UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
June 30, 2002 000-29619
KIEWIT MATERIALS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 47-0819021
(State of Incorporation) (I.R.S. Employer Identification No.)
Kiewit Plaza, Omaha Nebraska 68131
(Address of principal executive offices) (Zip Code)
(402) 536-3661
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of each of the registrant's classes of
stock as of August 13, 2002:
Title of Class Shares Outstanding
Common Stock, $0.01 par value 35,999,711
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
Table of Contents
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of June 30, 2002 and
December 31, 2001 1
Consolidated Condensed Statements of Earnings for the three
and six months ended June 30, 2002 and 2001 2
Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 17
PART II - OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
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Item 1. Financial Statements.
KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30, December 31,
2002 2001
(in thousands, except share data) (unaudited) (audited)
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 100,321 $ 117,218
Receivables, less allowance of $1,245 and
$1,083 63,067 51,534
Inventories 15,392 13,829
Deferred income taxes 3,462 3,622
Refundable income taxes - 435
Other 6,789 5,265
---------- ---------
Total current assets 189,031 191,903
Investment in limited partnership 24,186 -
Property, plant and equipment, less accumulated
depreciation and depletion of $133,745 and
$126,942 146,011 145,883
Goodwill, less accumulated amortization of
$10,008 and $10,008 59,347 57,476
Intangible, less accumulated amortization of
$2,399 and $2,053 and other assets 19,749 20,387
---------- ---------
Total assets $ 438,324 $ 415,649
========== =========
Liabilities and Redeemable Common Stock
Current liabilities:
Accounts payable $ 40,986 $ 37,101
Current portion of long-term debt 1,066 1,127
Accrued payroll and payroll taxes 8,493 8,770
Accrued insurance costs 5,925 6,103
Income taxes payable 1,698 -
Other 4,734 4,449
---------- ---------
Total current liabilities 62,902 57,550
Long-term debt, less current portion 1,810 2,534
Convertible debentures 15,724 15,762
Deferred income taxes 19,468 16,495
Other liabilities 1,380 1,111
---------- ---------
Total liabilities 101,284 93,452
---------- ---------
Minority interest 1,272 1,233
---------- ---------
Preferred stock, par $.01; 10 million shares
authorized, no shares issued - -
Redeemable common stock ($315,873 and $317,622
aggregate redemption value):
Common stock, par $.01; 100 million shares
authorized, 36,017,404 and 36,216,902 issued
and outstanding 360 362
Additional paid-in capital 173,808 175,555
Accumulated other comprehensive loss (194) (194)
Retained earnings 161,794 145,241
---------- ---------
Total redeemable common stock 335,768 320,964
---------- ---------
Total liabilities and redeemable common stock $ 438,324 $ 415,649
========== =========
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See accompanying notes to consolidated condensed financial statements.
1
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
Consolidated Condensed Statement of Earnings
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
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(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Revenue $ 130,437 $ 137,832 $ 243,668 $ 250,901
Cost of revenue (101,181) (110,007) (192,551) (202,711)
Depreciation, depletion and
amortization (5,373) (5,812) (10,815) (11,535)
--------- --------- --------- ---------
Gross profit 23,883 22,013 40,302 36,655
General and administrative expenses (8,068) (6,794) (15,186) (13,228)
Gain on sale of property, plant and
equipment 116 1,222 2,843 1,782
--------- --------- --------- ---------
Operating earnings 15,931 16,441 27,959 25,209
--------- --------- --------- ---------
Other income (expense):
Investment income 602 1,216 1,207 2,455
Equity earnings (loss) (95) - (814) -
Interest expense (338) (216) (679) (471)
Other, net (73) 91 (3) 97
--------- --------- --------- ---------
Total other income (expense) 96 1,091 (289) 2,081
--------- --------- --------- ---------
Earnings before income taxes and
minority interest 16,027 17,532 27,670 27,290
Minority interest in net earnings
of subsidiaries (12) (36) (42) (59)
Provision for income taxes (6,417) (7,015) (11,074) (10,916)
--------- --------- --------- ---------
Net earnings $ 9,598 $ 10,481 $ 16,554 $ 16,315
========= ========= ========= =========
Net earnings per share:
Basic $ .27 $ .29 $ .46 $ .45
========= ========= ========= =========
Diluted $ .26 $ .28 $ .44 $ .44
========= ========= ========= =========
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See accompanying notes to consolidated condensed financial statements.
2
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
- -----------------------------------------------------------------------------
(in thousands) 2002 2001
- -----------------------------------------------------------------------------
Cash flows from operations:
Net cash provided by operations $ 21,460 $ 29,167
--------- ---------
Cash flows from investing activities:
Short-term note receivable - (5,824)
Proceeds from sales of property, plant and equipment 3,999 5,694
Capital expenditures (6,862) (10,091)
Investment in land and mineral property and acquisitions (7,742) (7,289)
Investment in limited partnership (25,000) -
--------- --------
Net cash used in investing activities (35,605) (17,510)
--------- --------
Cash flows from financing activities:
Payments on long-term debt (880) (2,275)
Repurchases of common stock (1,872) (2,137)
--------- --------
Net cash used in financing activities (2,752) (4,412)
--------- --------
Net increase (decrease) in cash and cash equivalents (16,897) 7,245
Cash and cash equivalents at beginning of period 117,218 68,468
--------- --------
Cash and cash equivalents at end of period $ 100,321 $ 75,713
========= ========
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See accompanying notes to consolidated condensed financial statements.
3
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Basis of Presentation:
Kiewit Materials Company ("KMC") includes the accounts of KMC and its
subsidiaries (collectively, the "Company"). KMC's subsidiaries represent
several affiliated operating entities under common ownership, each of which
is engaged in an aspect of the materials business.
The consolidated balance sheet of the Company at December 31, 2001 has
been derived from the Company's audited balance sheet as of that date. All
other financial statements contained herein are unaudited and, in the opinion
of management, contain all adjustments, which are of a normal recurring
nature, that the Company considers necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for the
periods presented. The consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 27, 2002.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim net earnings are not indicative of the net earnings expected for
the full year or for any other interim period.
2. Spin-off Agreements:
On September 30, 2000, KMC became an independent company when Peter
Kiewit Sons', Inc. ("PKS") spun off its materials businesses in a tax-free
transaction (the "Spin-off"). In connection with the Spin-off, KMC and PKS
entered into various agreements including a Separation Agreement and a Tax
Sharing Agreement.
The Separation Agreement provides for the allocation of certain risks
and responsibilities between KMC and PKS and for cross-indemnifications that
are intended to allocate financial responsibility to PKS for liabilities
arising out of the construction business and to allocate to KMC liabilities
arising out of the materials business.
Under the Tax Sharing Agreement, with respect to periods, or portions
thereof, ending on or before the Spin-off, KMC and PKS generally will be
responsible for paying the taxes relating to such returns, including any
subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities, that are allocable to the
materials businesses and construction businesses, respectively. The Tax
Sharing Agreement also provides that KMC and PKS will indemnify the other
from certain taxes and expenses that would be assessed if the Spin-off were
determined to be taxable, but solely to the extent that such determination
arose out of the breach by KMC or PKS, respectively, of certain
representations made to the Internal Revenue Service in connection with the
private letter ruling issued with respect to the Spin-off.
4
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
3. Earnings Per Share:
Basic earnings per share have been computed using the weighted average
number of shares outstanding during each period. Diluted earnings per share
gives effect to convertible debentures considered to be dilutive common stock
equivalents. The potentially dilutive convertible debentures are calculated
in accordance with the "if converted" method. This method assumes that the
after-tax interest expense associated with the debentures is an addition to
income and the debentures are converted into equity with the resulting common
stock being aggregated with the weighted average shares outstanding.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
Net earnings available to
common stockholders $ 9,598 $ 10,481 $ 16,554 $ 16,315
Interest expense, net of tax
effect, associated with
convertible debentures 167 93 332 184
--------- --------- --------- ---------
Net earnings for diluted shares $ 9,765 $ 10,574 $ 16,886 $ 16,499
========= ========= ========= =========
Total number of weighted
average shares outstanding
used to compute basic earnings
per share 36,035 36,248 36,086 36,302
Additional dilutive shares
assuming conversion of
convertible debentures 2,119 1,158 2,119 1,158
--------- --------- --------- ---------
Total number of shares used to
compute diluted earnings
per share 38,154 37,406 38,205 37,460
========= ========= ========= =========
Net earnings per share:
Basic $ .27 $ .29 $ .46 $ .45
========= ========= ========= =========
Diluted $ .26 $ .28 $ .44 $ .44
========= ========= ========= =========
4. Inventories:
Inventories consist of the following:
June 30, December 31,
2002 2001
--------- -----------
Raw materials $ 13,724 $ 11,749
Other 1,668 2,080
--------- ---------
Total inventories $ 15,392 $ 13,829
========= =========
5
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
5. Intangible and Other Assets:
Intangible and other assets consist of the following:
June 30, December 31,
2002 2001
--------- -----------
Intangibles:
Mining Permit
Carrying value $ 15,448 $ 15,448
Accumulated amortization (1,404) (1,124)
Non-compete agreements
Carrying value 1,410 1,405
Accumulated amortization (995) (929)
Land option 2,000 2,000
Notes receivable 2,400 2,400
Other 890 1,187
--------- ---------
Total intangible and other assets $ 19,749 $ 20,387
========= =========
Amortization expense for the three months ended June 30, 2002 and 2001
amounted to $173 and $821, respectively. Amortization expense for the six
months ended June 30, 2002 and 2001 amounted to $346 and $1,642,
respectively. Amortization expense for 2002 and the subsequent five years is
as follows:
Mining Permit Non-compete
------------- -----------
2002 $ 562 $ 130
2003 $ 562 $ 101
2004 $ 562 $ 41
2005 $ 562 $ 34
2006 $ 562 $ 20
2007 $ 562 $ 19
6 Comprehensive Income:
Comprehensive income includes net earnings and unrealized gains (losses) on
securities and minimum pension liability adjustments.
Comprehensive income for the three and six months ended June 30, 2002 and
2001was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
Net earnings $ 9,598 $ 10,481 $ 16,554 $ 16,315
Other comprehensive income
(loss), before tax:
Minimum pension liability
Adjustment - - (323) -
Income tax expense related
to items of other
comprehensive income - - 129 -
--------- --------- --------- --------
Comprehensive income $ 9,598 $ 10,481 $ 16,360 $ 16,315
========= ========= ========= ========
6
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
7 Segment Reporting:
The Company has four operating segments: Arizona Operations, Pacific
Northwest Operations, Northern California Operations and Quarries Operations,
which represent separately managed strategic business units that have
different marketing strategies. Arizona Operations derives its revenue from
the sale of aggregates, ready-mix, asphalt and paving operations. Pacific
Northwest Operations and Northern California Operations derive their revenues
from the sale of aggregates, ready-mix and asphalt. Quarries Operations
derives its revenue from the sale of aggregates. Arizona and Pacific
Northwest Operations meet the requirements of quantitative thresholds and are
being disclosed as reportable operating segments. Other Operations includes
the Northern California and Quarries Operations. Corporate includes goodwill
and intangible amortization related to acquisitions, general corporate
expenses, corporate cash and cash equivalents, home office facilities,
investments in non-materials related operations and deferred tax assets,
which collectively are not reported to the chief operating decision maker by
segment.
Pacific
Three months ended Arizona Northwest Other
June 30, 2002 Operations Operations Operations Corporate Total
- ---------------------------------------------------------------------------
Aggregates $ 13,204 $ 6,214 $ 11,379 $ - $ 30,797
Hot-mix asphalt 19,763 2,885 1,264 - 23,912
Ready mix concrete 62,268 4,057 6,884 - 73,209
Other 2,519 - - - 2,519
---------- ---------- ---------- --------- --------
Total revenues $ 97,754 $ 13,156 $ 19,527 $ - $130,437
Depreciation,
depletion and
amortization $ 2,694 $ 1,352 $ 1,161 $ 166 $ 5,373
Operating income
(loss) $ 11,894 $ 1,169 $ 5,541 $ (2,673) $ 15,931
Identifiable assets $ 129,379 $ 50,978 $ 75,517 $ 123,103 $378,977
Goodwill, net of
accumulated
amortization $ 13,725 $ 14,854 $ 30,768 $ - $ 59,347
Capital expenditures$ 2,314 $ 967 $ 1,144 $ (94) $ 4,331
Three months ended
June 30, 2001
- ---------------------------------------------------------------------------
Aggregates $ 15,504 $ 5,902 $ 10,179 $ - $ 31,585
Hot-mix asphalt 23,180 1,965 1,320 - 26,465
Ready mix concrete 67,204 3,873 4,722 - 75,799
Other 3,983 - - - 3,983
---------- ---------- ---------- --------- --------
Total revenues $ 109,871 $ 11,740 $ 16,221 $ - $137,832
Depreciation,
depletion and
amortization $ 2,667 $ 1,295 $ 1,029 $ 821 $ 5,812
Operating income
(loss) $ 14,570 $ 2,420 $ 4,553 $ (5,102) $ 16,441
Identifiable assets $ 123,447 $ 55,405 $ 76,536 $ 78,690 $334,078
Goodwill, net of
accumulated
amortization $ 11,214 $ 15,286 $ 31,127 $ - $ 57,627
Capital expenditures$ 1,318 $ - $ 1,490 $ 598 $ 3,406
7
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
7. Segment Reporting:
Pacific
Six months ended Arizona Northwest Other
June 30, 2002 Operations Operations Operations Corporate Total
- ---------------------------------------------------------------------------
Aggregates $ 27,184 $ 10,982 $ 17,298 $ - $ 55,464
Hot-mix asphalt 34,578 4,264 1,818 - 40,660
Ready mix concrete 123,700 7,833 10,646 - 142,179
Other 5,365 - - - 5,365
---------- ---------- ---------- --------- --------
Total revenues $ 190,827 $ 23,079 $ 29,762 $ - $243,668
Depreciation,
depletion and
amortization $ 5,425 $ 2,694 $ 2,270 $ 426 $ 10,815
Operating income
(loss) $ 24,097 $ 1,440 $ 6,900 $ (4,478) $ 27,959
Identifiable assets $ 129,379 $ 50,978 $ 75,517 $ 123,103 $378,977
Goodwill, net of
accumulated
amortization $ 13,725 $ 14,854 $ 30,768 $ - $ 59,347
Capital expenditures$ 3,101 $ 967 $ 2,769 $ 25 $ 6,862
Six months ended
June 30, 2001
- ---------------------------------------------------------------------------
Aggregates $ 29,680 $ 10,285 $ 16,398 $ - $ 56,363
Hot-mix asphalt 38,545 3,589 1,627 - 43,761
Ready mix concrete 126,338 7,854 8,666 - 142,858
Other 7,919 - - - 7,919
---------- ---------- ---------- --------- --------
Total revenues $ 202,482 $ 21,728 $ 26,691 $ - $250,901
Depreciation,
depletion and
amortization $ 5,214 $ 2,612 $ 2,067 $ 1,642 $ 11,535
Operating income
(loss) $ 23,925 $ 2,408 $ 5,875 $ (6,999) $ 25,209
Identifiable assets $ 123,447 $ 55,405 $ 76,536 $ 78,690 $334,078
Goodwill, net of
accumulated
amortization $ 11,214 $ 15,286 $ 31,127 $ - $ 57,627
Capital expenditures$ 4,485 $ 1,361 $ 3,641 $ 604 $ 10,091
8
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
8. Transitional Disclosure for Adoption of SFAS 142:
On January 1, 2002, the Company adopted SFAS 142, and, accordingly,
discontinued goodwill amortization. Results for the three and six months
ended June 30 assuming the elimination of goodwill amortization are
summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
Net earnings
As reported $ 9,598 $ 10,481 $ 16,554 $ 16,315
Goodwill amortization
(net of tax) - 389 - 778
-------- --------- --------- --------
As adjusted net
earnings $ 9,598 $ 10,870 $ 16,554 $ 17,093
-------- --------- --------- --------
Basic net earnings per share
As reported $ .27 $ .29 $ .46 $ .45
Goodwill amortization
(net of tax) - .01 - .02
-------- --------- --------- --------
As adjusted $ .27 $ .30 $ .46 $ .47
-------- --------- --------- --------
Diluted net earnings per share
As reported $ .26 $ .28 $ .44 $ .44
Goodwill amortization
(net of tax) - .01 - .02
-------- --------- --------- --------
As adjusted $ .26 $ .29 $ .44 $ .46
-------- --------- --------- --------
The Company compared the carrying value of goodwill by reporting unit,
which is the same as operating segment, to the fair market value of the
related net assets using a discounted cash flows approach. Based on this
analysis, the Company determined there was no indication of impairment to the
carrying value of goodwill at any of its reporting units.
9. Subsequent Events:
On July 9, 2002, KMC entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Rinker Materials Corporation, a Georgia corporation
("Rinker"), and Jem Lear Acquisition Company, Inc., a Delaware corporation
and a wholly owned subsidiary of Rinker ("Merger Sub"). The Merger Agreement
provides that, subject to its terms and conditions, (i) Merger Sub will
commence a tender offer (the "Offer") for all of the issued and outstanding
shares of the common stock, par value $0.01 per share, of KMC (the "Common
Stock"), at a price of $17.00 per share (such price or any higher price as
may be paid in the Offer, the "Per Share Amount"), in each case, net to the
seller in cash, and (ii) following consummation of the Offer, and
satisfaction of the conditions of the Merger, Merger Sub will merge with and
into KMC, with KMC as the surviving corporation (the "Merger"). As a result
of the Merger, each issued and outstanding share of Common Stock (other than
shares held in the treasury of KMC, by Rinker, Merger Sub or any subsidiary
of Rinker or Merger Sub and other than shares as to which the holder thereof
has properly exercised and perfected its appraisal rights in accordance with
Delaware law) will be converted into the right to receive the Per Share
Amount in cash. On July 23, 2002, Merger Sub commenced the Offer, which is
scheduled to expire on September 25, 2002, unless extended.
In connection with KMC's execution of the Merger Agreement, on July 8,
2002, the Board of Directors of KMC unanimously adopted a resolution that
waived the transfer restrictions on the Common Stock set forth in Article
VIII, Section A.6 of KMC's Amended and Restated Certificate of Incorporation,
only to the extent necessary to permit the holders of shares of Common Stock
to tender such shares in the Offer and to allow Merger Sub to validly
purchase such tendered shares in the Offer.
9
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KIEWIT MATERIALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
In connection with the Merger, and pursuant to the terms of the Merger
Agreement, KMC also announced that its Board of Directors authorized
the redemption of all series of its outstanding Convertible Debentures that
were issued pursuant to the terms of that certain Indenture, dated as of
September 14, 2000, between KMC and UMB Bank, N.A. (the "Indenture").
Pursuant to the terms of the Indenture, each holder of a Convertible
Debenture has the right, in lieu of receiving the redemption amount in
respect thereof, to convert the principal amount of such Convertible
Debenture into fully paid and non-assessable shares of Common Stock at the
conversion rate set forth in the Indenture. Redemption notices and letters
of transmittal were mailed to holders of Convertible Debentures on or about
July 17, 2002. As set forth in the redemption notices, the redemption date
has been set for August 19, 2002.
In recognition of the efforts of Donald E. Bowman, Vice President and
Chief Financial Officer of KMC, and Mark E. Belmont, Vice President and
General Counsel of KMC, in connection with the preparation and negotiation of
the Merger Agreement and the related documents and transactions, the Board of
Directors has determined that, upon the closing of the Offer, Messrs. Bowman
and Belmont will be paid transaction bonuses of $500,000 and $100,000,
respectively.
KMC engaged James Goodwin Inc. ("JGI"), a company controlled by James
Goodwin, a member of the Board of Directors, to provide it with financial
advisory services in connection with the Offer and the Merger and its
negotiations with Parent. Pursuant to a fee letter, dated as of January 30,
2002, by and between KMC and JGI (the "Fee Letter"), KMC has agreed to pay
JGI a fixed fee of $3 million for services rendered. The payment of this fee
is contingent upon the successful completion of the Offer. KMC has also
agreed to reimburse JGI for certain expenses incurred in connection with
rendering its services, including fees and disbursements to its legal counsel
and certain transportation expenses. In addition, KMC has agreed to
indemnify JGI and its employees against any losses, damages, liabilities,
expenses or claims arising out of JGI's engagement, except to the extent such
losses, damages, liabilities, expenses or claims arise out of JGI's or its
employees bad faith or gross negligence.
Pursuant to the terms of the Merger Agreement, on August 2, 2002, KMC
redeemed its limited partnership interest in the private investment fund
limited partnership and received $24,219 in proceeds from such redemption.
KMC recognized a $781 loss on this investment. At June 30, 2002, the loss
reflected for this investment was $814. This loss is reflected in equity
earnings on the Consolidated Condensed Statement of Earnings.
10. Other Matters:
The Company is involved in various lawsuits and claims incidental to
its business. Management believes that any resulting liability should not
materially affect the Company's financial position, future results of
operations or cash flows.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This document contains forward-looking statements and information that
are based on the beliefs of management as well as assumptions made by and
information currently available to the Company. When used in this document,
the words "anticipate," "believe," "estimate," "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks or uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document.
The following discussion is based upon and should be read in conjunction
with the Company's Consolidated Condensed Financial Statements, including the
notes thereto, included elsewhere in this quarterly report on Form 10-Q.
Due to seasonal weather related conditions, earnings of any one quarter
should not be considered indicative of results to be expected for a full year
or any other interim period.
Results of Operations
The Consolidated Statements of Earnings summarizes the operating performance
of the Company for the first six months and quarters ending June 30, 2001 and
2002. To facilitate analysis, these results are discussed on an overall
basis and by reporting segment as explained in Footnote No. 8 of the Notes to
Consolidated Condensed Financial Statements.
Second Quarter 2002 vs. Second Quarter 2001
Revenue. Overall sales for the second quarter of 2002 were $130 million.
This is a decrease of $8 million when compared to sales of $138 million for
the second quarter of 2001. Average selling prices across product lines
declined 1% when comparing the second quarter of 2002 to the same period in
2001. Declines in asphalt and aggregate prices offset an overall increase in
the selling price of ready mix. Total revenues also declined 3% due to a
reduction in sales of hot-mix asphalt and ready mix products. The decline in
the unit volumes of these products was 5% for hot mix asphalt and 4% for
ready mix. Sales of aggregate products increased 2% when comparing the two
periods.
Gross Profit. Gross profit increased approximately $2 million to $24 million
in the second quarter of 2002 as compared to $22 million in 2001. Gross
profit improved for each segment. The gross profit margin percentage
increased to 18% from 16% in the second quarters of 2002 and 2001,
respectively. Approximately one third of this gross margin improvement was
from the elimination of goodwill amortization as required by Financial
Accounting Standards Board Statement of Financial Standards No. 142. The
remaining two third improvement is explained further in the segment analysis
below.
General and Administrative. General and administrative expenses increased $1
million in the second quarter of 2002 when compared to 2001. This increase
was attributable to higher expenses occurring at each segment as explained in
their individual sections below. Total corporate expenses were approximately
equal for the two periods as increases in compensation expense and
professional service costs were offset by a reduction in fees paid to the
former parent for various administrative services.
Gain on Sale of Property, Plant, and Equipment. Gains from the sale of
property, plant and equipment decreased $1 million in the second quarter of
2002 when compared to the same period in 2001. The decrease resulted from a
gain recognized on the sale of depleted mineral property in Washington in the
second quarter of 2001.
Other Income and Expenses. Other income decreased $1 million resulting from
lower investment income due to the decline in the investment return on excess
cash invested in money market funds due to a decline in interest rates and a
11
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decrease in principal invested due to the investment in the limited
partnership. In addition other income decreased due to a loss experienced by
the limited partnership investment that is accounted for using the equity
method and greater interest expense from the increased amount of convertible
debenture debt outstanding.
Provision for Income Taxes. The income tax rate for the second quarter of
2002 and 2001 was 40%. This rate differs from the federal statutory rate of
35% due to the inclusion of state income taxes and the additional deduction
of percentage depletion over cost depletion recorded in the financial
statements.
Arizona Operations. Revenue for the second quarter of 2002 declined $12
million to $98 million in 2002 as compared to $110 million in 2001. The
segment experienced declines in unit volumes for each product line. The
declines in unit volumes of aggregates, hot-mix asphalt and ready mix were
4%, 10% and 7%, respectively. The decrease in unit volumes is attributable
to completion in 2001 of several projects which required large purchases of
company aggregates and a general decline in construction activity. Average
selling prices across product lines declined 2% between the two quarters as
an increase in average selling prices for ready mix concrete was offset by
declines in aggregate and hot-mix asphalt prices. The decline in aggregate
prices was primarily caused by the completion in 2001 of the aforementioned
projects. The reduction in the average hot-mix asphalt selling price was
attributable to a change in the product mix within that product line. Gross
profit margins increased 1% between the two quarters as a result of lower
asphalt oil costs and lower transportation costs due to outsourcing of
various hauling needs. Additionally, gross profit increased due to a greater
percentage of aggregates being obtained from less expensive internal
production rather than third party purchases. General and administrative
expenses for this segment increased $0.5 million primarily from higher legal
and professional service costs.
Pacific Northwest Operations. Revenue increased $1 million to $13 million
in 2002 as compared to $12 million in the second quarter of 2001. Unit
volumes for aggregates and hot-mix asphalt increased 11% and 54%,
respectively, while ready mix unit volumes remained essentially
unchanged. Offsetting this increase was a price decrease for aggregate and
hot-mix asphalt products. The price decline in asphalt was caused by a
higher percentage of sales to public work projects that typically have a
lower average selling price. Pricing levels for aggregates continues to be
impacted by slow economic activity in the Portland Oregon area. The overall
decline in selling prices across product lines averaged 3% of sales revenue.
Gross profit margins increased 1% when comparing the two periods due to the
higher unit volumes in 2002. However, operating income levels in 2002
declined when compared to 2001 due to the sale of surplus real property in
2001 that resulted in a recognized gain of about $0.9 million. General and
administrative expenses for this segment increased slightly as a result of
litigation settlements.
Other Operations. Revenue increased $3 million in 2002 compared to the second
quarter in 2001. Higher unit sales of aggregates and ready mix were the main
sources for the revenue increase. The sales of these products benefited from
strong demand in the areas serviced by the Northern California Operations and
from additional sales by quarries located in Wyoming. Price increases
averaging 3% across product lines also contributed to the increase in sales
revenue. Gross profit margins also increased due to the higher selling
prices in 2002 and the increased unit volumes. General and administrative
expenses increased due to costs related to computer systems installed since
the second quarter of 2001 that were necessary to support an expanded service
area in Northern California.
Six Months 2002 vs. Six Months 2001
Revenue. Overall sales for the first six months of 2002 were $244 million.
This is a decrease of $7 million when compared to sales of $251 for the same
period in 2001. A reduction in the unit volume of each product was
responsible for the decline in sales revenue. The changes in volumes equaled
4% for aggregates, 2% for hot-mix asphalt, and 3% for ready mix. Average
selling prices across product lines were essentially unchanged when comparing
the two periods as declines in asphalt and aggregate prices were offset by
increases in the average selling price of ready mix.
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Gross Profit. Gross profit increased approximately $3 million to $40 million
in the first six months of 2002 as compared to $37 million in 2001. Gross
profit improved for each segment. The gross profit margin percentage
increased to 17% from 15% in the first six months of 2002 and 2001,
respectively. Approximately one third of this gross margin improvement was
from the elimination of goodwill amortization as required by Financial
Accounting Standards Board Statement of Financial Standards No. 142. The
remaining two third improvement is explained further in the segment analysis
below.
General and Administrative. General and administrative expenses increased $2
million in 2002 when compared to 2001. This increase was attributable to
higher expenses occurring at the Arizona Operations and Other Operations
segments as explained in their individual sections below. Total corporate
expenses were also higher in 2002 by approximately $0.2 million due to
increases in compensation expense and professional services. These increases
were partially offset by a decline in fees paid to the former parent for
various administrative services.
Gain on Sale of Property, Plant, and Equipment. Gains from the sale of
property, plant and equipment increased $1 million in the first six months of
2002 when compared to the same period in 2001. The increase resulted from a
gain recognized on the sale of depleted mineral property in Arizona in 2002.
Other Income and Expenses. Other income decreased $2 million due to a
decline in the investment return on excess cash invested in money market
funds due to a decline in interest rates and a decrease in principal invested
due to the investment in the limited partnership. In addition other income
decreased due to a loss experienced by the limited partnership investment
that is accounted for using the equity method and greater interest expense
from the increased amount of convertible debenture debt outstanding.
Provision for Income Taxes. The income tax rate for the first six months of
2002 and 2001 was 40%. This rate differs from the federal statutory rate of
35% due to the inclusion of state income taxes and the additional deduction
of percentage depletion over cost depletion recorded in the financial
statements.
Arizona Operations. Revenue for 2002 declined $11 million to $191 million as
compared to $202 million in 2001. The segment experienced declines in the
unit volumes for each product line. The declines in unit volumes of
aggregates, hot-mix asphalt and ready mix were 12%, 5% and 4%, respectively.
The decrease in unit volumes is attributable to the completion in 2001 of
several projects which required large purchases of company aggregates and a
general decline in construction activity. Average selling prices across
product lines were essentially equal between the two periods as increases in
average selling prices for ready mix and aggregates were offset by a decline
in hot-mix asphalt prices. The reduction in the average hot-mix asphalt
selling price was attributable to a change in the product mix within that
product line. Gross profit margins increased approximately 1% between the
two periods as a result of lower asphalt oil costs and lower transportation
costs due to outsourcing of various hauling needs. Additionally, gross
profit increased due to a greater percentage of aggregates being obtained
from less expensive internal production rather than third party purchases.
Operating income increased due to a $2 million gain from the sale of depleted
mineral property in 2002. General and administrative expenses for this
segment increased $0.9 million primarily from higher legal and professional
service costs.
Pacific Northwest Operations. Revenue increased $1 million to $23 million
in 2002 as compared to $22 million in 2001. Unit volumes for aggregates and
hot-mix asphalt increased 16% and 24%, respectively, while ready mix unit
volumes remained essentially unchanged. Offsetting this increase was a
price decline in each product line that averaged 5% of sales revenue.
Pricing levels were affected by the continued slow construction activity in
the Portland Oregon area and a higher proportion of public works projects
that typically carry a lower price level. Gross profit margins increased 3%
when comparing the two periods due to the higher volumes in 2002. However,
operating income levels in 2002 declined when compared to 2001 due to the
sale of surplus real property in 2001 that resulted in a recognized gain of
about $0.9 million. General and administrative expenses for this segment
decreased slightly as higher legal and service costs were offset by a general
decline of other expenses achieved through a cost reduction program.
Other Operations. Revenue increased $3 million in 2002 compared to 2001. A
3% increase in unit sales of aggregates and a 15% increase in ready mix unit
sales were the main sources of the revenue increase. The sales of these
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products benefited from strong demand in the area serviced by the Northern
California Operations and from quarries located in Wyoming. Price increases
averaging 4% across product lines also contributed to the increase in sales
revenue. Gross profit margins increased 3% due to the higher selling prices
in 2002 and the increased unit volumes. General and administrative expenses
increased due to costs related to computer systems installed since the first
six months of 2001 that were necessary to support an expanded California
service area.
Liquidity and Financial Condition - June 30, 2002
- -------------------------------------------------
Cash and cash equivalents decreased $17 million to $100 million at June
30, 2002 from $117 million at December 31, 2001. The decrease reflects cash
provided from operations of $21 million less cash used in investing
activities of $35 million and $3 million used in financing activities.
Net cash provided by operations for the first six months of 2002 of $21
million represented a $8 million decrease from the same period in 2001. The
decrease was mainly due to changes in working capital balances.
Net cash used in investing activities in the first six months of 2002
increased $18 million as compared to the first six months of 2001. The
increase in the use of cash was mainly due to an investment in a limited
partnership for $25 million and a decrease of $2 million in proceeds from the
sale of property, plant and equipment. These uses of cash were partially
offset by a decrease of $6 million and $3 million in cash used for the
issuance of a short-term note receivable in conjunction with a like kind
exchange of property and for the purchase of property, plant and equipment,
respectively. The decrease in purchases of property, plant and equipment is
mainly attributable to slow economic activity in the first six months of
2002. However, to meet ongoing maintenance needs the Company purchased $4
million of property, plant and equipment in the second quarter of 2002 when
compared to $3 million in the second quarter of 2001. On August 2, 2002, the
Company redeemed its limited partnership interest in the partnership and
received $24 million in proceeds from such redemption.
Net cash used in financing activities decreased $2 million in 2002 as
compared to the first six months of 2001. Payments on long-term debt
constituted the reason for the decrease due to the payoff of certain
outstanding debt in the first six months of 2001.
The Company believes that its current cash position together with
anticipated cash flows from operations will be sufficient for the working
capital and equipment replacement requirements of the Company for the next
twelve months. The Company does not have any established credit facilities.
At June 30, 2002, the Company had $19 million of notes payable and
convertible debentures payable. Further, the Company does not currently
intend to pay any cash dividends.
On July 9, 2002, KMC, Rinker and Merger Sub entered into the Merger
Agreement pursuant to which, on July 23, 2002, Merger Sub commenced the Offer
for all of the issued and outstanding shares of Common Stock of KMC at a
price of $17.00 per share, net to the seller in cash. Following consummation
of the Offer, and satisfaction of the conditions of the Merger, Merger Sub
will be merged with and into KMC, with KMC as the surviving corporation. As
a result of the Merger, each issued and outstanding share of Common Stock
(other than shares held in the treasury of KMC, by Rinker, Merger Sub or any
subsidiary of Rinker or Merger Sub and other than shares as to which the
holder thereof has properly exercised and perfected its appraisal rights in
accordance with Delaware law) will be converted into the right to receive the
Per Share Amount.
Critical Accounting Policies
- ----------------------------
The Company has identified the following accounting policies as
"critical" based on each one being important to the portrayal of the
Company's financial condition and results of operations, and requiring
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. As discussed below the Company's financial position or
results of operations may be materially different when reported under
different conditions or when using different assumptions in the application
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of such policies. In the event estimates or assumptions prove to be
different from actual results, adjustments are made in subsequent periods to
reflect more current information. The Company's critical accounting policies
include:
Inventories. Inventories consist primarily of raw materials, repair
parts, fuel and building materials that the Company holds for use or sale in
the ordinary course of business. Inventories are stated at the lower of
average cost or market. Cost of inventory is determined using the last-in,
first-out (LIFO) assumption as to the flow of cost factors, including
applicable expenditures and charges directly or indirectly incurred in
bringing inventories to their existing condition and location. Inventory
values are adjusted to survey results annually. Unforeseen events and
changes in circumstances and market conditions could affect the carrying
value of the Company's inventory and result in a charge or a benefit to the
Company's results of operations.
Capitalization of property, plant and equipment. The Company has
adopted a capitalization policy of capitalizing all new purchases and any
major improvements on property, plant and equipment costing in excess of
$10,000. All maintenance costs are expensed in the period the work is
completed. Unforeseen events and changes in circumstances which result in
the change of the dollar amount floor or the types of costs included or
excluded in the capitalization policy could affect the value of the Company's
assets and results of operations.
Depreciation and depletion. Depreciation is provided on a straight-line
method based on estimated useful lives. Depletion of mineral properties is
provided on a unit-of-extraction basis determined in relation to estimated
recoverable reserves at each mineral site. Unforeseen events and changes in
circumstances which change the estimates used to determine useful lives and
recoverable reserves could affect the value of the Company's assets and
results of operations.
Impairment of long-lived assets and intangibles. The Company reviews
the carrying amounts of its long-lived assets, including goodwill and
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that such carrying amounts may not be recoverable.
Measurement of any impairment would include a comparison of the present value
of the estimated future operating cash flows anticipated to be generated
during the remaining life of the assets to the net carrying value of the
assets. Unforeseen events and changes in circumstances and market conditions
and material differences in the value of intangible assets due to changes in
estimates of future operating cash flows could negatively affect the fair
value of the Company's assets and result in an impairment charge.
Accrued insurance cost. The Company maintains insurance coverage for
various aspects of its business and operations. The Company has elected,
however, to retain a portion of losses that occur through the use of various
deductibles, limits and retentions under its insurance programs. The Company
accrues for the estimated ultimate liability for incurred losses.
Consequently, the actual ultimate liability could differ from these estimated
liabilities.
Revenue recognition. Revenue is recognized when the earnings process is
complete, as evidenced by an agreement between the customer and the Company,
when delivery has occurred or services have been rendered, when the fee is
fixed or determinable and when collection is probable. The recognition of
revenue in conformity with accounting principles generally accepted in the
United States requires the Company to make estimates and assumptions that
affect the reported amounts of revenue.
New Accounting Pronouncement
In July 2001, the FASB issued SFAS No. 141 ("SFAS 141"), "Business
Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets."
SFAS 141 supercedes Accounting Principles Board Opinion ("APB") No. 16
"Business Combinations." The most significant changes made by SFAS 141 are:
(1) requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific
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criteria for the recognition of intangible assets separately from goodwill,
and (3) requiring unallocated negative goodwill to be written off immediately
as an extraordinary gain (instead of being deferred and amortized). Adoption
of this statement did not materially affect the Company's consolidated
financial position or results of operations.
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their acquisition (i.e., the post-acquisition accounting). The provisions of
SFAS 142 are effective for fiscal years beginning after December 15, 2001.
The most significant changes made by SFAS 142 are: (1) goodwill and
indefinite-lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level,
(3) intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.
On January 1, 2002, the Company adopted SFAS 142, and, accordingly,
discontinued goodwill amortization. Results for the three and six months
ended June 30 assuming the elimination of goodwill amortization are
summarized in Footnote 8 in the Notes to Consolidated Condensed Financial
Statements.
During June 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting
for Asset Retirement Obligations. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS
143 requires an enterprise to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of a tangible long-lived asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The Company is
required to perform reclamation at various locations depending upon state
and/or lease requirements. Due to the insignificance of the amount of the
reclamation obligations, the Company does not anticipate the adoption of this
Statement to have a material effect on the Company's consolidated financial
position or results of operations.
On October 3, 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting
for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
it retains many of the fundamental provisions of that Statement. SFAS 144 is
effective for fiscal years beginning after December 31, 2001. Adoption of
this statement did not materially affect the Company's consolidated financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS 145 rescinds FASB Statement No. 4, which
required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of the related
income tax effect. As a result, the criteria in Accounting Principles Board
Opinion 30 will now be used to classify those gains and losses. SFAS 145
amends FASB Statement No. 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. This amendment is
consistent with the FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects. In addition, SFAS 145 makes
technical corrections to existing pronouncements. While those corrections
are not substantive in nature, in some instances, they may change accounting
practice. The Company is currently evaluating the impact of this statement
to determine the effect, if any, it may have on its consolidated results of
operations and financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement sets forth
various modifications to existing accounting guidance which prescribes the
conditions which must be met in order for costs associated with contract
terminations, facility consolidations, employee relocations and terminations
to be accrued and recorded as liabilities in financial statements. This
statement is effective for exit or disposal activities initiated after
December 31, 2002. The Company is currently evaluating the impact of this
statement to determine the effect, if any, it may have on its consolidated
results of operations and financial position.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Other than discussed below, the Company does not believe it is
subject to significant market risks arising from interest rates, foreign
exchange rates or equity price fluctuations associated with market risk
sensitive instruments.
On February 1, 2002, KMC invested $25 million in a private
investment fund limited partnership (the "Partnership"). The investment
objective of the Partnership is to generate current income and capital
appreciation while minimizing the potential for loss of principal. The
Partnership may use a variety of investment strategies with the principal one
being merger arbitrage. In general, a merger arbitrage strategy involves
purchasing the stock of a company being acquired or merged with another
company and selling short the stock of the acquiring company. A particular
merger arbitrage transaction will either derive a profit or a loss depending
on the price differential between the price of the securities when purchased
and the price ultimately realized when the transaction is completed. The
primary risk is that a loss could result if the transaction is not completed.
The Partnership invests in a diversified portfolio of these types of
transactions to minimize risk of loss. On August 2, 2002, the Company
redeemed its limited partnership interest in the Partnership and received $24
million in proceeds from such redemption. KMC recognized a $.7 million loss
on this investment. At June 30, 2002, the loss reflected for this investment
was $.8 million. This loss is reflected in equity earnings in the
Consolidated Condensed Statement of Earnings.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits required by Item 601 of Regulation S-K.
2.1 Agreement and Plan of Merger, dated July 9, 2002, among
the Company, Rinker Materials Corporation and Jem Lear
Acquisition Company, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K filed by the Company on July
10, 2002).
10.1 Form of Executive Employment Agreement, dated as of
April 19, 2002, by and between KMC and certain executive
officers (incorporated by reference to Exhibit (e)(2) to
the Schedule 14D-9 filed by KMC on July 23, 2002).
10.2 Form of Amendment to Executive Employment Agreement,
dated as of July 8, 2002, by and between KMC and certain
executive officers (incorporated by reference to Exhibit
(e)(3) to the Schedule 14D-9 filed by KMC on July 23,
2002).
10.3 Revised Executive Employment Agreement, dated as of July
8, 2002, by and between KMC and Christopher J. Murphy
(incorporated by reference to Exhibit (e)(4) to the
Schedule 14D-9 filed by KMC on July 23, 2002).
10.4 Revised Executive Employment Agreement, dated as of July
8, 2002, by and between KMC and Daniel Speck
(incorporated by reference to Exhibit (e)(5) to the
Schedule 14D-9 filed by KMC on July 23, 2002).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) No reports on Form 8-K have been filed during the second
quarter of 2002.
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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.
KIEWIT MATERIALS COMPANY
Date: August 13, 2002 /s/ Donald E. Bowman
-----------------------------
Donald E. Bowman
Vice President, Chief
Financial Officer
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