4 million for the three and six months ended
February 28, 2003 , respectively, as compared with $21.9 million and $41.1
million for same periods in fiscal 2002. The gross margin percentage was
approximately 18.5% and 20.1% for the three months and six months ended February
28, 2003, respectively as compared with 22.3% and 21.9%, respectively, for the
three months and six months ended February 28, 2002. The decreases in revenues
and margin in fiscal 2003 versus fiscal 2002 were attributable to reduced
domestic demand primarily from power generation customers, without offsetting
increases in other industry sectors. The reduced demand for the segment's
products has had a resultant negative impact on pricing and gross margin.
Domestic demand is expected to continue at reduced levels for the remainder of
fiscal 2003.
As a result of the current market situation, the Company has decided to
significantly reduce or cease production at certain smaller facilities,
consolidate certain operations and will also implement certain other cost
savings programs for this segment. Further, the Company may, depending on market
conditions, suspend operations at its facility in Venezuela due to the political
situation in that country. However, demand is strong in the markets serviced by
the segments unconsolidated joint ventures in Bahrain and in China. The facility
for the China joint venture is under construction and is expected to become
operational in late calendar 2003 or early 2004.
29
Unconsolidated Subsidiaries
During the three and six months ended February 28, 2003, the Company recognized
losses of approximately $1.4 million and $3.0 million, respectively, from
operations of its unconsolidated joint ventures which are accounted for on the
equity method. These losses were primarily attributable to one project from the
Entergy/Shaw joint venture. The operations of the Entergy/Shaw joint venture are
winding down and are not expected to continue. Management does not anticipate
any significant future contribution from this joint venture. In the three and
six months ended February 28, 2002 the Company realized income of approximately
$1.0 million and $1.1 million from the operations of unconsolidated joint
ventures.
General and Administrative Expenses, Interest Expense and Income, and Income
Taxes
General and administrative expenses increased to approximately $49.2 million and
$99.1 million for the three and six months ended February 28, 2003 as compared
with approximately $33.0 million and $63.9 million for the three and six months
ended February 28, 2002. As a percentage of revenues, general and administrative
expenses increased to 6.8% for the three months ended February 28, 2003 as
compared with 5.8% for the same period in fiscal 2002, However, general and
administrative expenses represented only 5.8% of revenues for the six months
ended February 28, 2003 as compared with 6.3% for the six months ended February
28, 2002. A substantial portion of the approximate $35.2 million increase in
general and administrative costs for the six months ended February 28, 2003 is
attributable to the operations of Shaw E&I (comprised largely of the IT Group
businesses which the Company acquired in the third quarter of fiscal 2002). Many
of Shaw E&I's contracts are cost-plus and allow for full or partial
reimbursement of certain components of general and administrative costs.
Accordingly, a large percentage of Shaw E&I's general and administrative costs
are directly reimbursed through its contract provisions. Additionally, the
Company is incurring increased depreciation and facilities costs in fiscal 2003
resulting from capital projects completed in the latter part of fiscal 2002. The
Company anticipates that it will reduce its total general and administrative
expenses in the remaining quarters of fiscal 2003 from the first six months
level of fiscal 2003 as a result of reduced revenues from the construction of
gas power generation plants, although that reduction will be substantially
offset by expected increases in the Environmental and Infrastructure segment's
general and administrative expenses.
Interest expense for the three months and six months ended February 28, 2003 was
approximately $5.8 million and $11.5 million, respectively, representing an
increase of $.3 million from the same periods in fiscal 2002. Substantially all
of the Company's borrowings were attributable to its 2.25% zero coupon LYONs
subordinated debentures which were issued in fiscal 2001 (see Note 7 of Notes to
Condensed Consolidated Financial Statements). Accordingly, the Company's
interest expense for the three and six months ended February 28, 2003 remained
comparable with interest expense for the same periods in fiscal 2002 because
there was no substantive change in the amounts borrowed or interest rates. 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 and the LYONs
stated interest rate. The primary components (accretion of zero coupon discount
interest and amortization of loan fees) of the Company's interest expense are
non-cash charges. However, the Company's interest expense will increase
significantly for the remainder of fiscal 2003 as a result of the sale on March
17, 2003 of $253 million of 7-year 10.75% unsecured Senior Notes ("Senior Notes"
or "notes"). The Senior Notes were issued at original discount price of $988.03
per $1000 maturity value and have a yield to maturity of 11.00%. The net
proceeds of the sale were used to repurchase LYONs subordinated debentures
pursuant to the Company's tender offer described in Subsequent Events below.
Interest income for the three and six months ended February 28, 2003 decreased
to approximately $2.1 million and $3.6 million from $2.4 million and $5.4
million for the same periods in fiscal 2002 as a result of lower interest rates
and lower levels of invested funds.
The Company's effective tax rate was 41% and 33% for the three and six months
ended February 28, 2003. The Company's effective tax rate was 36% for the three
and six months ended February 28, 2002. Primarily as a result of the Company's
second quarter loss in fiscal 2003, the estimated effective tax rate for the
entire fiscal year of 2003 was reevaluated and estimated to be 33%. Therefor,
the year-to-date effective tax rate was adjusted to 33%, resulting in a 41% tax
benefit for the three months ended February 28, 2003. Overall, the Company's tax
rate
30
is significantly impacted by the mix of foreign (including foreign export
revenues) versus domestic work.
Additionally, as of February 28, 2003, the Company recorded a $6.3 million net
of tax liability for one of its United Kingdom (U.K.) defined benefit retirement
plans and its Canadian defined benefit retirement plan. (Also see Note 8 of
Notes to Condensed Consolidated Financial Statements). This liability is
required to be recognized on the plan sponsor's balance sheet when the
accumulated benefit obligations of the plan exceed the fair value of the plan's
assets. In accordance with SFAS No. 87 - "Employers Accounting for Pensions" the
increase in the minimum liability is recorded through a direct charge to
stockholders' equity and is, therefore, reflected, net of tax, as a component of
accumulated other comprehensive income (loss) on the Condensed Consolidated
Balance Sheet. This liability will require the Company to increase its future
contributions to the plan.
Liquidity and Capital Resources
Net cash used in operations was $141.2 million for the six months ended February
28, 2003 compared with $129.0 million of net cash provided by operations for the
six months ended February 28, 2002. For the six months ended February 28, 2003
cash was increased by (i) net income of $8.6 million, (ii) deferred tax expense
of $5.2 million, (iii) depreciation and amortization of $22.9 million, and (iv)
interest accretion and loan fee amortization of $10.3 million. These increases
were more than offset as net cash was decreased from cash used in other
operating activities by $173.5 million, comprised primarily of reductions in
accounts payable and accrued liabilities, and advanced billings and billings in
excess of cost and estimated earnings on uncompleted contracts. Partially
offsetting these uses of cash were decreases in costs and estimated earnings in
excess of billings on uncompleted contracts and accounts receivable. During
fiscal 2002 and 2001, the Company billed and collected substantial advanced
billings on its larger EPC contracts, which positively impacted cash flow in
fiscal 2002 and 2001; however, the Company's cash flow in the first six months
of fiscal 2003 was negatively impacted as the Company utilized these funds to
pay project costs. Further, the Company did not receive a substantial amount of
advanced billings in the first six months of fiscal 2003. The Company expects
that its cash flow will continue to be negatively impacted by the payment of
project costs for which it has received advance payments during the remainder of
fiscal 2003.
Additionally, the Company acquired a large number of contracts in the Stone &
Webster and IT Group acquisitions with lower than market rate margins due to the
effect of the financial difficulties experienced by Stone & Webster and the IT
Group on negotiating and executing contracts prior to acquisition. These
contracts were adjusted to their fair value as an asset or liability and the
related amortization has the net effect of reducing cost of revenues for the
contracts as they are completed, while the amortization of the asset increases
costs of revenues. Cost of revenues was reduced on a net basis by approximately
$14.7 million and $14.1 million during the six months ended February 28, 2003
and 2002, respectively, through the amortization of these adjustments, which is
a non-cash component of income. The amortization of these assets and liabilities
resulted in a corresponding net increase in gross profit. The adjustments are
amortized over the lives of the contracts, which for certain IT Group contracts,
will continue for several years. See Note 4 and Note 11 of Notes to Condensed
Consolidated Financial Statements.
Net cash used in investing activities was $17.4 million for the first six months
of fiscal 2003, compared to $61.2 million for the same period of the prior
fiscal year. During the first six months of fiscal 2003, the Company purchased
approximately $16.6 million of property and equipment and received proceeds from
the sale of property and equipment of approximately $2.9 million. The Company
also paid $1.2 million for LFG&E (see Note 4 of Notes to Condensed Consolidated
Financial Statements). Additionally, purchases of marketable securities held to
maturity exceeded purchases by $3.1 million.
Net cash used in financing activities totaled approximately $49.8 million for
the six months ended February 28, 2003 compared with $24.5 million of net cash
used in the first six months of fiscal 2002. During the six months ended
February 28, 2003 the Company purchased approximately 3,171,000 shares of its
Common Stock for a cost of approximately $47.8 million. These purchases
completed the Company's $100 million Common Stock repurchase program that it
initiated in September 2001. The Company also made payments on credit lines,
debt and leases of approximately $2.2 million.
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 $350 million limits
31
of this facility. The 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 of the Company's
domestic subsidiaries and 66% of the capital stock of 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 Common Stock repurchases and/or
LYONs repurchases made subsequent to February 28, 2002, without prior consent.
Subsequent consent was provided to allow the Company to complete in October 2002
the $100 million Common Stock repurchase program which was authorized by the
Company's Board of Directors in September 2001 (see Note 3 of Notes to Condensed
Consolidated Financial Statements). As of February 28, 2003, the Company was in
compliance with these covenants or had obtained the necessary waivers. At
February 28, 2003 letters of credit of approximately $180.8 million were
outstanding and no revolving credit loans were outstanding under the Credit
Facility.
The Credit Facility was amended and restated on March 17, 2003 (see "Subsequent
Events" below).
The Company's cash flow and/or working capital for the remainder of fiscal 2003
will be impacted by such factors as (i) the amount of increased working capital
necessary to support the operations and the settlement of assumed liabilities of
the recently acquired IT Group, (ii) payment of costs on projects for which
significant advance payments had been previously received and the timing and
negotiated payment terms of its projects, (iii) developments with respect to the
Pike, NEG and other IPP projects (see Note 12 of Notes to Condensed Consolidated
Financial Statements) and (iv) its capital expenditures program.
Further, the Company anticipates recording in the third quarter of fiscal 2003
an increase in the current maturity of long term debt (as a reduction to working
capital) related to the Company's LYONs' obligations. (Note: The amortized value
of the Company's remaining LYONs debt after the issuance of the Senior Notes and
the purchase of LYONs debt with the proceeds from the Senior Notes was
approximately $270.5 million as of March 31, 2003 -also see "Subsequent Events"
below). The adjustment to classify a substantial amount of LYONs debt as having
a current maturity will be required because the owners of the LYONs' notes are
permitted, if they choose to do so, to submit these notes to the Company on May
1, 2004, May 1, 2006, May 1, 2011, and May 1, 2016 for repurchase by the
Company. This adjustment will not affect actual liquidity requirements in fiscal
2003. However, liquidity requirements in fiscal 2004 will be affected by the
amount of LYONs submitted to the Company for repurchase in May 2004 and the
amortized value of the LYONs obligations will be approximately $278 million at
that time. The Company may choose to repurchase the LYONs submitted to the
Company for repurchase by the LYONs holders in either cash or shares of the
Company's Common Stock, or a combination of Common Stock and cash. The Company
anticipates funding all or substantially all of the LYONs repurchase obligations
in cash, and accordingly, the Company's cash resources and other forms of
liquidity will be substantially reduced. Additionally during fiscal 2004 the
Company's liquidity will be also be reduced by its cash interest payments on the
Company's $253 million of Senior Notes which were sold and issued on March 17,
2003 ( see - "Subsequent Events" below). Accordingly, as a result of these
factors, the Company's expects its working capital position to decrease during
the next twelve months to fifteen months.
The Company believes that its $363.0 million of working capital and unused
borrowing capacity of approximately $69.2 million at February 28, 2003,
(calculated based on the borrowing capacity of the Company's Credit Facility as
amended and restated on March 17, 2003), is in excess of its identified
short-term working capital needs, (based on its existing operations) and that
the Company will have sufficient working capital and borrowing capacity to fund
its operations for the next twelve months.
32
Subsequent Events
Senior Notes and Tender Offer for LYONs
On March 17, 2003 the Company issued and sold $253 million of 7-year 10.75%
unsecured Senior Notes ("Senior Notes" or "notes"). The Senior Notes were issued
at original discount price of $988.03 per $1000 maturity value and have a yield
to maturity of 11.00%. The notes have a call (repurchase) feature that allows
the Company to repurchase the notes at the following prices (as percentage of
maturity value) and dates.
<Table>
<Caption>
Price As Percentage
Repurchase (Call) Dates of Maturity Value
- ----------------------- -------------------
March 15, 2007 105.375%
March 15, 2008 102.688%
March 15, 2009 until maturity 100.000%
</Table>
Additionally, prior to March 15, 2006 the Company may, at its option, utilize
the proceeds from one or more equity offerings, within ninety days of the
Company's receipt of the equity funds, to purchase up to 35% of the then
outstanding amount of Senior Notes at a price of 110.75% of the maturity value
of the notes. Prior to March 15, 2007 the Company may, at its option, repurchase
not less than all of the then outstanding notes at a price equal to the
principal amount of the notes plus a specified applicable premium. Although the
notes are unsecured, they are guaranteed by the Company's domestic subsidiaries.
On March 31, 2003, the Company purchased LYONs with an amortized value of
approximately $256.7 million and an aggregate principal value of approximately
$384.6 million for a cost of approximately $248.1 million, resulting in a net
gain after expenses and write-off of unamortized debt costs of approximately
$1.7 million. The Company used the total net proceeds, after fees, from the sale
of the Senior Notes of approximately $243 million and internal funds of
approximately $5.1 million to effect this repurchase. The LYONs were purchased
pursuant to a tender offer which commenced on February 26, 2003.
Amended Credit Facility
On March 17, 2003, concurrent with the closing of the Senior Notes offering, the
Company amended and restated its Credit Facility ("Amended Credit Facility ")
and extended its term to March 16, 2006. The Amended Credit Facility has a $250
million credit limit which is less that the $350 million amount of the Credit
Facility prior to the amendment and restatement. The Company may, by March 16,
2004, increase the credit limit to a maximum of $300 million by allowing one or
more lenders to increase their commitment or by adding new lenders.
Under the Amended Credit Facility, interest will be computed, at the Company's
option, using either the defined base rate or the defined LIBOR rate, plus an
applicable margin. The terms "base rate" and "LIBOR rate" have meanings
customary for financings of this type The applicable margin is adjusted pursuant
to a pricing grid based on ratings by Standard and Poor's Rating Services and
Moody's Investor Services for the Amended Credit Facility or, if the Amended
Credit Facility is not rated, the ratings from these services applicable to the
Company's senior, unsecured long-term indebtedness. The margins for Credit
Facility loans may be in a range of (i) 1.00% to 3.00% over LIBOR or (ii) from
the base rate to 1.50 % over the base rate.
The Company is required to prepay, with certain exceptions loans under the
Amended Credit Facility with (i) the proceeds of new indebtedness; (ii) net cash
proceeds equity sales to third parties (if not used for acquisitions or other
general corporate purposes within 90 days after receipt), and(iii) insurance
proceeds or condemnation awards in excess of in excess of $5 million that are
not used to purchase a similar asset or for a like business purpose.
33
The collateral requirements did not change significantly as a result of the
amendment and restatement. The Amended Credit Facility contains certain
financial covenants, including a leverage ratio which changes after May 1, 2004
(representing the initial date LYONs may be submitted by LYONs holders for
repurchase by the Company - see Note 7 to Notes to Condensed Consolidated
Financial Statements ) and a minimum fixed charge coverage ratio, which requires
achievement of levels of defined net worth and EBITDA. Further, the Company is
required to obtain the consent of the lenders, to prepay the Senior Notes or
amend the terms of the Senior Notes. The Amended Credit Facility includes
customary events of default, including a defined "change of control." The
Amended Credit Facility permits the Company to repurchase $10 million of its
LYONs obligations. Additional LYON's repurchases are also permitted (after
giving effect to the repurchases), if the Company has the ability to borrow up
to $50 million under the Amended Credit Facility and the Company has the
required amounts of cash and cash equivalents. Prior to May 1, 2004, $100
million of cash and cash equivalents is required and thereafter not less than
$75 million. Under the Amended Credit Facility, cash and cash equivalents for
purposes of this test consist of balances not otherwise pledged or escrowed
under the Company's Amended Credit Facility and are reduced by amounts borrowed
under the Amended Credit Facility.
At February 28, 2003, the interest rate on this line of credit would have been,
pursuant to the terms of Amended Credit Facility, either 5.25% (if the prime
rate index had been chosen) or 3.84% (if the LIBOR rate index had been chosen).
Envirogen Acquisition
On March 21, 2003 the Company's Shaw Environmental subsidiary acquired all of
the common stock of Envirogen, Inc for a cost of approximately $3.6 million.
Envirogen, Inc. is a provider of soil and water remediation services to
commercial customers and specialized it remediating complex contaminants. It is
also a provider of contractual environmental research services to both
commercial and governmental customers.
Financial Accounting Standards Board Statements
In November 2002 the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. In addition, FIN 45 requires additional disclosures about the
guarantees that an entity has issued. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospectus basis to guarantees issued
or modified after December 31, 2002 and the disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods ending
after December 15, 2002. The recognition and measurement provisions of FIN 45
are not expected to have a material effect on the Company's financial position,
results of operations or cash flows.
34
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.
Additionally, as discussed in Note 13 to the Notes to the Condensed Consolidated
Financial Statements on March 17, 2003 the Company issued and sold approximately
$ 253 million of 7-year, 10.75% unsecured Senior Notes ("Senior Notes" or
"notes"). The Senior Notes were issued at original discount price of $ 988.03
per $1000 maturity value and have a yield to maturity of 11.00%. On March 31,
2003 the Company purchased LYONs with an amortized value of approximately $256.7
million and an aggregate principal value of approximately $384.6 million for a
cost of approximately $248.1 million. The Company used the total net proceeds ,
after fees, from the sale of the Senior Notes of approximately $243 million and
corporate funds of approximately $5.1 million to fund this repurchase. The LYONs
were purchased pursuant to the Company's tender offer which commenced on
February 26, 2003.
The Company's Credit Facility permits both revolving credit loans and letters of
credit, and was amended and restated on March 17, 2003 to reduce the total
availability under the Credit Facility to $250 million from $350 million. At
February 28, 2003 letters of credit of approximately $180.8 million were
outstanding and no revolving credit loans were outstanding under the Credit
Facility. At February 28, 2003, the interest rate on this line of credit would
have been, pursuant to the terms of the March 17, 2003 amendment to the Credit
Facility either 5.25% (if the prime rate index had been chosen) or 3.84% (if the
LIBOR rate index had been chosen). See Note 7 and Note 13 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 hedging
instruments to manage its risks associated with its operating activities when an
operation enters into a transaction in a currency that is different than its
local currency. In these circumstances, the Company will frequently utilize
forward exchange contracts to hedge the anticipated purchases and/or revenues.
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, 2003, 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.
35
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Within the 90 day
period prior to the filing date of this Quarterly Report on Form 10-Q,
the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer believe that:
o the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the
Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and
o the Company's disclosure controls and procedures operate such
that important information flows to appropriate collection and
disclosure points in a timely manner and are effective to
ensure that such information is accumulated and communicated
to the Company's management, and made known to the Company's
Chief Executive Officer and Chief Financial Officer,
particularly during the period when this Quarterly Report on
Form 10-Q was prepared, as appropriate to allow timely
decision regarding the required disclosure.
b) Changes in internal controls. There have been no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
their evaluation, nor have there been any corrective actions with
regard to significant deficiencies or material weaknesses.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pike Litigation
On August 5, 2002, the Company was notified by NRG Energy, Inc. ("NRG") that due
to liquidity issues, neither NRG nor its subsidiary, LSP-Pike Energy, LLC
("Pike"), could make the next scheduled payment on the project for which the
Company had a contract involving engineering, procurement, and construction of a
combined cycle power plant in Holmesville, Mississippi. Consequently, on October
17, 2002 the Company filed an involuntary petition for liquidation of LSP-Pike
Energy, LLC, under Chapter 7 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of Mississippi, Jackson Division, to
protect its rights, claims and security interests in and to the assets of Pike.
Additionally, the Company filed suit against NRG and Xcel, and certain of their
officers in the United States District Court for the Southern District of
Mississippi, Jackson Division, to collect amounts due, damages and costs. A lien
has also been filed on the project property. The Company has also joined in an
involuntary Bankruptcy instituted against NRG by former executives in Bankruptcy
Court in Minnesota.The Company is continuing discussions with NRG, Xcel, and the
lenders in an effort to resolve this matter. In December 2002, Pike disputed the
bankruptcy petition in court and discovery is proceeding. Also see Note 12 to
the Notes to the Condensed Consolidated Financial Statements in Part I of this
report, which is hereby incorporated by reference, for a further discussion of
the Pike project.
NEG Litigation
On December 13, 2002, the Company filed suit in the U.S. District Court in
Delaware seeking a declaration that NEG had repudiated the Covert and Harquahala
contracts and that the Company was entitled to adequate assurances of
performance under these contracts, including adequate assurance of payment. The
suit further requested that in the event adequate assurance is not provided, the
Company be relieved of its obligation to complete the EPC services on these
projects. In addition, the Company has provided a notice of default under the
agreements to NEG and its lenders, and of its right to terminate the contracts
as early as January 15, 2003, unless adequate assurance of payment under the
contracts can be made.
On March 13, 2003 the Company filed a Notice of Dismissal of its suit. On March
16, 2003 the Company announced that it notified NEG and its lenders that it had
terminated the Covert and Harquahala projects. The Company has elected to
terminate the contracts in order to preserve, and better enable the Company to
assert certain legal rights under the contracts.
On March 18, NEG's lenders filed suit in the U.S. District Court for the
District of Delaware claiming wrongful termination of these projects and seeking
damages "expected to be in excess of $100 million". The Company denies this
allegation.
If this termination is determined to have been wrongful the Company could be
subject to claims for damages for breach of contract by NEG or its lenders which
claims for damages could include the cost of third parties to complete the
projects. Such claims for damages could exceed our own estimates of the cost to
complete such projects. In such an event, any claims by NEG or its lenders would
likely be determined in any legal proceeding in which our claims against NEG
would be determined.
On April 10, 2003, a non-binding term sheet was executed among the Company, NEG,
and other parties, including NEG's lenders, which provides for, among other
things, a resolution of the foregoing claims related to the NEG projects. The
term sheet is non-binding and subject to definitive documentation and approval
by the lenders. See Note 12 to the Notes to the Condensed Consolidated Financial
Statements in Part I of this report, which is hereby
37
incorporated by reference, for a further discussion of the NEG projects.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 24, 2003, the Company held its 2003 Annual Meeting of Shareholders.
Two proposals were submitted to a vote at the meeting. The proposals and the
results of the vote on the proposals were as follows:
PROPOSAL NO. 1 - Election of Directors:
<Table>
<Caption>
Name For Withheld
---- --- --------
J. M. Bernhard, Jr. 35,727,208 271,060
William H. Grigg 35,718,784 279,484
L. Lane Grigsby 34,879,896 1,118,372
David W. Hoyle 34,879,001 1,119,267
Albert McAlister 35,730,639 267,629
John W. Sinders, Jr. 35,729,949 268,319
Charles E. Roemer 35,718,569 279,699
</Table>
There were no broker non-votes with respect to the election of directors.
PROPOSAL NO. 2 - To Approve an Amendment to Increase the Number of Shares
Reserved for Issuance Under the Company's 2001 Employee Incentive Compensation
Plan
For: 24,808,711
Against: 10,695,154
Abstain: 483,477
There were 10,956 broker non-votes with respect to increase the number of shares
for issuance under the Company's 2001 Employee Incentive Compensation Plan.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
4.1 Indenture dated as of March 17, 2003 by and between The Shaw Group
Inc., the Subsidiary Guarantors party thereto, and The Bank of New
York, as trustee (Filed herewith).
4.2 Registration Rights Agreement dated as of March 17, 2003 by and among
The Shaw Group, Inc. and Credit Suisse First Boston LLC, UBS Warburg
LLC, BMO Nesbitt Burns Corp., Credit Lyonnaise Securities (USA) Inc.,
BNP Paribas Securities Corp. and U.S. Bancorp Piper Jaffrey Inc. (Filed
herewith)
4.3 Form of 10-3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture field as Exhibit 4.1 hereto).
10.1 Third Amended and Restated Credit Agreement, dated as of March 17,
2003, by and among The Shaw Group Inc., as borrower, Credit Lyonnais
New York Branch, as a joint arranger and sole book runner, Credit
Suisse First Boston, as joint arranger, Harris Trust and Savings Bank
and BNP Paribas co-syndication agents; U.S. Bank National Association,
as documentation agent, and the other lenders signatory thereto.
Incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 19, 2003.
38
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
B. Reports on Form 8-K
1. On February 27, 2003, the Company filed a Form 8-K, attaching
a press release dated February 26, 2003, announcing that the
Company intended to offer $250.0 million principal amount at
maturity of senior notes due 2010 in a private placement to
qualified institutional buyers in accordance with Rule 144A
under the Securities Act of 1933, as amended.
2. On February 27, 2003, the Company filed a Form 8-K, attaching
a press release dated February 26, 2003, announcing that the
Company had received commitments for an aggregate of $250.0
million in borrowing capacity to amend and restate its senior
secured credit facility under a credit agreement dated July
14, 2000, as amended and restated.
3. On February 27, 2003, the Company filed a Form 8-K, to set
forth therein a Regulation FD disclosure under Item 9 of Form
8-K relating to supplemental information contained in the
preliminary offering circular dated February 26, 2003 for the
proposed private placement by the Company of $250 million
principal amount at maturity of its senior notes due 2010.
4. On February 28, 2003, the Company filed a Form 8-K, to set
forth therein Regulation FD disclosure relating to information
to be used by senior executives of the Company in making
presentations to small groups of prospective investors.
39
SIGNATURES AND CERTIFICATIONS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SHAW GROUP INC.
Dated: April 14, 2003 /s/ Robert L. Belk
-------------------------
Chief Financial Officer
(Duly Authorized Officer)
40
CERTIFICATION
I, J.M. Bernhard, Jr., President and Chief Executive Officer of The
Shaw Group Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Shaw Group
Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 14, 2003 /s/ J. M. Bernhard, Jr.
-------------------------------------
J. M. Bernhard, Jr.
President and Chief Executive Officer
41
CERTIFICATION
I, Robert L. Belk, Executive Vice President and Chief Financial Officer
of The Shaw Group Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Shaw Group
Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Robert L. Belk
----------------------------
Robert L. Belk
Executive Vice President and
Chief Financial Officer
42
THE SHAW GROUP INC.
EXHIBIT INDEX
Form 10-Q Quarterly Report for the Quarterly Period ended February 28, 2003.
A. Exhibits
4.1 Indenture dated as of March 17, 2003 by and between The Shaw Group Inc,
the Subsidiary Guarantors party thereto,. and The Bank of New York, as
trustee (Filed herewith).
4.2 Registration Rights Agreement dated as of March 17, 2003 by and among
The Shaw Group, Inc. and Credit Suisse First Boston LLC, UBS Warburg
LLC, BMO Nesbitt Burns Corp., Credit Lyonnaise Securities (USA) Inc.,
BNP Paribas Securities Corp. and U.S. Bancorp Piper Jaffrey Inc. (Filed
herewith).
4.3 Form of 10-3/4% Senior Note Due 2010 (Included as Exhibit 1 to the
Indenture field as Exhibit 4.1 hereto).
10.2 Third Amended and Restated Credit Agreement, dated as of March 17,
2003, by and among The Shaw Group Inc., as borrower, Credit Lyonnais
New York Branch, as a joint arranger and sole book runner, Credit
Suisse First Boston, as joint arranger, Harris Trust and Savings Bank
and BNP Paribas co-syndication agents; U.S. Bank National Association,
as documentation agent, and the other lenders signatory thereto.
Incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 19, 2003.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
43