DURATEK INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended September 30, 2002
		OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from to

Commission File Number 0-14292

DURATEK, INC.
(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		22-2427618 (I.R.S. Employer Identification No.)
10100 Old Columbia Road, Columbia, Maryland (Address of principal executive offices)		21046 (Zip Code)

Registrant's telephone number, including area code: (410) 312-5100

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 ý No o

Number of shares outstanding of each of the issuer's classes of common stock as of November 4, 2002:

Class of stock		Number of shares
Common stock, par value $0.01 per share		13,505,128

DURATEK, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		PAGE
Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001	3
	Condensed Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2002	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
Part II	Other Information
Item 1.	Legal Proceedings	19
Item 3.	Defaults Upon Senior Securities	19
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	20
	Signatures	21
	Certifications	22

Part I Financial Information

Item 1. Financial Statements

DURATEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of dollars, except per share amounts)

			September 30, 2002			December 31, 2001
			(unaudited)			*
ASSETS
Current assets:
	Cash and cash equivalents		$	1,526		$	4,519
	Receivables, net			58,148			48,034
	Other accounts receivable			1,915			3,671
	Costs and estimated earnings in excess of billings on uncompleted contracts			12,746			25,539
	Prepaid expenses and other current assets			6,394			5,131
	Deferred income taxes			6,080			6,080

		Total current assets		86,809			92,974
Property, plant and equipment, net				71,130			75,883
Goodwill				70,797			70,797
Other intangible assets, net				6,730			7,936
Decontamination and decommissioning trust fund				19,724			18,640
Retention				5,858			4,236
Other assets				6,360			6,261

			$	267,408		$	276,727

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	10,400		$	10,400
	Short-term borrowings			5,218			7,763
	Accounts payable			17,178			24,987
	Accrued expenses and other current liabilities			44,932			41,903
	Unearned revenues			11,710			10,488
	Waste processing and disposal liabilities			9,948			10,584

		Total current liabilities		99,386			106,125
Long-term debt				60,649			73,900
Facility and equipment decontamination and decommissioning liabilities				31,938			30,014
Other noncurrent liabilities				1,447			2,547
Deferred income taxes				1,523			1,523

		Total liabilities		194,943			214,109

Redeemable preferred stock (Liquidation value $17,958 as of September 30, 2002)				15,752			15,734

Stockholders' equity:
	Preferred stock — $.01 par value; authorized 4,840,000 shares; none issued			—			—
	Common stock — $.01 par value; authorized 35,000,000 shares; issued 15,081,648 shares in 2002 and 15,070,879 shares in 2001			150			150
	Capital in excess of par value			77,300			77,240
	Accumulated deficit			(11,064	)		(20,594	)
	Treasury stock, at cost, 1,576,658 shares			(9,275	)		(9,275	)
	Deferred stock compensation			(398	)		(637	)

		Total stockholders' equity		56,713			46,884

			$	267,408		$	276,727

*: The Condensed Consolidated Balance Sheet as of December 31, 2001 has been derived from the Company's audited Consolidated Balance Sheet reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

See Notes to Condensed Consolidated Financial Statements.

DURATEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2002			2001			2002			2001
	(unaudited)						(unaudited)
Revenues	$	72,837		$	66,737		$	214,361		$	206,217
Cost of revenues		51,243			49,770			153,883			158,334

Gross profit		21,594			16,967			60,478			47,883
Selling, general and administrative expenses		13,916			12,719			38,695			36,146

Income from operations		7,678			4,248			21,783			11,737
Other income (expense)		108			(11	)		309			159
Interest expense, net		(1,173	)		(2,429	)		(4,279	)		(8,636	)
Minority interest in loss of consolidated subsidiary		10			—			10			—

Income before income taxes and proportionate share of loss of joint venture		6,623			1,808			17,823			3,260
Income taxes		2,682			837			7,218			1,418

Income before proportionate share of loss of joint venture		3,941			971			10,605			1,842
Proportionate share of loss of joint venture		(37	)		(50	)		(111	)		(150	)

Net income		3,904			921			10,494			1,692
Preferred stock dividends and charges for accretion		(315	)		(374	)		(964	)		(1,123	)

Net income attributable to common shareholders	$	3,589		$	547		$	9,530		$	569

Basic earnings per share	$	0.27		$	0.04		$	0.71		$	0.04

Diluted earnings per share	$	0.20		$	0.04		$	0.55		$	0.04

Basic weighted average common stock outstanding		13,504			13,479			13,500			13,446

Diluted weighted average common stock and dilutive securities outstanding		19,066			13,561			19,086			13,502

See Notes to Condensed Consolidated Financial Statements.

DURATEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended September 30, 2002

(in thousands of dollars)

	Common Stock
	Common Stock			Capital in Excess of Par Value		Accumulated Deficit			Treasury Stock			Deferred Stock Compensation			Total Stockholders' Equity
	Shares	Amount		Capital in Excess of Par Value		Accumulated Deficit			Treasury Stock			Deferred Stock Compensation			Total Stockholders' Equity
	(unaudited)
Balance, December 31, 2001	15,070,879	$	150	$	77,240	$	(20,594	)	$	(9,275	)	$	(637	)	$	46,884
Net income	—		—		—		10,494			—			—			10,494
Amortization of deferred stock compensation	—		—		—		—			—			239			239
Exercise of options and warrants	1,125		—		7		—			—			—			7
Other issuances of common stock	9,644		—		53		—			—			—			53
Preferred stock dividends and charges for accretion	—		—		—		(964	)		—			—			(964	)

Balance, September 30, 2002	15,081,648	$	150	$	77,300	$	(11,064	)	$	(9,275	)	$	(398	)	$	56,713

See Notes to Condensed Consolidated Financial Statements.

DURATEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

				Nine months ended September 30,
				2002			2001
				(unaudited)
Cash flows from operating activities:
	Net income			$	10,494		$	1,692
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			8,806			9,787
		Stock compensation expense			239			239
		Proportionate share of loss of joint venture			111			150
		Changes in operating assets and liabilities:
			Receivables, net		(8,274	)		(907	)
			Cost and estimated earnings in excess of billings		12,793			(50	)
			Prepaid expenses and other current assets		(1,263	)		7,229
			Retention		(1,622	)		(1,722	)
			Accounts payables, accrued expenses and other current liabilities		(6,492	)		(8,314	)
			Unearned revenues		1,222			(3,369	)
			Waste processing and disposal liabilities		(636	)		(2,217	)
			Facility and equipment decontamination and decommissioning liabilities		840			147
			Other		195			60

		Net cash provided by operating activities			16,413			2,725

Cash flows from investing activities:
	Additions to property, plant and equipment, net				(2,052	)		(3,747	)
	Other				(134	)		(19	)

		Net cash used in investing activities			(2,186	)		(3,766	)

Cash flows from financing activities:
	Proceeds from (repayments of) short-term borrowings				(2,545	)		6,239
	Proceeds from (repayments of) borrowings under revolving credit facility				(5,200	)		5,500
	Repayments of long-term debt				(8,051	)		(7,800	)
	Deferred financing costs				(1,098	)		(648	)
	Repayments of capital lease obligations				(326	)		(684	)
	Preferred stock dividends				—			(268	)
	Treasury stock purchases				—			(24	)

		Net cash provided by (used in) financing activities			(17,220	)		2,315

Net increase (decrease) in cash and cash equivalents					(2,993	)		1,274
Cash and cash equivalents at beginning of period					4,519			431

Cash and cash equivalents at end of period				$	1,526		$	1,705

See Notes to Condensed Consolidated Financial Statements.

DURATEK, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(in thousands of dollars, except per share amounts)

1. Principles of consolidation and basis of presentation

The accompanying unaudited condensed consolidated financial statements of Duratek, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in subsidiaries and joint ventures in which the Company does not have control or majority ownership are accounted for under the equity method.

All adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for the fair presentation of this interim financial information have been included. Results of interim periods are not necessarily indicative of results to be expected for the year as a whole. The effect of seasonal business fluctuations and the occurrence of many costs and expenses in annual cycles require certain estimations in the determination of interim results. The information contained in the interim financial statements should be read in conjunction with the Company's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.

2. Goodwill and Other Intangible Assets

Goodwill is attributable to several acquisitions made by the Company. Goodwill was being amortized on a straight-line basis over a 30-year period through December 31, 2001. Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, became effective for the Company on January 1, 2002. Under SFAS No. 142, the Company's goodwill is no longer amortized to expense (See note 5). The following is an analysis which adjusts actual amounts for

the three and nine months ended September 30, 2001 of net income and basic and diluted earnings per share as if SFAS No. 142 had been adopted effective January 1, 2001:

	Three months ended September 30,				Nine months ended September 30,
	2002		2001		2002		2001
Net income attributable to common shareholders	$	3,589	$	547	$	9,530	$	569
Plus: Income impact of assumed conversions — preferred stock dividends and charges for accretion		315		—		964		—

Net income attributable to common shareholders assuming conversion		3,904		547		10,494		569
Add back: Goodwill amortization, net of tax		—		386		—		1,087

Adjusted net income	$	3,904	$	933	$	10,494	$	1,656

Basic earnings per share	$	0.27	$	0.04	$	0.71	$	0.04
Add back: Goodwill amortization		—		0.03		—		0.08

Adjusted basic earnings per share	$	0.27	$	0.07	$	0.71	$	0.12

Diluted earnings per share	$	0.20	$	0.04	$	0.55	$	0.04
Add back: Goodwill amortization		—		0.03		—		0.08

Adjusted diluted earnings per share	$	0.20	$	0.07	$	0.55	$	0.12

Other intangibles consist principally of amounts assigned to operating rights related to the Barnwell, South Carolina low-level radioactive waste disposal facility acquired as part of the Waste Management Nuclear Services ("WMNS") transaction, covenants not-to-compete, and costs incurred to obtain patents. The Barnwell operating rights are being amortized on a straight-line basis over the remainder of the eight-year life of the facility. Covenants not to compete and patent amounts are being amortized over 10 and 17 years, respectively, on a straight-line basis. Intellectual property is being amortized over 4 years.

Goodwill is tested for impairment annually. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The Company uses the two-step impairment test discussed in SFAS No. 142. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company has completed the first step of the goodwill impairment test, which was performed as of January 1, 2002. It has been determined that the fair value of all of the Company's reporting units exceed their carrying amount, therefore, there is no goodwill impairment as of January 1, 2002.

3. Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of stock options, restricted stock, and convertible redeemable preferred stock that could share in the earnings of the Company. The reconciliation of amounts used in the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001 consist of the following:

				Three months ended September 30,				Nine months ended September 30,
				2002		2001		2002		2001
Numerator:
	Net income attributable to common shareholders			$	3,589	$	547	$	9,530	$	569
	Plus: Income impact of assumed conversions — preferred stock dividends and charges for accretion				315		—		964		—

	Net income attributable to common shareholders assuming conversion			$	3,904	$	547	$	10,494	$	569

Denominator:
	Weighted-average shares outstanding				13,504		13,479		13,500		13,446
	Effect of dilutive securities:
		Incremental shares from assumed conversion of:
			Employee stock options		204		39		249		26
			Restricted stock		107		43		86		30
			Convertible redeemable preferred stock		5,251		—		5,251		—