UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
Commission file number
December 27, 2003
000-23943
PETER KIEWIT SONS’, INC.
(Exact name of registrant as specified in its charter)
Delaware
91-1842817
(State of Incorporation)
(I.R.S. Employer Identification No.)
Kiewit Plaza, Omaha, Nebraska
68131
(Address of principal executive offices)
(Zip Code)
(402) 342-2052
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The registrant’s stock is not publicly traded, and therefore, there is no ascertainable market value of voting stock held by non-affiliates.
29,955,901 shares of the registrant’s $0.01 par value Common Stock were issued and outstanding on March 4, 2004.
Portions of the registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
Government Contracts.
Public contracts accounted for approximately 81% of the combined prices of contracts awarded to the Company and 68% of revenue earned by the Company during 2003. Most of these contracts were awarded by government and quasi-government units under fixed price contracts after competitive bidding. Credit risk is minimal with public (government) owners since the Company ascertains that funds have been appropriated by the governmental project owner prior to commencing work on public projects. Most public contracts are subject to termination at the election of the government. In the event of termination, however, the contractor is entitled to receive the contract price on completed work and payment of termination-related costs.
Competition.
A contractor’s competitive position is based primarily on its prices for construction services, ability to obtain performance bonds and in certain instances, its reputation for quality, timeliness, experience, and financial strength. The construction industry is highly competitive and lacks firms with dominant market power. In 2003, Engineering News Record, a construction trade publication, ranked the Company as the seventh largest United States contractor in terms of 2002 revenue. Also in terms of 2002 revenue, it ranked the Company first in the construction markets of bridges, highways, water supply and dams, second in transportation (including mass transit and rail) and sanitary and storm sewers, and in the top ten of various other markets.
Demand.
The volume and profitability of the Company’s construction work depends to a significant extent upon the general state of the economies of the United States and Canada, and the volume of work available to contractors. Fluctuating demand cycles are typical of the industry, and such cycles determine to a large extent the degree of competition for available projects. The Company’s construction operations could be adversely affected by labor stoppages or shortages, adverse weather conditions, shortages of supplies, or governmental action. The volume of available government work is affected by budgetary and political considerations. A significant decrease in the amount of new government contracts, for whatever reason, would have a material adverse effect on the Company.
Backlog.
At the end of 2003 and 2002, the Company had backlog (anticipated revenue from uncompleted contracts) of approximately $3.7 billion and $4.2 billion, respectively. Of current backlog, approximately $1.6 billion is not expected to be completed during 2004. Additionally, the Company was low bidder on $.9 billion and $.2 billion of jobs that have not yet been awarded at December 27, 2003 and December 28, 2002, respectively. In 2003, the Company was the successful bidder on 288 jobs with total contract prices of approximately $2.0 billion, an average price of approximately $6.9 million per job. There were 18 new projects with contract prices over $25 million, accounting for approximately 60% of the successful bid volume. The Company’s share of a highway contract in Colorado and bridge contracts in California and Washington make up 36% of backlog at December 27, 2003. A s
ingle owner in the western region of the United States makes up 15% of total backlog at December 27, 2003
Joint Ventures.
The Company frequently enters into joint ventures to efficiently allocate expertise and resources among the venturers and to spread risks associated with particular projects. In most joint ventures, if one venturer is financially unable to bear its share of expenses, the other venturers will be required to pay those costs. The Company prefers to act as the sponsor of its joint ventures. The sponsor generally provides the project manager, the majority of venturer-provided personnel, and accounting and other administrative support services. The joint venture generally reimburses the sponsor for such personnel and services on a negotiated basis. The sponsor is generally allocated a majority of the venture’s profits and losses and usually has a controlling vote in joint venture decision-making. In 2003, the Company derived approximately 86% of its joint venture revenue from sponsored joint ventures and approximatel
y 14% from non-sponsored joint ventures. The Company’s share of joint venture revenue accounted for approximately 31% of its 2003 total revenue.
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Item 4A.
Executive Officers of the Registrant.
The table below shows information as of March 4, 2004, about each executive officer of PKS, including his business experience during the past five years. PKS’ executive officers are elected annually to serve until their successors are elected and qualified or until their death, resignation or removal.
Name
Business Experience
Age
John B. Chapman
Mr. Chapman has been a Vice President of PKS since August 1997.
58
Lawrence J. Cochran
Mr. Cochran has been a Vice President of PKS since March 2003. Mr. Cochran has served as an Area Manager for Kiewit Pacific Co., a subsidiary of the Company, since 1997.
48
Richard W. Colf
Mr. Colf has been a director of PKS since August 1997. Mr. Colf has been an Executive Vice President of PKS since July 1998. Mr. Colf is a member of the Executive Committee of PKS.
60
Bruce E. Grewcock
Mr. Grewcock has been a director of PKS since August 1997. Mr. Grewcock has been President and Chief Operating Officer of PKS since December 2000 and was an Executive Vice President of PKS from August 1997 until December 2000. Mr. Grewcock is a member of the Executive Committee of PKS.
50
Norman D. Holly
Mr. Holly has been Associate General Counsel and a Vice President of PKS since May 2003. Mr. Holly was a Senior Attorney for PKS for more than five years prior to May 2003.
57
Allan K. Kirkwood
Mr. Kirkwood has been a director of PKS since August 1997. Mr. Kirkwood has been an Executive Vice President of PKS since July 1998. Mr. Kirkwood is a member of the Executive Committee of PKS.
60
Ben E. Muraskin
Mr. Muraskin has been the Treasurer of PKS since June 2003 and a Vice President of PKS since January 2000. Mr. Muraskin was a partner at Alston & Bird LLP from January 1999 to December 1999, and an associate at that firm from May 1992 to January 1999.
40
Douglas E. Patterson
Mr. Patterson has been a director of PKS since June 2001. Mr. Patterson has been Executive Vice President of PKS since November 2001. Mr. Patterson was President of Gilbert Central Corp., Gilbert Industrial Corporation and Kiewit Engineering Co., all subsidiaries of PKS, from June 1999 to June 2001. Mr. Patterson was Senior Vice President of Kiewit Construction Company, a subsidiary of PKS, from July 1996 to June 1999. Mr. Patterson is a member of the Executive Committee of PKS.
52
Gerald S. Pfeffer
Mr. Pfeffer has been a Vice President of PKS since April 1998.
58
Michael J. Piechoski
Mr. Piechoski has been Chief Financial Officer of PKS since November 2002 and a Vice President of PKS since June 2000. Mr. Piechoski was Treasurer of PKS from June 2000 to June 2003. Mr. Piechoski was Director of Audit of PKS from April 1999 to June 2000. Mr. Piechoski was Chief Accounting Officer of United Metro Materials, Inc., a former subsidiary of PKS, for more than five years prior to March 1999.
50
5
Jerry C. Porter
Mr. Porter has been a Vice President of PKS since May 2000. Mr. Porter has been the design/build manager of PKS since September 1999. Mr. Porter was a construction design manager for Kiewit Pacific Co. from September 1996 until September 1999.
60
Tobin A. Schropp
Mr. Schropp has been the Senior Vice President of PKS since November 2002 and General Counsel and Secretary of PKS since September 1998. Mr. Schropp was a Vice President of PKS from September 1998 to November 2002.
41
Kenneth E. Stinson
Mr. Stinson has been a director and Chairman of PKS since August 1997. Mr. Stinson has been Chief Executive Officer of PKS since March 1998 and was President of PKS from August 1997 until December 2000. Mr. Stinson is also currently a director of ConAgra Foods, Inc. and Valmont Industries, Inc. Mr. Stinson is the Chairman of the Executive Committee of PKS.
61
Michael J. Whetstine
Mr. Whetstine has been the Controller and Assistant Secretary of PKS since September 2003. Mr. Whetstine served as Controller for DTN Corporation from January 2001 to August 2003, and was Assistant Controller from February 2000 to January 2001. Mr. Whetstine was affiliated with PricewaterhouseCoopers, LLP (formerly Coopers & Lybrand) for more than five years prior to February 2000.
37
6
Due to its competitive nature, the construction industry experiences lower margins than many other industries. As a result, cost control is a primary focus of the Company. The ability to control costs enables a contractor to bid work more competitively and also to complete the work profitably. Further, since the formula price of Common Stock is based upon the Company’s book value, formula price is primarily driven by the Company’s ability to complete projects profitably. Consequently, the Company views both margin as a percentage of revenue and general and administrative expenses as a percentage of revenue as key measures of operating results.
Results of Operations 2003 vs. 2002
Revenue.
Total revenues decreased $324 million or 8.8.% from the same period in 2002. Significant projects located in Canada and the southwest and southeast regions of the United States that were completed during the year were not fully offset by the start of new work as significant projects in the northwest region of the United States were delayed due to unanticipated site conditions and environmental issues. Additionally, in 2002 the Company received a nonrecurring early completion bonus of $28 million on a significant power plant project. Lastly, claim settlements decreased to $28 million for the year ended December 27, 2003 from $92 million for the same period in 2002. The Company recognizes claims in the period in which they are settled. As a result, the amount of claims settlements recognized varies with both the amount of settlements outstanding and the stage of the negotiation process fo
r each claim.
Contract backlog was $3.7 billion and $4.2 billion at December 27, 2003 and December 28, 2002, respectively. Additionally, the Company was low bidder on $902 million and $209 million of jobs that had not been awarded at December 27, 2003 and December 28, 2002, respectively. Backlog included $2.1 billion for sole contracts and $1.6 billion for the Company’s share of joint ventures at December 27, 2003. Foreign operations, located primarily in Canada, represent 5.3% of backlog at December 27, 2003. Domestic projects are spread geographically throughout the U.S. The Company’s share of a highway contract in Colorado and bridge contracts in California and Washington make up 36% of total backlog at December 27, 2003. A single owner in the western region of the United States makes up 15% of total backlog at December 27, 2003.
Margin.
Total margin decreased $66 million or 12.8% from the same period in 2002. Total margin as a percentage of revenue for the twelve months ended December 27, 2003 decreased to 13.3% compared to 13.9% in 2002. The decreased margin percentage is primarily attributable to a decrease in claim settlements. Claim settlements for the twelve months ended December 27, 2003 and December 28, 2002 were $28 million and $92 million, respectively. Additionally, in 2002 the Company received a nonrecurring early completion bonus of $28 million on a significant power plant project. These reductions were offset by the recognition of additional operating income through a $37 million reduction in a sole contract job loss after an agreement was reached with the project owner during 2003.
General and Administrative Expenses.
General and administrative expenses for the twelve months ended December 27, 2003 increased $24 million from the same period in 2002. As a percentage of revenue, general and administrative expenses for the twelve months ended December 27, 2003 increased to 6.6% compared to 5.4% for the same period in 2002. The Company experienced an increase in compensation and travel as a result of several operating offices expanding to markets outside of their previous territories and increased estimating efforts. Additional factors were an increase in profit sharing expense offset by a reduction in costs related to the proposed corporate conversion to a limited partnership which was abandoned during 2003.
Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other assets during the twelve months ended December 27, 2003 and 2002 were $12 million and $11 million, respectively. Gain on sale of operating assets is affected to a large degree by market conditions and the specific types and quantity of pieces of equipment sold.
10
Investment Income and Equity Earnings, net.
Investment income and equity earnings increased $18 million for the twelve months ended December 27, 2003 from the same period in 2002. The Company sold its investment in stock warrants during the twelve months ended December 27, 2003 and recognized a $6 million gain as compared to a $4 million unrealized holding loss for the same period in 2002. During the twelve months ended December 28, 2002, the Company also sold shares in a stock mutual fund at a $7 million loss.
Interest Expense.
During the twelve months ended December 27, 2003, the Company recognized $4 million of look back interest expense (interest related to the timing of revenue recognition for income tax purposes for completed construction projects). Look back interest is calculated every year and was less than $1 million in 2002. The 2003 look back interest, however, increased significantly due to the receipt of significant claims that had been in negotiation for a number of years.
Other, net.
Other income is comprised primarily of mine management fee income. The Company’s fee is a percentage of adjusted operating income of coal mines managed, as defined in a mine management agreement. Fees for these services for the twelve months ended December 27, 2003 and December 28, 2002 were $5 million and $7 million, respectively. The decrease was primarily attributed to a decrease in operating income related to restructuring charges incurred at one of the mines during the twelve months ended December 27, 2003.
Provision for Income Taxes.
The effective income tax rates for the twelve months ended December 27, 2003 and 2002 were 38.4% and 41.7%, respectively. In 2002, the rate differs from the federal statutory rate of 35% primarily due to state and foreign income taxes and costs capitalized for tax purposes in anticipation of a proposed corporate conversion to a limited partnership. In 2003, the rate differs from the federal statutory rate of 35% primarily due to state and foreign income taxes, offset in part by the expected deduction of previously capitalized costs related to the Company’s abandoned pursuit of a proposed conversion to a limited partnership.
Results of Operations 2002 vs. 2001
Revenue.
Total revenues decreased $172 million or 4% from the same period in 2001. The decrease was primarily attributed to a $702 million reduction in revenue earned on a significant fiber optic project for the twelve months ended December 28, 2002 from the same period in 2001. This project was substantially complete at the end of 2001. Offsetting the decrease were increases in other sole contract projects of $15 million, joint venture projects of $514 million and other sources of $1 million. The joint venture increase is primarily attributable to a $417 million increase in revenue on four significant transportation projects. Also offsetting the decrease was an increase in claim settlements of $67 million on various sole contract and joint venture projects. Claim settlements for the twelve months ended December 28, 2002 and December 29, 2001 were $92 million and $25 million, respectiv
ely.
Contract backlog was $4.2 billion at December 28, 2002 and December 29, 2001. Backlog included $2.2 billion for sole contracts and $2.0 billion for the Company’s share of joint ventures at December 28, 2002. Foreign operations, located primarily in Canada, represent 5.6% of backlog at December 28, 2002. Domestic projects are spread geographically throughout the U.S. The Company’s share of a highway contract in Colorado and bridge contracts in California and Washington make up 41% of total backlog at December 28, 2002.
11
Margin.
Total margin increased $87 million or 20% from the same period in 2001. Excluding the significant fiber optic project for 2002 and 2001, construction margin (including both sole contracts and the Company’s share of joint ventures), as a percentage of revenue, increased to 13.6% compared to 9.5%. Margins increased due to several factors. Claim settlements on various sole contract and joint venture projects increased by $67 million for the twelve months ended December 28, 2002 when compared to the same period in 2001. Claim settlements for the twelve months ended December 28, 2002 and December 29, 2001 were $92 million and $25 million, respectively. During 2002, the Company received an early completion bonus of $28 million on a significant power plant project. The Company also experienced a $45 million reduction in job losses for the twelve months ended December 28, 2002 wh
en compared to the same period in 2001. The decrease in job losses was attributed to the Company’s emphasis on continuous improvements in cost containment efforts. Also contributing to increased margin was an increase in significant high risk projects with increased bonding requirements. These projects generally provide higher margins due to the increased risk and limited number of bidders willing or able to take such risks. The increase in margin was partially offset by a $114 million decrease in margins on a significant fiber optic project for the twelve months ended December 28, 2002 as compared to the same period in 2001. This project was substantially complete at the end of 2001.
General and Administrative Expenses.
General and administrative expenses for the twelve months ended December 28, 2002 increased $15 million to $199 million compared to the same period in 2001. As a percentage of revenue, general and administrative expenses for the twelve months ended December 28, 2002 increased to 5.4% compared to 4.8% for the same period in 2001 This increase was primarily attributed to Home Office costs of $8 million related to a potential corporate conversion to a limited partnership and a $4 million increase in compensation. Overall, operating office general and administrative expenses remained relatively stable for the twelve months ended December 28, 2002 compared to the same period in 2001. Increases for operating offices in the states of Washington and Texas were partially offset by a reduction in expenses as a result of consolidating operations located on the East Coast.
Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other assets decreased to $11 million during the twelve months ended December 28, 2002 from $20 million the same period in 2001. The decrease was primarily attributable to a $5 million loss incurred on the sale of a specialized piece of equipment with no ready resale market.
Investment Income and Equity Earnings, net.
Investment income and equity earnings decreased $20 million for the twelve months ended December 28, 2002 from the same period in 2001. During the twelve months ended December 28, 2002, interest income, primarily from money market funds, bond funds and other highly liquid instruments, decreased $9 million compared to the same period in 2001. The decrease was primarily attributable to a decline in interest rates earned on money market funds from approximately 4.2% for the twelve months ended December 29, 2001 to approximately 1.7% for the same period in 2002. Another factor contributing to the decrease in interest income was a decline in funds carried in interest bearing money market accounts. These funds were transferred, during the third quarter of 2001, to investments that primarily recognize changes in market value as a separate component of accumulated other comprehensive income.
During the twelve months ended December 28, 2002, the Company also sold shares in a stock mutual fund at a $7 million loss and recognized a $4 million unrealized holding loss on its investment in stock warrants acquired in December 2001.
12
Other, net.
Other income is comprised primarily of mine management fee income. Fees for these services for the twelve months ended December 28, 2002 and December 29, 2001 were $7 million and $5 million, respectively.