For the quarterly period ended March 31, 2007

 

 

 

For the transition period from _________ to _________

 

 

 

 

 

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

 

The number of shares of Common Stock, $1.00 par value per share, of registrant outstanding at May 4, 2007 was 26,690,246.

 

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2

 

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Part I. – Financial Information

 

Item 1. Financial Statements (Unaudited)

 

PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006

(In Thousands)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(In Thousands, Except Per Share Data)

 

 

 

 

The accompanying notes are an integral part of these consolidatd condensed financial statements.

 

4

 

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The accompanying notes are an integral part of these consolidated condensed financial statements.

 

5

 

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PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(In Thousands)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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The unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 2007 and December 31, 2006, results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006. The results of operations for the three months ended March 31, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007 because, among other reasons, such results can vary depending on the timing of progress achieved and changes in estimated profitability of projects being reported.

 

The significant accounting policies followed by the Company and its subsidiaries in preparing its consolidated financial statements are set forth in Note (1) to such financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company has made no significant change in these policies during 2007, except as noted below.

 

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the implementation of FIN 48, there was no impact on total liabilities or stockholders’ equity. At the adoption date, the Company had $2.5 million of gross unrecognized tax benefits. At March 31, 2007, the Company had $1.5 million of gross unrecognized tax benefits. Of these amounts, $1.2 million as of January 1, 2007 and $0.5 million as of March 31, 2007 (both net of the federal benefit on state issues), represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The decrease of $1.0 million from January 1 to March 31, 2007 in the gross unrecognized tax benefits is the result of a favorable settlement with a state tax agency. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2007, the Company has approximately $0.1 million of accrued interest and zero accrued for penalties related to uncertain tax positions. The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions in which the Company has filed tax returns.

 

Cash equivalents include short-term, highly liquid investments with original maturities of three months or less.

 

Cash and cash equivalents as reported in the accompanying Consolidated Condensed Balance Sheets consist of amounts held by the Company that are available for general corporate purposes and the Company’s proportionate share of amounts held by construction joint ventures that are available only for joint venture-related uses. Joint venture cash and cash equivalents are not restricted to specific uses within those entities; however, the terms of the joint venture agreements limit the Company’s ability to distribute those funds and use them for corporate purposes. Cash held by construction joint ventures is distributed from time to time to the Company and to the other joint venture participants in accordance with their percentage interest after the joint venture partners determine that a cash distribution is

 

7

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

prudent. Cash distributions received by the Company from its construction joint ventures are then available for general corporate purposes. At March 31, 2007 and December 31, 2006 cash and cash equivalents consisted of the following (in thousands):

 

 

 

(a)  Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter

During 1995, a joint venture, Tutor-Saliba-Perini, or the Joint Venture, in which Perini Corporation, or Perini, is the 40% minority partner and Tutor-Saliba Corporation, or Tutor-Saliba, of Sylmar, California is the 60% managing partner, filed a complaint in the Superior Court of the State of California for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority, or LAMTA, seeking to recover costs for extra work required by LAMTA in connection with the construction of certain tunnel and station projects. In 1999, LAMTA countered with civil claims under the California False Claims Act (“CFCA”) against the Joint Venture, Tutor-Saliba and Perini jointly and severally (together, TSP).  Ronald N. Tutor, the Chairman and Chief Executive Officer of Perini since 2000, is also the chief executive officer and the sole stockholder of Tutor-Saliba.

 

Claims concerning the construction of LAMTA projects were tried in 2001.  During the trial, based on the Joint Venture's alleged failure to comply with the court's discovery orders, the judge issued terminating sanctions that resulted in a substantial judgment against TSP.

 

TSP appealed and, on January 25, 2005, the State of California Court of Appeal reversed the trial court's entire judgment and found that the trial court judge had abused his discretion and had violated TSP's due process rights, and had imposed impermissibly overbroad terminating sanctions.  The Court of Appeal also directed the trial court to dismiss LAMTA's claims that TSP had violated the Unfair Competition Law ("UCL") because LAMTA lacked standing to bring such a claim, and remanded the Joint Venture's claims against LAMTA for extra work required by LAMTA and LAMTA's counterclaim under the CFCA against TSP to the trial court for further proceedings, including a new trial.  LAMTA petitioned the Court of Appeal for rehearing and the California Supreme Court for review. Both petitions were denied and the case was remanded and reassigned for a new trial.

 

In 2006, upon remand, the trial court allowed LAMTA to amend its cross-complaint to add the District Attorney as a party in order to have a plaintiff with standing to assert a UCL claim, and allowed a UCL claim to be added. The court also ordered that individual issues of the case be tried separately.

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

(4)     Contingencies and Commitments (continued)

 

(a)  Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter (continued)

On December 18, 2006, in the trial of the first issue, which arose out of a 1994 change order involving a Disadvantaged Business Enterprise subcontractor pass-through claim, the jury found that the Joint Venture had submitted two false claims for payment and had breached its contract with LAMTA and awarded LAMTA $111,651 in damages. The court will treble those damages and may award penalties up to $10,000 for each of the two claims. In addition, the court will determine whether there was one or more violations of the UCL. Each such violation may bear a penalty of up to $10,000. A final judgment with respect to these claims will not be entered until the entire case has been resolved and is subject to appeal.

 

On February 21, 2007, the court granted a Joint Venture motion and precluded LAMTA in future proceedings from presenting its claims that the Joint Venture breached its contract and violated the CFCA by allegedly “frontloading” the so called “B Series” contracts. The court ordered further briefing on LAMTA’s UCL claim on this issue.

 

The court has indicated that it would like the parties to resolve the entire case through mediation.  Mediation was held on April 16, 2007 and discussions are continuing.

 

The ultimate financial impact of the lawsuit is not yet determinable. Therefore, no provision for loss, if any, has been recorded in the financial statements.

 

(b)  Redondo/Perini Joint Venture vs. Siemens Transportation Matter

This is a binding arbitration proceeding arising out of a contract between the Redondo/Perini Joint Venture, or RPJV, a joint venture in which Perini and Redondo Construction Corp., or Redondo, each have a 50% interest and the Siemens Transportation Partnership, S.E., Puerto Rico, or STP. STP constructed a public metropolitan passenger rail transportation project for the Commonwealth of Puerto Rico and RPJV was responsible for the design and construction of a portion of the project.

 

On March 19, 2002, Redondo filed a petition for reorganization under Chapter 11 in U.S. Bankruptcy Court for the District of Puerto Rico. On December 23, 2002, RPJV filed an arbitration demand against STP seeking the recovery of additional costs related to design changes and the late completion of the design. On January 31, 2003, STP filed a counter-demand against RPJV seeking the recovery of damages allegedly related to defects in design and construction and the late completion of RPJV's work along with the repayment for alleged advances previously paid to RPJV.

 

On October 7, 2004, STP filed suit against Perini in New York State court seeking enforcement against Perini of a Guaranty Agreement that allegedly guarantees the performance and payment obligations of the subject RPJV/Siemens contract in an amount to be determined at trial, but not less than $27.0 million. This action has been stayed pending the arbitration.

 

On March 14, 2006, the arbitration panel issued a final award on Phase I of the arbitration, awarding RPJV approximately $16.2 million on its claim and awarding STP approximately $0.5 million on its claim, for a net award to RPJV of approximately $15.7 million, payable in thirty days.  The arbitrators also deferred decision on an additional amount of approximately $15.5 million of RPJV’s Phase I claims until the conclusion of Phase II.  Subsequently, STP filed a Motion to Stay Enforcement of the Phase I arbitration award, together with a petition for an order to vacate, annul and set aside the award.  The motion was denied and the arbitration award was confirmed.  As a result, a judgment was entered, as of September 29, 2006, in favor of RPJV and against STP in the sum of approximately $16.0 million,

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

 

(b)  Redondo/Perini Joint Venture vs. Siemens Transportation Matter (continued)

including prejudgment interest from April 13, 2006 through September 29, 2006, totaling approximately $0.3 million.  Interest accrues on the judgment from September 29, 2006 at 9% per annum.  STP has filed an appeal of the judgment.

 

There will be a second phase of the arbitration, which will include claims which existed on or after September 29, 2003.   The parties exchanged statements of claim on July 24, 2006. RPJV’s claim is approximately $23.2 million, plus interest.  STP’s claim is $17.5 million.  Discovery has started, but no hearings have been held. Hearings are scheduled to start in July, 2007.

 

Management has made an estimate of the anticipated total cost recovery on this project and it is included in revenue recorded to date. To the extent new facts become known or the final cost recovery included in the claim settlement varies from this estimate, the impact of the change will be reflected in the financial statements at that time.

 

(c)  Perini/Kiewit/Cashman Joint Venture-Central Artery/Tunnel Project Matter 

Perini/Kiewit/Cashman Joint Venture, or PKC, a joint venture in which Perini holds a 56% interest and is the managing partner, is currently pursuing a series of claims for additional contract time and/or compensation against the Massachusetts Highway Department, or MHD, for work performed by PKC on a portion of the Central Artery/Tunnel project in Boston, Massachusetts. During construction, MHD ordered PKC to perform changes to the work and issued related direct cost changes with an estimated value, excluding time delay and inefficiency costs, in excess of $100 million. In addition, PKC encountered a number of unforeseen conditions during construction that greatly increased PKC's cost of performance.

 

Certain of PKC's claims have been presented to a Disputes Review Board, or DRB, which consists of three construction experts chosen by the parties. To date, the DRB has issued five binding awards on PKC’s claims. It has ruled that PKC is entitled to additional compensation for the first portion of its contract time delay claim in the amount of $17.4 million. On March 20, 2002, the Superior Court of the Commonwealth of Massachusetts approved PKC's request to confirm the DRB's $17.4 million award. The MHD appealed the Superior Court decision to the Appeals Court of the Commonwealth of Massachusetts, which affirmed the Superior Court’s confirmation of the DRB’s award on May 30, 2006.

 

The DRB has also ruled on a binding basis that PKC is entitled to four additional compensation awards, less credits, totaling $39.8 million for impacts and inefficiencies caused by MHD to certain of PKC’s work.  The first two such awards, totaling $17.1 million, have been confirmed by the Superior Court and were not appealed.  MHD has filed actions in the Superior Court seeking to vacate the other two awards, and PKC has answered, seeking to confirm them. These actions have not yet been heard. PKC has taken the position that it is entitled to interest on each of the five binding DRB awards as provided in the awards. It appears that MHD will object to payment of any interest.

 

Under the dispute resolution rules of the contract, either party may periodically terminate the services of some or all of the DRB members, provided that members who are removed under this provision will remain on the DRB through the completion of any then pending claims. The MHD removed the "Second DRB" members and the “Third DRB” members have been agreed upon and have begun hearing claims.  It is PKC’s position that the remaining claims to be decided by the Third DRB on a binding basis have an anticipated value of approximately $104 million (exclusive of interest). MHD disputes that the remaining claims before the Third DRB may be decided on a binding basis.

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

(4)     Contingencies and Commitments (continued)

 

(c)  Perini/Kiewit/Cashman Joint Venture-Central Artery/Tunnel Project Matter  (continued)

Hearings before the Third DRB began in October, 2006 and are scheduled to occur throughout the remainder of 2007 and into 2008.  

 

On August 14, 2002, the Massachusetts Attorney General's office, pursuant to its authority under the state’s False Claims Act, served a Civil Investigative Demand ("CID") on Perini and the other joint venture partners. The CID sought the production of certain construction claims documentation in connection with the Central Artery/Tunnel Contract No. C11A1.  In September 2004, the Attorney General's office presented a list of items that it believed constitutes possible false claims. PKC made a responsive presentation to the Attorney General's office in January, 2005.  PKC vigorously denies that it submitted any false claims and is cooperating with the Attorney General's office in the ongoing investigation.

 

Management has made an estimate of the total anticipated cost recovery on this project and it is included in revenue recorded to date. To the extent new facts become known or the final cost recovery included in the claim settlement varies from this estimate, the impact of the change will be reflected in the financial statements at that time.

 

(d) Investigation by U.S. Attorney for Eastern District of New York

In 2001, the Company received a grand jury subpoena for documents in connection with an investigation by the U.S. Attorney’s Office for the Eastern District of New York. The Company’s understanding is that the investigation concerns contracting with disadvantaged, minority, and women-owned businesses in the New York City area construction industry.  The Company has cooperated with the U. S. Attorney’s Office in the investigation and produced documents pursuant to the subpoena in 2001 and 2002.  In August 2006, the Company received two additional grand jury subpoenas for documents in connection with the same investigation.  The Company subsequently produced documents pursuant to those subpoenas, and continues to cooperate in the investigation. It is the Company’s understanding that lawyers for two former Perini Civil employees also are in separate discussions with the U.S. Attorney’s Office related to the investigation.  On January 8, 2007, the Company was informed by the U.S. Attorney's Office that the Company meets the definition of "subject" in the United States Attorney's Manual.  That definition is "a person whose conduct is within the scope of the grand jury's investigation." At the same time, the U.S. Attorney's Office also wrote to the Company that "Perini has been cooperatively engaged in discussions with this office and that we are considering a civil settlement with regard to Perini."  The Company is unable to evaluate the potential impact, if any, of the investigation at this time.

 

In May 2004, the Company’s stockholders approved the adoption of the 2004 Stock Option and Incentive Plan which provided that up to 1,000,000 shares of the Company’s common stock would be available for the granting of stock-based compensation awards to key executives, employees and directors of the Company. In May 2006, the Company’s stockholders approved an amendment to the plan that increased the number of shares of the Company’s common stock available for issuance thereunder from 1,000,000 shares to 3,000,000 shares. The plan allows these stock-based compensation awards to be granted in a variety of forms, including stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, deferred stock awards and dividend equivalent rights.

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

On April 5, 2006 and May 18, 2006, the Compensation Committee of the Company’s Board of Directors approved the grant of 1,295,000 restricted stock units to certain of its executive officers and employees under the 2004 Stock Option and Incentive Plan. As of March 31, 2007, 165,000 restricted stock units have vested and accordingly 165,000 shares of common stock have been issued. 765,000 of the remaining restricted stock units generally vest in three equal installments on January 1 of 2008, 2009 and 2010, and 365,000 generally vest on January 1, 2010. Of the restricted stock units granted, 745,000 (including the 165,000 restricted stock units that have vested) are subject only to the satisfaction of service requirements; the remaining 550,000 restricted stock units granted are subject to the satisfaction of both service requirements and achievement of certain pre-established pretax income performance criteria. Upon vesting, each restricted stock unit will be exchanged for one share of the Company’s common stock. The grant date fair value of these restricted stock units is $40.7 million based on the closing price of the Company’s common stock on the dates of grant. For the three month period ended March 31, 2007, the Company recognized compensation expense of $3.7 million related to these restricted stock units and this amount is included as a component of “General and Administrative Expenses” in the Consolidated Condensed Statements of Income. At March 31, 2007, there was $20.5 million of unrecognized compensation cost related to the non-vested restricted stock units outstanding which, absent significant forfeitures in the future, will be recognized over a weighted average period of 2.3 years.

 

A summary of stock-based compensation awards related to the restricted stock units outstanding under the Company’s 2004 Stock Option and Incentive Plan for the three months ended March 31, 2007 is as follows:

 

 

The aggregate intrinsic value of the restricted stock units outstanding at March 31, 2007 is approximately $41.7 million.

 

In May 2000, the Company’s stockholders approved the adoption of the Special Equity Incentive Plan which provides that up to 3,000,000 shares of the Company’s common stock will be available for the granting of nonqualified stock options to key executives, employees and directors of the Company. Options are granted at not less than the fair market value on the date of grant, as defined. Options generally expire 10 years from the date of grant. Options outstanding under the Special Equity Incentive Plan are generally exercisable in three equal annual installments, on the date of grant and on the first and second anniversary of the date of grant. As of March 31, 2007, all of the options outstanding were exercisable. A summary of stock option activity related to the Company’s Special Equity Incentive Plan is as follows:

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

(5)     Stock-Based Compensation (continued)

 

 

Options outstanding at March 31, 2007 under the Special Equity Incentive Plan and related weighted average price and life information follows:

 

 

Basic earnings per common share was computed by dividing net income less dividends accrued on the $21.25 Preferred Stock during the period by the weighted average number of common shares outstanding. Diluted earnings per common share was similarly computed after giving consideration to the dilutive effect of stock options, warrants and restricted stock units outstanding on the weighted average number of common shares outstanding.

 

There were no antidilutive stock options or stock purchase warrants at March 31, 2007 and 2006. The effect of the assumed conversion of the Company’s outstanding $21.25 Preferred Stock into Common Stock was antidilutive for all applicable periods presented. The $21.25 Preferred Stock was redeemed in full on May 17, 2006.

 

 

(a) Common Stock

There were no cash dividends declared or paid on the Company’s outstanding Common Stock during the periods presented in the consolidated condensed financial statements included herein.

 

The Company redeemed all remaining outstanding Depositary Shares on May 17, 2006, in accordance with the terms of the $21.25 Preferred Stock, at a price of $25.00 per Depositary Share plus accrued and unpaid dividends to that date, for an aggregate amount of approximately $8.8 million.

 

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PERINI CORPORATION AND SUBSIDIARIES

(Continued)

 

 

(8)     Business Segments

The following tables set forth certain business segment information relating to the Company’s operations for the three months ended March 31, 2007 and 2006 (in thousands):

 

 

 

The Company has a defined benefit pension plan that covers its executive, professional, administrative and clerical employees, subject to certain specified service requirements. The Company also has an unfunded supplemental retirement plan for certain employees whose benefits under the defined benefit plan are reduced because of compensation limitations under federal tax laws. Effective June 1, 2004, all benefit accruals under the Company’s pension plan were frozen; however, the current vested benefit will be preserved. In accordance with SFAS No. 132(R), “Employers’ Disclosures About Pensions and Other Post-Retirement Benefits”, the pension disclosure presented below includes aggregated amounts for both of the Company’s plans. The following table sets forth the net pension cost by component for the three months ended March 31, 2007 and 2006 (in thousands):

 

 

The Company contributed $3.2 million to its defined benefit pension plan on April 10, 2007 and does not expect to make any additional contributions during the remainder of 2007.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Perini Corporation is a leading construction services company, based on revenues, as ranked by Engineering News-Record, offering diversified general contracting, construction management and design/build services to private clients and public agencies throughout the world. We have provided construction services since 1894 and have established a strong reputation within our markets for executing large, complex projects on time and within budget while adhering to strict quality control measures. We offer general contracting, pre-construction planning and comprehensive project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project. We also offer self-performed construction services including site work, concrete forming and placement and steel erection.

 

Our business is conducted through three primary segments: building, civil, and management services. Our building segment focuses on large, complex projects in the hospitality and gaming, sports and entertainment, educational, transportation, healthcare, biotech, pharmaceutical and high-tech markets. Our civil segment specializes in public works construction, primarily in the northeastern and mid-Atlantic United States, including the repair, replacement and reconstruction of the public infrastructure such as highways, bridges, mass transit systems and wastewater treatment facilities. Our management services segment provides diversified construction, design/build and maintenance services to the U.S. military and government agencies, as well as surety companies and multi-national corporations in the United States and overseas.

 

Significant Accounting Policies

 

Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Our critical accounting policies are also identified and discussed in Item 7 of said Annual Report on Form 10-K. We have made no significant change in these policies during 2007, except as noted below.

 

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the implementation of FIN 48, there was no impact on total liabilities or stockholders’ equity. At the adoption date, we had $2.5 million of gross unrecognized tax benefits. At March 31, 2007, we had $1.5 million of gross unrecognized tax benefits. Of these amounts, $1.2 million as of January 1, 2007 and $0.5 million as of March 31, 2007 (both net of the federal benefit on state issues), represent the amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate in any future periods. The decrease of $1.0 million from January 1 to March 31, 2007 in the gross unrecognized tax benefits is the result of a favorable settlement with a state tax agency. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2007, we have approximately $0.1 million of accrued interest and zero accrued for penalties related to uncertain tax positions. The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions in which we have filed tax returns.

 

Recent Developments

 

New Credit Agreement

 

On February 22, 2007, we entered into an Amended and Restated Credit Agreement with Bank of America, N.A. and three participant lenders (the “Amended Agreement”). The Amended Agreement amends and restates in its entirety our previously existing credit agreement (the “Prior Agreement”).

 

The Amended Agreement provides for a secured revolving credit facility (the “Revolving Facility”) of up to $125 million, which can be expanded to $175 million in the future with the consent of the lenders. This represents an increased borrowing capacity from the Prior Agreement, which provided for a revolving

 

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credit facility of $50 million, plus a term loan in the original amount of $30 million, of which $22.5 million was outstanding at December 31, 2006. The term loan was paid in full on February 22, 2007 in conjunction with the closing of the Amended Agreement.

 

While the Amended Agreement also provides for an increase in the aggregate amount of letters of credit that may be issued under the agreement from $15 million to $50 million, any outstanding letters of credit reduce availability under the Revolving Facility on a dollar-for-dollar basis. The termination date of the Revolving Facility is February 22, 2012, as compared to June 30, 2008 under the Prior Agreement. For a more detailed description of the Amended Agreement, see “Liquidity and Capital Resources – Cash and Working Capital” below.

 

Backlog Analysis for 2007

 

Our backlog of uncompleted construction work at March 31, 2007 was approximately $8.6 billion, up from the $8.5 billion backlog reported at December 31, 2006. The March 31, 2007 backlog includes new contract awards added during the first quarter of 2007 totaling approximately $1.1 billion and includes approximately $580 million of additional work in the hospitality and gaming market in Las Vegas, as well as approximately $435 million of various new awards at Rudolph and Sletten including the healthcare, high-tech and office building markets.

 

 

Results of Operations

 

Comparison of the First Quarter of 2007 with the First Quarter of 2006

 

Revenues increased by $374.6 million, gross profit increased by $25.6 million, income from construction operations increased by $18.3 million, and net income increased by $14.6 million (or 180.0%) in 2007. Our strong performance in the first quarter of 2007 was led by our building and management services segments. The increase in revenues and profit primarily reflects the conversion of our substantial building segment backlog into revenues and profit as expected. In addition, our management services segment also made a significant contribution to our first quarter 2007 operating results. The operating results for the first quarter of 2007 were negatively impacted by a $3.7 million pretax charge related to stock-based compensation expense resulting from restricted stock units granted in the second quarter of 2006. Basic earnings per common share were $0.85 for the first quarter of 2007, compared to $0.31 for the first quarter of 2006. Diluted earnings per common share were $0.84 for the first quarter of 2007, compared to $0.30 for the first quarter of 2006.

 

 

 

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Overall revenues increased by $374.6 million (or 61.1%), from $612.8 million in 2006 to $987.4 million in 2007. This increase was due primarily to an increase in building construction revenues of $403.2 million (or 83.4%), from $483.7 million in 2006 to $886.9 million in 2007, primarily as a result of the conversion of our substantial building segment backlog into revenues as expected, led by an increased volume of work in the hospitality and gaming market as a result of the significant new contract awards we received in the latter half of 2005, which are now well into the construction phase. Civil construction revenues decreased by $13.7 million (or 19.4%), from $70.8 million in 2006 to $57.1 million in 2007, due primarily to the timing of the start-up of new work. Management services revenues decreased by $14.9 million (or 25.6%), from $58.3 million in 2006 to $43.4 million in 2007, due primarily to the completion of our nuclear power plant maintenance and modification contract with Exelon as of December 31, 2006, which was partly offset by an increased volume of work in Iraq.

 

 

Income from construction operations (excluding corporate) increased by $21.3 million (or 124.6%), from $17.1 million in 2006 to $38.4 million in 2007. Building construction income from operations increased by $14.6 million (or 157.0%), from $9.3 million in 2006 to $23.9 million in 2007, due primarily to the significant increase in revenues discussed above. Building construction income from operations was reduced by a $1.4 million charge related to stock-based compensation expense resulting from certain restricted stock units granted in the second quarter of 2006. Civil construction income from operations decreased by $3.6 million (or 81.8%), from $4.4 million in 2006 to $0.8 million in 2007, due primarily to the decrease in revenues discussed above and to downward profit adjustments on roadway projects in Maryland and Florida. Despite the decrease in revenues discussed above, management services income from operations increased by $10.3 million (or 302.9%), from $3.4 million in 2006 to $13.7 million in 2007, due primarily to favorable performance on work in Iraq. Overall income from construction operations was negatively impacted by a $3.0 million increase in corporate general and administrative expenses, from $2.7 million in 2006 to $5.7 million in 2007, due primarily to a $2.8 million increase in corporate incentive compensation expense, including a $1.7 million increase in stock-based compensation expense resulting from certain restricted stock units granted in the second quarter of 2006.

 

Other income increased by $2.0 million, from $0.4 million in 2006 to $2.4 million in 2007, due primarily to a $2.1 million increase in interest income as a result of an increase in cash available for short-term investment due largely to the positive cash flow we generated from operating activities in the latter half of 2006 and the first quarter of 2007.

 

Interest expense decreased by $0.2 million, from $0.9 million in 2006 to $0.7 million in 2007, due primarily to the February 22, 2007 repayment of our term loan in full in conjunction with the closing of our new credit agreement.

 

The provision for income taxes increased by $5.9 million, from $5.8 million in 2006 to $11.7 million in 2007, due primarily to the increase in pretax income in 2007. The effective tax rate for first quarter of 2007 was 34.2%, as compared to 41.9% for the first quarter of 2006. The decrease in the effective tax

 

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rate is due to a partial release of a tax contingency and a reduction in permanently disallowed tax deductions in 2007.

 

Liquidity and Capital Resources

 

Cash and Working Capital

On February 22, 2007, we entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, and three participant lenders (the “Amended Agreement”). The Amended Agreement amends and restates in its entirety the Company’s previously existing credit agreement dated as of October 14, 2005, as amended through April 13, 2006 (the “Prior Agreement”).

 

The Amended Agreement provides for a secured revolving credit facility (the “Revolving Facility”) of up to $125 million, which can be expanded to $175 million in the future with the consent of the lenders. This represents an increased borrowing capacity from the Prior Agreement, which provided for a revolving credit facility of $50 million, plus a term loan in the original amount of $30 million, of which $22.5 million was outstanding at December 31, 2006. The term loan was paid in full on February 22, 2007 in conjunction with the closing of the Amended Agreement.

 

We can choose from interest rate alternatives including a prime-based rate, as well as Eurodollar rate-based options. While the Amended Agreement also provides for an increase in the aggregate amount of letters of credit that may be issued under the agreement from $15 million to $50 million, any outstanding letters of credit reduce availability under the Revolving Facility on a dollar-for-dollar basis. The termination date of the Revolving Facility is February 22, 2012, as compared to June 30, 2008 under the Prior Agreement.

 

The Amended Agreement requires us to comply with certain financial and other covenants at the end of each fiscal quarter, including:

 

 

 

 

 

The Amended Agreement also includes operational covenants customary for facilities of this type, including limitations on incurring additional indebtedness and liens, as well as restrictions on types of investments and the purchase and sale of assets outside of the normal course of business. Our obligations under the Amended Agreement are guaranteed by substantially all of our current and future subsidiaries, and secured by substantially all of our and our subsidiaries’ assets.

 

Cash and cash equivalents as reported in the accompanying consolidated condensed financial statements consist of amounts held by us as well as our proportionate share of amounts held by construction joint ventures. Cash held by us is available for general corporate purposes while cash held by construction joint ventures is available only for joint venture-related uses. Joint venture cash and cash equivalents are not restricted to specific uses within those entities; however, the terms of the joint venture agreements limit our ability to distribute those funds and use them for corporate purposes. Cash held by construction joint ventures is distributed from time to time to us and to the other joint venture participants in accordance with

 

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our respective percentage interest after the joint venture partners determine that a cash distribution is prudent. Cash distributions received by us from our construction joint ventures are then available for general corporate purposes. At March 31, 2007 and December 31, 2006, cash held by us and available for general corporate purposes was $210.1 million and $189.6 million, respectively, and our proportionate share of cash held by joint ventures and available only for joint venture-related uses was $32.2 million and $35.9 million, respectively.

 

A summary of cash flows for each of the three month periods ended March 31, 2007 and 2006 is set forth below:

 

 

During the first three months of 2007, we generated $49.0 million in cash flow from operating activities to fund $25.6 million in financing activities, primarily to pay in full the remaining $22.5 million balance outstanding on our term loan in conjunction with the closing of our new revolving credit facility in February 2007, and to pay down debt assumed in conjunction with the Cherry Hill acquisition; and to fund $6.6 million in investing activities, principally to fund the purchase of construction equipment and property to be used in support of our building construction operations. As a result, we increased our cash balance by $16.8 million during the first three months of 2007.

 

Working capital increased from $194.0 million at the end of 2006 to $203.4 million at March 31, 2007. The current ratio of 1.22x at March 31, 2007 was the same as the current ratio at December 31, 2006.

 

Long-term Debt

Long-term debt, net of current maturities, at March 31, 2007 was $16.4 million, a decrease of $17.7 million ($25.7 million including current portion) from December 31, 2006, due to the February 22, 2007 repayment of our term loan in full in conjunction with the closing of our new credit agreement, and reductions in mortgage debt and equipment financing debt assumed in conjunction with the Cherry Hill acquisition. Accordingly, the long-term debt to equity ratio decreased from .14x at December 31, 2006 to .06x at March 31, 2007.

 

Dividends

There were no cash dividends declared or paid on our outstanding Common Stock during the periods presented herein.

 

We redeemed all remaining outstanding Depositary Shares on May 17, 2006, in accordance with the terms of our $21.25 Preferred Stock, at a price of $25.00 per Depositary Share plus accrued and unpaid dividends to that date, for an aggregate amount of approximately $8.8 million.

 

Forward-looking Statements

 

The statements contained in this Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements and other sections of this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the

Securities Exchange Act of 1934, including without limitation, statements regarding our expectations,

 

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hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to convert backlog into revenue; our ability to successfully complete construction projects; the potential delay, suspension, termination or reduction in scope of a construction project; the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to us; the ability to retain certain members of management; the ability to obtain surety bonds to secure our performance under certain construction contracts; possible labor disputes or work stoppages within the construction industry; changes in federal and state appropriations for infrastructure projects; possible changes or developments in worldwide or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including our customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials; and other risks and uncertainties discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on March 7, 2007. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There has been no material change in the Company’s exposure to market risk from that described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, Item 7A., since December 31, 2006.

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. The effectiveness of our disclosure controls and procedures is necessarily limited by the staff and other resources available to us and, although we have designed our disclosure controls and procedures to address the geographic diversity of our operations, this diversity inherently may limit the effectiveness of those controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

In connection with these rules, we will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

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Part II. - Other Information

 

Item 1. Legal Proceedings

 

 

Item 1A. Risk Factors

 

Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes from those risk factors during 2007.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) None

 

(b) Not applicable

 

(c) Not applicable

 

Item 3. Defaults Upon Senior Securities

 

(a) None

 

(b) None

 

Item 4. Submission of Matters to a Vote of Security Holders

 

(a) None

 

(b) Not applicable

 

(c) Not applicable

 

(d) Not applicable

 

Item 5. Other Information

 

(a) None

 

(b) None

 

Item 6. Exhibits

 

 

 

 

 

 

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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.

 

 

 

 

 

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