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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 January 31, 2001
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: 000-30966
BRACKNELL CORPORATION
(Exact name of registrant as specified in its charter)
Ontario, Canada Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 South Eighth Street
Suite 1100 55402
Minneapolis, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 604-0101
150 York Street, Suite 1506, Toronto Ontario, Canada M5H 3S5
(Former address of principal executive offices)
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 ( )
Number of shares of registrant's common stock outstanding as of March
14, 2001: 64,386,784
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BRACKNELL CORPORATION
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at January 31, 2001 and October 31, 2000................................. 1
Consolidated Statements of Earnings for the Three Months Ended January 31, 2001 and 2000............. 2
Consolidated Statements of Cash Flow for the Three Months Ended January 31, 2001 and 2000............ 3
Notes to Consolidated Financial Statements........................................................... 4
Report of Independent Public Accountants............................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................. 14
ITEM 2. Changes in Securities and Use of Proceeds...................................................... 14
ITEM 3. Defaults Upon Senior Securities................................................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 15
ITEM 5. Other Information.............................................................................. 15
ITEM 6. Exhibits and Reports on Form 8-K............................................................... 15
Signature ............................................................................................... 16
BRACKNELL CORPORATION
Consolidated Balance Sheets
Unaudited
January 31, October 31,
(U.S. GAAP in thousands of U.S. dollars) 2001 2000
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Assets
Current assets:
Cash and cash equivalents $ 3,790 $ 4,455
Contract and accounts receivables, net 310,618 210,016
Costs and estimated earnings in excess of billings on
uncompleted contracts 122,237 81,993
Inventory 3,005 1,901
Prepaid expenses and other assets 8,987 6,402
Deferred income taxes 4,721 7,493
Income taxes receivable 1,643 2,674
Current assets held for sale 10,000 --
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Total current assets 465,001 314,934
Capital assets, net 27,996 18,044
Deferred income taxes 48,477 1,208
Other long-term assets 19,753 9,118
Networks under construction 135,235 --
Intangible assets, net 44,813 --
Goodwill, net 319,372 189,071
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Total assets $ 1,060,647 $ 532,375
================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving credit facilities $ 36,960 $ 45,292
Current portion of long-term debt and Sunbelt Notes 54,409 40,469
Accounts payable and other accrued liabilities 237,553 130,521
Billings in excess of costs and estimated earnings on
uncompleted contracts 108,911 40,242
Income taxes payable -- 4,350
Deferred income taxes 3,922 4,093
Current liabilities held for sale 14,043 --
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Total current liabilities 455,798 264,967
Long-term debt 210,363 123,817
Deferred income taxes 11,514 272
Long-term deferred revenues 58,174 --
Other long-term liabilities 19,671 1,200
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Total liabilities 755,520 390,256
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Mandatorily redeemable convertible preferred stock 40,000 --
Stockholders' Equity
Common stock 206,572 91,865
Contributed surplus 4,706 229
Retained earnings 57,136 54,503
Cumulative other comprehensive loss (3,287) (4,478)
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Total stockholders' equity 265,127 142,119
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Total liabilities and stockholders' equity $ 1,060,647 $ 532,375
================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
1
BRACKNELL CORPORATION
Consolidated Statements of Earnings
Unaudited
For the three months ended January 31,
(U.S. GAAP in thousands of U.S. dollars, except per share amounts) 2001 2000
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Revenues $ 266,098 $ 146,085
Cost of services 224,016 124,903
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Gross margin 42,082 21,182
Selling, general and administrative expenses 22,899 12,903
Depreciation and amortization 5,163 1,825
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Earnings from operations 14,020 6,454
Interest expense, net 6,951 1,905
Other expense (income) 969 (74)
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Earnings before provision for income taxes 6,100 4,623
Provision for income taxes 2,175 1,822
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Earnings before extraordinary item and discontinued operations 3,925 2,801
Extraordinary item, net of taxes of $554 1,292 --
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Earnings before discontinued operations 2,633 2,801
Loss from discontinued operations, net of taxes -- 8
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Net earnings $ 2,633 $ 2,793
===============================================================================================================
Earnings per share
Earnings before extraordinary item and discontinued operations
Basic $ 0.08 $ 0.09
Diluted 0.07 0.08
Impact of extraordinary item on earnings per share
Basic $ 0.03 $ --
Diluted 0.02 --
Earnings before discontinued operations
Basic $ 0.05 $ 0.09
Diluted 0.05 0.08
Net earnings
Basic $ 0.05 $ 0.09
Diluted 0.05 0.08
The accompanying notes are an integral part of these consolidated
financial statements.
2
BRACKNELL CORPORATION
Consolidated Statements of Cash Flow
Unaudited
For the three months ended January 31,
(U.S. GAAP in thousands of U.S. dollars) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,633 $ 2,793
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 5,163 1,825
Provision for deferred income taxes 555 --
Write-off of deferred financing fees 1,292 --
Other 35 442
Change in operating assets and liabilities, excluding assets
acquired and liabilities assumed in acquisitions (82,623) (14,822)
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Net cash used in operating activities (72,945) (9,762)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,650) (1,007)
Long-term investments and acquisitions (15,197) --
Other (150) (493)
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Net cash used in investing activities (16,997) (1,500)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs (2,139) (1,216)
Net proceeds from exercise of options 482 --
Net proceeds from the issuance of preferred stock 40,000 --
Borrowings under term facilities 105,071 --
Borrowings under revolving credit facilities, net (8,332) 13,540
Repayment of term facilities (35,394) (305)
Repayment of Sunbelt Notes (9,875) --
Other (126) (67)
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Net cash provided by financing activities 89,687 11,952
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Effect of exchange rate changes on cash (410) --
Net decrease in cash and cash equivalents (665) 690
Cash and cash equivalents, beginning of period 4,455 651
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Cash and cash equivalents, end of period $ 3,790 $ 1,341
===============================================================================================================
Supplemental disclosure:
Cash paid for interest $ 4,396 $ 924
Cash paid for income taxes 2,727 2,842
Common stock issued for acquisitions 118,702 --
The accompanying notes are an integral part of these consolidated
financial statements.
3
FORM 10-Q - PART I
ITEM 1. Financial Statements (continued)
Bracknell Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
January 31, 2001
(tabular dollar amounts in thousands of U.S. dollars)
1. Basis of Presentation and Nature of Business
The accompanying consolidated financial statements of Bracknell Corporation, an
Ontario corporation, and its subsidiaries (the "Company" or "Bracknell") are
presented in accordance with the disclosure requirements for Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management of the Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
statements have been included therein. The unaudited consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in Bracknell's Annual Report on Form 10-K for the
fiscal year ended October 31, 2000.
All currency amounts are expressed in United States dollars, unless otherwise
indicated. References to "Cdn. $" are to Canadian dollars. Financial information
is presented in accordance with accounting principles generally accepted in the
United States.
The consolidated financial statements have been restated to reflect the
operations of PROFAC Facilities Management Services, Inc. as a discontinued
operation. Unless indicated otherwise, all financial information in the notes to
the consolidated financial statements exclude discontinued operations.
Bracknell provides a full range of infrastructure services for networks,
systems, production facilities and equipment of companies across North America.
Bracknell's capabilities include the design and engineering, project management,
installation, maintenance and service of increasingly complex and critical
infrastructure. Critical infrastructure includes those systems whose incapacity
or failure could have a devastating impact on a business. Bracknell provides its
services on systems related to voice, data and video wireless and wireline
communications, electrical power, lighting, automated controls, heating,
ventilation, air conditioning, refrigeration, plumbing and process piping, and
low voltage systems, such as fire alarms, security and surveillance.
2. Acquisitions
On December 22, 2000, Bracknell completed the acquisition of Able Telcom Holding
Corp. ("Able"), a telecommunications network services company. The acquisition
was accounted for under the purchase method of accounting. The acquisition and
Able's working capital requirements were financed with the issuance of
approximately 24 million common shares valued at $114.2 million, options and
warrants valued at $4.5 million, an estimated $85.0 million from the Company's
expanded credit facility and the issuance of $40.0 million in convertible
preferred stock. The net assets of Able had a fair value of approximately $8.8
million, including intangible network assets of approximately $27.0 million (net
of taxes) and net tangible network assets of approximately $74.1 million. The
excess of the cost over the fair market value of the net assets acquired,
primarily goodwill, is approximately $128.0 million and is being amortized over
20 years using a straight line method. The fair value of the net assets acquired
was based on preliminary estimates and may be revised at a later date.
Concurrent with the closing of the transaction, Bracknell amended its credit
facility in order to provide working capital financing to Able. See Note 5
"Credit Facility." As part of the acquisition Bracknell issued 1.2 million
options to purchase shares at prices ranging from $4.02 to $16.60 per share and
3.4 million warrants at prices ranging from $4.02 to $22.08 per share.
The Company intends to dispose of Able's operations that were involved in
transportation services, construction and international communications
development. As such, as of January 31, 2001, the assets and liabilities of
these operations were treated as held for sale.
4
Pro Forma Presentation
The following unaudited pro forma information presents certain income statement
data of Bracknell on a pro forma basis as if the acquisition of Able had been
completed as of the beginning of each respective period.
Three Months Ended
January 31,
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2001 2000
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Revenues $309,441 $215,846
Earnings before extraordinary item 3,827 2,880
Net earnings 2,535 2,880
Earnings before extraordinary item per share - diluted 0.05 0.05
Net earnings per share - diluted 0.04 0.05
The unaudited pro forma consolidated financial information does not purport to
represent what the Company's financial position or results of operations would
actually have been if these transactions had occurred at such dates or project
the Company's future results of operations.
3. Comprehensive Income
The following table presents the calculation of comprehensive income as required
by Statement of Financial Accounting Standards No. 130. For Bracknell,
comprehensive income represents net earnings adjusted for foreign currency
translation adjustments. Comprehensive income for all the periods were as
follows (in thousands):
Three Months Ended
January 31,
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2001 2000
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Net earnings $ 2,633 $ 2,793
Changes in cumulative translation adjustments 1,191 570
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Comprehensive income $ 3,824 $ 3,363
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4. Earnings Per Share
Basic earnings per common share was calculated by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net earnings by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
have been issued pursuant to outstanding options, warrants and other convertible
securities. The following table reconciles the number of shares utilized in the
earnings per share calculations for the periods ended January 31, 2001 and 2000
(in thousands, except earnings per share):
Three Months Ended
January 31,
------------------
2001 2000
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Net earnings $ 2,633 $ 2,793
Earnings per common share - basic 0.05 0.09
Earnings per common share - diluted 0.05 0.08
Weighted average common shares outstanding - basic 51,037 32,547
Effect of dilutive securities - options/warrants 916 2,228
Effect of convertible preferred securities 1,987 --
Weighted average common shares outstanding - dilutive 53,940 34,775
5
5. Credit Facility
As of January 31, 2001, Bracknell had in place $370.0 million in credit
facilities from a syndicate of banks. The credit facilities are made up of
$250.0 million in term commitments and $120.0 million in operating commitments.
The operating facilities are 364-day renewable facilities on December 22 of each
year and the term facilities mature on October 31, 2004. The credit facility was
increased on December 22, 2000 to its current amount from $212.5 million to
provide for the acquisition of Able and the repayment of the Sunbelt Notes. See
Note 2 "Acquisitions." As of January 31, 2001, approximately $287.0 million of
the facilities were utilized for borrowings, including $250.0 million under U.S.
and Canadian term facilities, and $2.3 million was utilized for letters of
credit. Available borrowings at January 31, 2001 under the operating facilities
were $80.7 million. The term facilities require repayments of 5% per quarter for
the 11 quarters beginning April 30, 2001, increasing to 10% for the next three
quarters and 15% for the final quarter.
Borrowings under these facilities are in the form of advances, accommodations,
bankers acceptances, or letters of credit and as of January 31, 2001 bore
interest at the London Interbank Offered Rate ("LIBOR") plus 2.75% or prime rate
plus 1.75%. Interest can vary between 1.75% to 4.25% over LIBOR or 0.75% to
3.25% over the prime rate based on the Company's ratio of total net debt to
consolidated earnings before interest, tax, depreciation and amortization.
The senior credit facility has general and financial covenants that place
certain restrictions on the Company, including the making of payments (dividends
and distributions), incurrence of certain liens, the sale of assets under
certain circumstances, certain transactions with affiliates, certain
consolidations, mergers and transfers and the use of loan proceeds. In addition,
the senior credit facility limits the aggregate amount of additional borrowings
that can be incurred by the Company. The operating commitment may be used only
for general corporate purposes and not for acquisitions. As a matter of policy
and under the terms of the credit agreement, the Company is required to provide
the lenders with periodic budgets, financial statements and public reports and
filings, and the Company must meet specified thresholds with respect to
profitability and debt to net worth ratios. As of January 31, 2001, the Company
was in compliance with these covenants.
A non-cash extraordinary loss of $1.3 million, net of taxes of $0.5 million, was
recorded in the first quarter of 2001 due to the write-off of previously
deferred financing fees that were incurred related to the bank credit
facilities. Fees associated with the December 22, 2000 amended credit facilities
in the amount of $2.1 million are being amortized over the remainder of the
four-year period of the facilities.
6. Mandatorily Redeemable Convertible Preferred Stock
On January 5, 2001, the Company sold 8,000 shares of Series D Preferred Stock
for $40.0 million to WorldCom, Inc. ("WorldCom"). Proceeds from the sale of the
Series D Preferred Stock were used to fund working capital requirements related
to the Able acquisition. The preferred shares are not entitled to a dividend and
are non-voting until January 5, 2007. Subject to certain provisions, the shares
are redeemable by the Company at the issue price per share at any time in whole
or in part. Subject to the reasonable approval of the Company's lenders and
starting July 5, 2001, the holder may require the Company to repay $10.0
million. The shares contain other restrictions on the Company as to the payment
of dividends on any junior shares or the retirement of other shares of the
Company. At any time after January 5, 2002, at the election of the holder, the
preferred shares are convertible to Bracknell common shares at $8.75 per common
share, subject to adjustment as provided by the terms of the agreement. The
preferred shares are mandatorily redeemable at the earlier of January 5, 2007,
subject to the reasonable approval of the Company's lenders, or at the election
of WorldCom, on or after the date on which the Company receives proceeds from a
public debt or equity financing, but only up to the amount of any proceeds
remaining after all other indebtedness which the Company is obligated to pay
from such proceeds is repaid.
7. Commitments and Contingencies
The Company in currently involved in a dispute involving a claim for wrongful
termination of a contract at one of the Company's subsidiaries by NKK Steel
Engineering, Inc. that has resulted in litigation. The original value of the
6
contract was $30.9 million. At the time of termination, $14.9 million had been
paid under the contract with undisputed receivables outstanding on the project
of $9.1 million. Unbilled change orders are not expected to exceed 30% of the
original contract value. The reason for the termination has not been
particularized and therefore the ultimate outcome of this matter cannot be
predicted with certainty. The Company believes there is merit to its claim for
wrongful termination of the agreement and that it has substantive defenses to
NKK Steel's claim against it.
The Company is involved in other claims and litigation primarily arising from
the normal course of business for the reimbursement of costs of additional work
and of additional costs incurred due to changed conditions. Any settlements or
awards will be recognized when the outcome and amounts are reasonably
estimatable and determinable. Management believes that the ultimate outcome of
these other matters will not have a material effect on the Company's
consolidated results of operations or financial position.
8. Segment Information
The Company operates in one reportable segment as a facilities infrastructure
services provider. The Company designs, installs and maintains the networks,
systems and facilities supporting the operations of commercial, industrial,
special technologies and telecom customers. Each of these services is provided
by several of the Company's subsidiaries and discrete financial information is
not provided to management at the customer level. The segment information
presented designates the internal organization that is used by management for
making operating decisions and assessing performance. The following table
presents information regarding revenues from the customer groupings noted above.
Revenues:
Three Months Ended
January 31,
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2001 2000
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Commercial $ 69,185 $ 46,868
Industrial 85,151 64,142
Special Technologies 39,915 11,082
Telecom 71,847 23,993
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$266,098 $146,085
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The Company had operations in the United States, Canada and other jurisdictions
as follows:
U.S. Canada Other Total
2001 Geographic Segment: ---------- ---------- --------- ----------
Revenues $ 213,218 $ 52,130 $ 750 $ 266,098
Total Assets 983,151 77,496 -- 1,060,647
2000 Geographic Segment:
Revenues $ 97,349 $ 48,736 -- $ 146,085
Total Assets 201,192 83,151 -- 284,343
7
Report of Independent Public Accountants
To Bracknell Corporation:
We have reviewed the accompanying consolidated balance sheet of Bracknell
Corporation (an Ontario corporation) as of January 31, 2001, and the related
consolidated statements of earnings for the three-month periods ended January
31, 2001 and 2000, and the consolidated statements of cash flows for the
three-month periods ended January 31, 2001 and 2000. These financial statements
are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Bracknell
Corporation as of October 31, 2000 (not presented herein), and, in our report
dated December 22, 2000, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of October 31, 2000, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
Arthur Andersen LLP
Minneapolis, Minnesota,
March 2, 2001
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis relates to Bracknell's consolidated
financial condition and interim results of operations. You should read the
following in conjunction with Bracknell's consolidated financial statements and
the related notes contained herein.
Overview
Bracknell provides a full range of infrastructure services for networks,
systems, production facilities and equipment of companies across North America.
Bracknell's capabilities include the design and engineering, project management,
installation, maintenance and service of increasingly complex and critical
infrastructure. Critical infrastructure includes those systems whose incapacity
or failure could have a devastating impact on a business. Bracknell provides its
services on systems related to voice, data and video wireless and wireline
communications, electrical power, lighting, automated controls, heating,
ventilation, air conditioning, refrigeration, plumbing and process piping, and
low voltage systems, such as fire alarms, security and surveillance. Bracknell
helps customers accelerate their time to market, reduce costs, realize
efficiencies and increase focus on their core business with our end-to-end,
life-cycle approach to supporting infrastructure needs. Certain of Bracknell's
operating units have been competing in the facilities infrastructure services
industry for as many as 80 years.
Bracknell's historical financial results include the results of the companies
acquired in fiscal 2000 and 2001 from the date those acquisitions were
completed. Bracknell has significantly increased the scale and scope of its
operations through the acquisition and integration of several companies.
Accordingly, historical financial results are not indicative of Bracknell's
financial position or results of operations in the future. The Company also
disposed of certain operations that are disclosed as discontinued operations.
Results of Operations
The following table sets forth certain historical financial data for the periods
indicated (U.S. dollars in millions, except per share amounts).
Three Months Ended January 31,
-------------------------------------
2001 2000
--------------- ---------------
Revenues $266.1 100.0% $146.1 100.0%
Cost of services 224.0 84.2 124.9 85.5
Selling, general and administrative expenses 22.9 8.6 12.9 8.8
--------------- ---------------
Earnings before interest, taxes, depreciation and amortization (a) 19.2 7.2 8.3 5.7
Depreciation and amortization 5.2 1.9 1.8 1.2
--------------- ---------------
Earnings from operations $ 14.0 5.3% $ 6.5 4.5%
=============== ===============
Operating earnings per share - Diluted (b) $ 0.09 $ 0.08
(a) EBITDA is not intended to represent an alternative to net earnings (as
determined in accordance with generally accepted accounting principles) as
a measure of performance, but management believes that it does provide an
important additional perspective on the Company's operating results and the
Company's ability to service its long-term debt and to fund the Company's
continuing growth.
(b) Operating earnings are net earnings excluding the after-tax effect of
non-recurring and non-operating revenues and expenses, discontinued
operations and extraordinary items. Such earnings per share disclosure is
not intended to represent an alternative to net earnings per share (as
determined in accordance with generally accepted accounting principles) as
a measure of performance, but management believes that it does provide an
important additional perspective on the Company's operating results.
Revenues
Revenues increased to $266.1 million for the quarter ended January 31, 2001 from
$146.1 million for the same quarter in 2000. Companies acquired during the past
year increased revenues by $119.6 million in the first quarter of 2001. Adesta
Communications, Inc., which was acquired on December 22, 2000 as part of the
acquisition of Able Telcom Holding Corp., added $26.9 million in revenue in the
first quarter of 2001. Able's other operations were classified as assets held
for sale. Revenue growth in existing and acquired business, excluding Adesta,
was 9% from the first quarter of 2000 to the first quarter of 2001. Cost of
sales also increased in the first three months of 2001 versus the same period of
2000 due to acquisitions with gross margins benefiting principally from a higher
margin business mix.
9
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $22.9 million in the first
quarter of 2001 versus $12.9 million for the year-ago period. The increase in
selling, general and administrative expenses was also primarily due to acquired
companies. Selling, general and administrative expenses also increased due to
approximately $0.4 million in costs associated with the consolidation of the
Company's executive offices.
EBITDA
Earnings before interest, taxes, depreciation and amortization, or EBITDA,
improved to $19.2 million for the quarter ended January 31, 2001 from $8.3
million in the same quarter of the prior year. Companies acquired during the
past year increased EBITDA by $10.6 million in the first quarter of 2001. Adesta
added $3.8 million in EBITDA in the first quarter of 2001. EBITDA growth in
existing and acquired business, excluding Adesta, was 29% from the first quarter
of 2000 to the first quarter of 2001. The benefit of the shift to a higher
margin business mix more than offset increased start-up costs related to a new
facility services unit, a tight labor situation in some markets and one time
costs for the recent executive office consolidation.
EBITDA margins improved 27% to 7.2% in the first quarter of 2001 from 5.7% in
the first quarter of 2000. Margins improved as Bracknell has focused its
operations on higher-margin sectors and implemented better purchasing and
procurement practices and planning and control processes. First quarter EBITDA
margins were lower than the fourth quarter of 2000 margins of 8.4% principally
due to seasonality. The first quarter is typically a seasonally weaker quarter
due to reduced winter activity, customer spending cycles and the normal timing
of certain work, especially in the auto industry. With seasonally lower sales
and relatively constant selling, general and administrative expenses, margin
percentages are typically reduced. Refer to Note a above.
Depreciation and Amortization
Depreciation and amortization increased to $5.2 million in the first quarter of
2001 from $1.8 million in the year-ago period due to acquisitions. Goodwill
amortization increased by $1.9 million to $3.0 million, depreciation increased
by $1.1 million to $1.8 million and the remainder was associated with
amortization of intangible assets and financing costs.
Interest Expense
Interest expense increased in the quarter ended January 31, 2001 as compared to
the same quarter in 2000 principally due to increased interest rates and higher
levels of debt incurred to finance acquisitions.
Extraordinary Item
A non-cash extraordinary loss of $1.3 million, net of taxes of $0.5 million, was
recorded in the first quarter of 2001 due to the write-off of previously
deferred financing fees that were incurred related to the bank credit
facilities. The expansion of the bank facilities to $370 million in the quarter
in connection with the acquisition of Able triggered the charge.
Income Taxes
The income tax provision in the first three months of 2001 included an
approximate 10% benefit for tax efficient financing offset by a similar amount
for non-deductible goodwill. These also substantially offset in the same period
of 2000.
Operating Earnings per Share
Diluted operating earnings per share in the quarter ended January 31, 2001
improved to $0.09 from $0.08 in the same period of 2000. Operating earnings are
net earnings excluding the after-tax effect of non-recurring and non-operating
revenues and expenses, discontinued operations and extraordinary items. Refer to
Note b above. In the first quarter of 2001, items excluded in the calculation of
operating earnings per share were the extraordinary loss and an item reported as
10
Other expense related to a foreign exchange translation loss. These two items
combined to reduce net earnings for the period by $2.0 million on an after-tax
basis. There were no material non-operating items in the prior period.
Outlook
Bracknell's estimated project backlog as of January 31, 2001, including
maintenance and service contracts, was approximately $1.1 billion. The Company
expects to complete approximately 80% of the backlog in the next twelve months.
Many of the service contracts with customers do not specify the volume of
services to be committed, but instead commit the customer to obtain these
services from Bracknell. As such, these estimates are based on historical
relationships with customers and experience with similar contracts.
Bracknell provides services to a diversified mix of telecommunications,
technology, commercial and industrial companies. While Bracknell's backlog
increased over the past year, the Company's business is influenced by overall
economic conditions. In the first quarter, the Company experienced weaker market
conditions with some of its auto and telecommunication customers. However, the
Company witnessed strength in other areas of its business. The Company currently
expects fiscal 2001 revenues will be approximately $1.4 billion.
Liquidity and Capital Resources
Bracknell operates a primarily service-based business and therefore its capital
requirements are primarily for operating working capital and acquisitions.
Liquidity needs are primarily met through borrowings under working capital
facilities and cash flows from operations. As of January 31, 2001, Bracknell had
in place $370.0 million in credit facilities from a syndicate of banks. The
credit facilities are made up of $250.0 million in term commitments and $120.0
million in operating commitments. The operating facilities are 364-day renewable
facilities on December 22 of each year and the term facilities mature on October
31, 2004. The credit facility was increased on December 22, 2000 to its current
amount from $212.5 million to provide for the acquisition of Able and the
repayment of the Sunbelt Notes. See Note 2 "Acquisitions" to the Consolidated
Financial Statements. As of January 31, 2001, approximately $287.0 million of
the facility was utilized for borrowings, including $250.0 million under U.S.
and Canadian term facilities, and $2.3 million was utilized for letters of
credit. Available borrowings at January 31, 2001 under the operating facilities
were $80.7 million. The term facilities require repayments of 5% per quarter for
the 11 quarters beginning April 30, 2001, increasing to 10% for the next three
quarters and 15% for the final quarter.
Borrowings under these facilities are in the form of advances, accommodations,
bankers acceptances, or letters of credit and as of January 31, 2001 bore
interest at the London Interbank Offered Rate ("LIBOR") plus 2.75% or prime rate
plus 1.75%. Interest can vary between 1.75% to 4.25% over LIBOR or 0.75% to
3.25% over the prime rate based on Bracknell's ratio of total net debt to
consolidated earnings before interest, tax, depreciation and amortization.
Changes in LIBOR, which are affected by changes in interest rates in general,
will affect the interest rate applicable on our senior credit facility.
The senior credit facility has general and financial covenants that place
certain restrictions on Bracknell, including the making of payments (dividends
and distributions), incurrence of certain liens, the sale of assets under
certain circumstances, certain transactions with affiliates, certain
consolidations, mergers and transfers and the use of loan proceeds. In addition,
the senior credit facility limits the aggregate amount of additional borrowings
that can be incurred by Bracknell. The operating commitment may be used only for
general corporate purposes and not for acquisitions. As a matter of policy and
under the terms of the credit agreement, Bracknell is required to provide the
lenders with periodic budgets, financial statements and public reports and
filings, and Bracknell must meet specified thresholds with respect to
profitability and debt to net worth ratios. As of January 31, 2001 the Company
was in compliance with these covenants.
Cash flows provided by operating activities before changes in operating assets
and liabilities were $10.2 million for the quarter ended January 31, 2001 as
compared to cash flows of $5.1 million in the same period of 2000. The
improvement in 2001 as compared to the prior year was principally due to
improved cash earnings from operations. Cash flows invested in operating assets
and liabilities were $83.2 million in the first quarter of 2001 versus $14.8
million in the first quarter of 2000. The increase in cash invested in the
current year was primarily due to the
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planned reduction of Adesta's accounts payable following the Able acquisition.
Operating working capital at January 31, 2001 improved to 30 days of revenue at
the end of the first quarter of 2001 from 44 days at October 31, 2000. This
improvement was principally due to the addition of Adesta, which carried lower
operating working capital in terms of days of revenue outstanding. As Adesta
completes the planned reduction of its payables following the acquisition,
working capital days outstanding are expected to increase over the next quarter.
Bracknell continues to implement programs to reduce operating working capital to
its longer-term goal of 25 days of revenue.
Cash flows used in investing activities increased to $17.0 million in the first
quarter of 2001 from $1.5 million for the quarter ended January 31, 2000. The
increase in investing activities was primarily due to the acquisition of Able.
See Note 2 "Acquisitions" to the Consolidated Financial Statements.
On December 22, 2000 Bracknell completed the acquisition of Able, including
Adesta, a telecommunications network services company. The acquisition was
accounted for under the purchase method. The acquisition and Able's working
capital requirements were financed with the issuance of approximately 24 million
common shares valued at $114.2 million, options and warrants valued at $4.5
million, an estimated $85 million from the Company's expanded credit facility
and the issuance of $40.0 million in convertible preferred stock. As part of the
acquisition Bracknell issued 1.2 million options to purchase shares at prices
ranging from $4.02 to $16.60 per share and 3.4 million warrants at prices
ranging from $4.02 to $22.08 per share. See Note 2 "Acquisitions" to the
Consolidated Financial Statements.
Certain of the Company's agreements related to acquisitions that were completed
over the past two years include contingent earn-out provisions that may be
triggered based on these acquired companies achieving certain financial targets.
As of January 31, 2001, the maximum potential payment under these agreements was
approximately $82 million.
Bracknell's cash flows from financing activities increased to $89.3 million for
the first three months of 2001 from $12.0 million in same period of 2000. The
net increase in cash flows from financing activities in 2001 was principally due
to proceeds from borrowings under the term credit facility and new issuance of
preferred stock.
Bracknell believes that its anticipated cash flows from operating activities,
together with availability under its credit facilities and proceeds from
monetization of networks under construction, will be sufficient to finance
working capital requirements and anticipated capital spending requirements for
the next year. At January 31, 2001, net assets for networks under construction
that the Company intends to monetize totaled approximately $121.9 million. If
the Company is unable to monetize these assets due to industry conditions, or
otherwise, it may have to seek other sources of liquidity. Bracknell plans to
finance its growth, including potential acquisitions, through borrowings under
new term facilities and by accessing the public and private debt and equity
capital markets.
Forward-Looking Statements
In various places in Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this document, we discuss our
expectations regarding future performance of the Company. These
"forward-looking" statements are based on currently available competitive,
financial and economic data, and operating plans, but are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Bracknell, as well as
statements preceded by, followed by or that include the words "plans,"
"believes," "expects," "anticipates," "estimates," "projects," "intends" or
similar expressions. You should understand that important factors, in addition
to those discussed in this
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document, could affect the future results of Bracknell and could cause those
results to differ materially from those expressed in any forward-looking
statements. These factors include, among others:
o Trends and conditions in Bracknell's and its customers' industry,
including future consolidation;
o Risks associated with the ability to compete in local markets;
o Risks associated with the ability to integrate acquired businesses;
o The importance of acquisitions for growth;
o Risks associated with the ability to implement cost savings and
operational strategy; and
o General and regional economic conditions.
There can be no assurances that any anticipated future results will be achieved.
As a result of the factors identified above and other factors, Bracknell's
actual results or financial or other condition could vary significantly from the
performance or financial or other condition set forth in any forward-looking
statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Bracknell is exposed to market risks from changes in interest and foreign
exchange rates that may impact its financial position. The senior credit
facility makes interest rate and foreign exchange rate hedging activities
available to Bracknell. Historically, and as of January 31, 2001, Bracknell has
not used derivative instruments or engaged in hedging activities.
Interest Rates
As of January 31, 2001 the fair value of Bracknell's total debt outstanding was
estimated to be $301.7 million, which approximated carrying value due its
market-based interest rates. Market risk is estimated as the potential change in
fair value resulting from a 10% adverse change in interest rates and amounted to
$2.3 million at January 31, 2001.
The Company had $293.0 million of variable rate debt outstanding at January 31,
2001. Interest rates on the Company's variable rate debt are subject to
fluctuations based on changes in the LIBOR and prime lending rates. Based on
these quarter-end debt levels, a hypothetical 10% adverse change in interest
rates would have reduced net earnings and cash flows by an estimated $0.4
million for the quarter.
Foreign Currency Risks
On November 1, 1999, Bracknell adopted the practice of reporting in United
States dollars to reflect the fact that a greater portion of its business
operations will be conducted in the United States. Bracknell's foreign currency
exposures give rise to market risk associated with exchange rate movements
against the Canadian dollar, the functional currency for its operations in
Canada. As a result, fluctuations in foreign currencies may have an impact on
Bracknell's reported business and financial results and the value of its foreign
assets, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. Changes in currency
exchange rates may affect the relative prices at which Bracknell and foreign
competitors sell products in the same market. In addition, changes in the value
of relevant currencies may affect the cost of items required in Bracknell's
operations. The Company expects less than 20% of fiscal 2001 revenues to be
invoiced in Canadian dollars.
Bracknell endeavors to minimize the impact of such currency fluctuations through
its ongoing commercial practices. In attempting to manage this foreign exchange
risk, Bracknell generally sources particular materials and labor of a particular
contract in the same currency as it receives the revenues for that contract.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On September 24, 1999 Bracknell entered into an agreement with NKK Steel
Engineering, Inc. related to the installation of electrical and mechanical
systems for the construction of a continuous galvanizing process facility
located at the site of National Steel Corporation Great Lakes Division in
Ecorse, Michigan. On February 6, 2000 NKK Steel terminated this agreement. On
April 6, 2000 Bracknell filed a claim of lien against NKK Steel Engineering,
Inc. for approximately $25 million representing portions due to Bracknell and
various subcontractors. Legal actions were commenced in May 2000 by Bracknell
and NKK Steel in respect of the termination of the agreement. In the actions
continued as NKK Steel Engineering, Inc. v. The State Group International
Limited in the United States District Court, Eastern District of Michigan, no
monetary amounts have been specified by either party. In NKK Steel's claim, NKK
Steel alleges, among other things, that Bracknell breached the agreement. In
Bracknell's proceedings, Bracknell claimed, among other things, breach by NKK
Steel of the agreement, unjust enrichment, misrepresentation and violations
under the Michigan Building Contract Fund Act. Bracknell believes there is merit
to its claim for wrongful termination of the agreement and that it has
substantive defenses to NKK Steel's claim against it. Based on the advice of
counsel and Bracknell's investigations, Bracknell believes that the results of
these proceedings will not have a material adverse effect on Bracknell. See also
Note 7 "Commitments and Contingencies" to the Consolidated Financial Statements.
The Company is involved in other claims and litigation primarily arising from
the normal course of business for the reimbursement of costs of additional work
and of additional costs incurred due to changed conditions. Any settlements or
awards will be recognized when the outcome and amounts are reasonably
estimatable and determinable. Management believes that the ultimate outcome of
these other matters will not have a material effect on the Company's
consolidated results of operations or financial position.
ITEM 2. Changes in Securities and Use of Proceeds
On January 5, 2001, Bracknell sold 8,000 shares of Series D Preferred Stock to
WorldCom, Inc. ("WorldCom") for $40.0 million. WorldCom committed to purchase
the mandatorily redeemable convertible preferred stock on December 22, 2000 as
part of the Able acquisition. Proceeds from the sale of the Series D Preferred
Shares were used to fund working capital requirements related to the Able
acquisition. The preferred shares are not entitled to a dividend and are non-
voting until January 5, 2007. Subject to certain provisions, the shares are
redeemable by Bracknell at the issue price per share at any time in whole or in
part. Subject to the reasonable approval of Bracknell's lenders and starting
July 5, 2001, WorldCom may require Bracknell to repay $10 million. The shares
contain other restrictions on the Company as to the payment of dividends on any
junior shares or the retirement of other shares of the Company. At any time
after January 5, 2002, at the election of WorldCom, the preferred shares are
convertible to Bracknell common shares at $8.75 per common share, subject to
adjustment as provided by the terms of the agreement. The preferred shares are
mandatorily redeemable at the earlier of:
o January 5, 2007, subject to the reasonable approval of Bracknell's
lenders, or
o at the election of WorldCom, on or after the date on which Bracknell
receives proceeds from a public debt or equity financing, but only up
to the amount of any proceeds remaining after all other indebtedness
which Bracknell is obligated to pay from such proceeds is repaid.
The Series D Preferred Shares were issued pursuant to an exemption from
registration under Rule 506 of Regulation D under the Securities Act of 1933, as
amended. This transaction was privately negotiated and the purchaser was an
accredited investor. No public offering or public solicitation was used by
Bracknell in the placement of these securities.
ITEM 3. Defaults Upon Senior Securities
None
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ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On January 8, 2001, Bracknell filed a Form 8-K with the
Securities and Exchange Commission reporting the acquisition of
Able Telcom Holding Corp. under Item 2. Acquisitions or
Dispositions of Assets.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bracknell Corporation
(Registrant)
/s/ John A. Witham
--------------------------------------------
John A. Witham
Executive Vice President and Chief Financial
Officer (Principal Financial Officer and
Duly Authorized Officer)
March 16, 2001
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