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
March 31, 2005
Commission file number
000-23943
PETER KIEWIT SONS’, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
91-1842817
(I.R.S. Employer Identification No.)
Kiewit Plaza, Omaha Nebraska
(Address of principal executive offices)
68131
(Zip Code)
(402) 342-2052
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of each of the registrant’s classes of common stock as of May 4, 2005:
Title of Class
Common Stock, $0.01 par value
Shares Outstanding
28,322,175
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
Consolidated Condensed Statements of Operations for the three months ended
March 31, 2005 and 2004
2
Consolidated Condensed Balance Sheets as of March 31, 2005 and December 25, 2004
3
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2005 and 2004
4
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
13
Item 3.
19
Item 4.
19
PART II - OTHER INFORMATION
Item 1.
20
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
21
Item 6.
21
21
i
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Peter Kiewit Sons’, Inc.:
We have reviewed the consolidated condensed balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of March 31, 2005, the related consolidated condensed statements of operations for the three month periods ended March 31, 2005 and 2004, and the related consolidated condensed statements of cash flows for the three month periods ended March 31, 2005 and 2004. These consolidated condensed financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of December 25, 2004, and the related consolidated statements of earnings, changes in redeemable common stock and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 25, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
(signed) KPMG LLP
Omaha, Nebraska
May 4, 2005
1
2
3
4
5
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
1.
Basis of Presentation, Continued:
Application of FIN 46-R to construction joint ventures formed prior to December 31, 2003 affected the financial statements for the three months ended March 31, 2005 as follows:
Financial
Statement As
Reported (Joint
Ventures
Consolidated)
Financial
Statements
Under Previous
Accounting (Joint
Ventures
Equity Method)
Balance Sheet:
Current assets
$
1,782
$
1,567
Total assets
2,359
2,082
Current liabilities
1,021
773
Noncurrent liabilities
119
119
Minority interest
29
-
Total liabilities
1,169
892
Retained earnings
917
917
Total redeemable common stock
1,190
1,190
Statement of operations:
Revenue
809
725
Margin
45
53
Operating loss
(20
)
(14
)
Other income
4
4
Loss before minority interest and income taxes
(16
)
(10
)
Minority interest
6
-
Loss before taxes
(10
)
(10
)
Net loss
(6
)
(6
)
Net income and total redeemable common stock are unchanged as the Company’s share of equity earnings of these entities is already included in the Consolidated Condensed Financial Statements.
2.
Recent Accounting Pronouncements:
In 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123-R”). SFAS 123-R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such instruments. SFAS 123-R is effective for the beginning of the first fiscal reporting period that begins after December 15, 2005. The Company is currently assessing the impact of the adoption of SFAS 123-R.
6
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements – (Continued)
3.
Acquisitions:
On August 20, 2004, the Company acquired the assets and certain liabilities of the Buckskin Mine (“Buckskin”), a coal mine located near Gillette, Wyoming. The total purchase price was $74 million. The results of Buckskin’s operations have been included in the consolidated financial statements since that date. The acquisition occurred as part of the Company’s plan to expand its coal mining businesses.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
As of
August 20, 2004
(dollars in millions)
Current assets
$
10
Intangibles
3
Property and equipment (including mineral rights)
81
Total assets acquired
94
Current liabilities
4
Accrued reclamation
16
Total liabilities assumed
20
Net assets
$
74
The following unaudited, pro-forma financial information assumes the Buckskin acquisition occurred at the beginning of 2004. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 2004, or the results which may occur in the future.
March 31,
2004
(dollars in
millions, except
per share data)
Revenue
$
707
Net (loss) income
$
13
Net (loss) earnings per share:
Basic
$
.45
Diluted
$
.43
7
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements – (Continued)
4.
Earnings Per Share:
Basic earnings per share has 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 shares being aggregated with the weighted average shares outstanding.
Three Months Ended
March 31,
2005
2004
(dollars in millions)
Net (loss) income available to common stockholders (in millions)
$
(6
)
$
11
Add: Interest expense, net of tax effect,
associated with convertible debentures
*
*
Net (loss) income for diluted shares
$
(6
)
$
11
Total number of weighted average shares outstanding used to
compute basic earnings per share (in thousands)
28,753
29,969
Additional dilutive shares assuming
conversion of convertible debentures
1,224
1,297
Total number of shares used to compute
diluted earnings per share
29,977
31,266
Net (loss) earnings per share:
Basic
$
(.21
)
$
.38
Diluted
$
(.21
)
$
.37
* Interest expense attributable to convertible debentures was less than $0.5 million, net of tax.
8
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements – (Continued)
5.
Disclosures about Fair Value of Financial Instruments:
Foreign Currency Forward Contracts:
The Company entered into a foreign currency forward contract in June 2004 that has not been designated as a hedging instrument under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” The forward is used to offset the earnings impact of a U.S. dollar denominated liability of a Canadian subsidiary. The forward is recorded in other current liabilities in the Consolidated Condensed Balance Sheets at fair value based upon quoted market prices. Changes in the fair value of the forward are immediately recognized in Other, net in the Consolidated Condensed Statements of Operations.
The forward matures in June 2005 and will settle based upon the $U.S. 15 million notional amount and the difference between the current exchange rate at the time of settlement and the exchange rate in the forward. At March 31, 2005, the fair value of the forward was a current liability of $1.8 million. During the three months ended March 31, 2005, the Company recognized losses on the forward of less than $0.5 million.
In February 2005, the Company entered into a series of foreign currency forward contracts with a total notional amount of $U.S. 49 million that have not been designated as hedging instruments under SFAS 133. The forward contracts will offset the earnings impact caused by currency fluctuations of U.S. dollar denominated expenses related to the completion of a construction contract by a Canadian subsidiary. The forward contracts are recorded in liabilities in the Consolidated Condensed Balance Sheets at fair value based upon quoted market prices. Changes in the fair value of the forward contracts are immediately recognized in cost of revenue in the Consolidated Condensed Statements of Operations.
The forward contracts mature monthly in varying amounts between 2005 and 2007 and will settle based upon the difference between the current exchange rate at the time of settlement and the exchange rates in the forward contracts. At March 31, 2005, the fair value of these forward contracts was a current liability of $1.3 million and a long-term liability of $0.6 million. During the three months ended March 31, 2005, the Company recognized losses on the forward contracts of $1.9 million.
6.
Long-Term Debt:
Effective January 1, 2005, the Company purchased a federal coal lease from the Bureau of Land Management for $43 million. The Company paid a deposit of $9 million in 2004 that accompanied the bid submitted for the coal lease. The remainder is due in four equal annual installments. The installments are non-interest bearing, and the Company imputed a 4.65% interest rate. The first installment, due January 1, 2006, is included in the current portion of long-term debt. The remainder is included in long-term debt.
9
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements – (Continued)
7.
Comprehensive Income:
Comprehensive income includes net (loss) income, unrealized (losses) gains on securities and foreign currency translation adjustments which are charged or credited to the cumulative translation account within Redeemable Common Stock. Comprehensive income for the three months ended March 31, 2005 and 2004 is as follows:
Three Months Ended
March 31,
2005
2004
(dollars in millions)
Net (loss) income
$
(6
)
$
11
Other comprehensive (loss) income before tax:
Unrealized (losses) gains arising during period
(1
)
1
Comprehensive income
$
(7
)
$
12
8.
Segment Data:
The Company has two reportable segments. The Construction segment performs services for a broad range of public and private customers primarily in North America. Construction services are performed in the following construction markets: transportation (including highways, bridges, airports, mass transit and rail); power, heat, cooling; commercial buildings; sewage and solid waste; water supply/dams; petroleum; and mining. The Company’s Coal Mining segment owns and manages coal mines in the United States that sell primarily to electric utilities.
Intersegment sales are recorded at cost. There were no intersegment sales for the three months ended March 31, 2005 and March 31, 2004. Operating income is comprised of net sales less all identifiable operating expenses, allocated general and administrative expenses, gain on sale of operating assets, depreciation and amortization. Investment income, interest expense and income taxes have been excluded from segment operations. Segment asset information has not been presented as it is not reported to or reviewed by the chief operating decision maker.
Three Months Ended
Three Months Ended
March 31, 2005
March 31, 2004
Construction
Coal
Mining
Construction
Coal
Mining
(dollars in millions)
Revenue – external customers
$
768
$
41
$
670
$
14
Depreciation and amortization
$
27
$
6
$
16
$
3
Operating (loss) income
$
(31
)
$
11
$
11
$
4
During the three months ended March 31, 2005, construction revenue recognized from a single owner represented 13% of the Company's total revenue.
10
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements – (Continued)
9.
Other Matters:
On November 19, 2002, a suit was filed in the District Court, City and County of Broomfield, Colorado (the “Court”) for an unspecified amount of damages by Gary Haegle, derivatively on behalf of Level 3 Communications, Inc. (“Level 3”), against Walter Scott, Jr., James Q. Crowe, R. Douglas Bradbury, Charles C. Miller, III, Kevin V. O’Hara, Mogens C. Bay, William L. Grewcock, Richard Jaros, Robert E. Julian, David C. McCourt, Kenneth E. Stinson, Michael B. Yanney, Colin V. K. Williams (collectively, the “Level 3 Directors”) and PKS. The suit alleges that the Level 3 Directors breached their fiduciary duty with respect to various transactions between Level 3 and PKS, and that PKS aided and abetted the Level 3 Directors in their alleged breach of fiduciary duty. The suit also alleges that PKS exercised improper control over certain of the Lev
el 3 Directors. The defendants filed a motion to dismiss, which was denied by the court in early October 2003. Subsequently, the Board of Directors of Level 3 appointed a Special Litigation Committee comprised of an independent director with the exclusive power to conduct or cause to be conducted an impartial and independent investigation of all matters alleged by the Plaintiff and to determine whether the litigation should be maintained, terminated, or otherwise disposed, in accordance with its findings as to whether the litigation is in the best interests of Level 3. On August 2, 2004, the Special Litigation Committee delivered its report in which it concluded that it is not in the best interests of either Level 3 or its stockholders to pursue any of the claims asserted by the plaintiff. Level 3 has filed a motion to dismiss the suit based on the recommendation of the Special Litigation Committee and Plaintiff is conducting limited discovery regarding the issues of independence and author
ity of the Special Litigation Committee and the reasonableness of the Special Litigation Committee’s investigation and analysis. On May 2, 2005, Level 3 filed an additional motion to dismiss claims asserted by Plaintiff that are based on transactions and/or alleged conduct occurring prior to May 13, 1999, which is the date upon which the Plaintiff first acquired shares of Level 3 common stock. The claims that Level 3 is seeking to dismiss for this reason include several of the claims Plaintiff asserts against PKS. PKS has filed papers with the court joining in Level 3’s motion to dismiss. PKS believes that the factual allegations and legal claims made against it are without merit and intends to vigorously defend them.
On August 7, 2003, BBC-MEC, a Joint Venture, and its two joint venture partners, including Mass. Electric Construction Co., a subsidiary of PKS, received "target letters" from the U.S. Department of Justice and the United States Attorney for the District of Connecticut ("DOJ"), notifying the joint venture and its joint venture partners that each was a target of a criminal investigation in connection with a certain portion of the work performed by the joint venture to electrify a high speed rail line from New Haven, Connecticut, to Boston, Massachusetts. After several meetings and an extensive exchange of information between the joint venture and the DOJ, the DOJ notified the joint venture and its partners, by letter dated July 2, 2004, that it had reached a decision not to pursue criminal charges. The DOJ is also conducting a civil investigation relating to ce
rtain proposed change orders and modifications that were issued in conjunction with the work. In a meeting on July 30, 2004 the DOJ presented its concerns to the joint venture, including raising several new issues. The joint venture provided a counter-presentation to the DOJ on January 18 and 19, 2005, which the DOJ is in the process of evaluating. The DOJ has requested a meeting on May 19-20, 2005 for further presentations and discussion of settlement proposals. The Company is currently unable to determine the impact of the investigation upon the future financial position, results of operations or cash flows of either the Company or the joint venture.
The United States Attorney’s Office for the Northern District of California has initiated a grand jury investigation of Kiewit/FCI/Manson, A Joint Venture (Kiewit Pacific Co., FCI Constructors, Inc. and Manson Construction Co.), the contractor on the Bay Bridge – Skyway Segment project in Oakland, California. On April 8, 2005, subpoenas were issued to the joint venture requesting documentation in relation to welds alleged by certain former and current employees as being substandard. The joint venture is cooperating fully with the investigation. The Company is currently unable to determine the impact of the investigation upon the future financial po