As a private company, the independent board makeup and internal audit structure are voluntary measures. Why do it?
It's a really important model for us. We are employee owned and promote best practices. In this case, we think the best practice is to have independent directors making up the majority of our board. The board also includes executive directors — myself, the presidents and CEOs of our largest businesses, energy and water, plus our CEO, who is our chairman and president. We also ask for quarterly certification of financial results from our operating units, which publicly-traded companies are required to do under the Sarbanes-Oxley Act. All of our certifications are passed to our audit committee for review. We feel like it's an additional means of engaging our leadership ... and as an employee-owned company we think [that type of governance] is really part of the company's fiduciary responsibilities.
I know you work with a bank consortium. Did the credit crisis change your banking relationships in anyway?
No, we have a credit-facility arrangement that covers an extended period of time, so we have not really had any significant issues with our banks. We typically do not use our credit facility for borrowing, so there haven't been any issues in that regard. There are 10 banks in the group and we have a lead bank that facilitates and coordinates, but we have individual relationships with each of the banks. Our disbursements — payroll, accounts payable, for example — are negotiated or arranged separately from the consortium — although with members of the group. The consortium's primary function is to provide us with a credit facility — which really gives us the ability to borrow — and letters of credit, that we use to provide support our projects.
Is there anything about the credit crisis that keeps you up at night?
Trying to predict the implications tied to a lack of availability of credit for our clients. Many of our clients, at some level, depend upon the credit market returning so that larger projects can be funded. We are trying to understand when the credit market will come back, and to what degree. Then we can determine how we might help our clients position themselves for new projects. So we stay very, very close to our clients. But I think all CFOs are looking at predicting the severity and the length of the recession; it has been a daily process.
Do you worry about the financial condition of your vendors?
We have processes in place to evaluate their financial wherewithal. It's important to be mindful of the financial condition of business partners in general. We evaluate our business partners and really try to develop fair terms and conditions.
As a private company that focuses on a project portfolio, is the debt on your books project debt?
No. The debt that you may see really is associated with lease obligations and such, for computers and things of that nature. It's not really debt for projects. If you are looking at current liabilities, those items really have to do with projects, our payables due and what we call our billings in excess [on costs and estimated earnings for uncompleted contracts.] It represents billings that we've sent to our clients based on milestones, which is typical in our industry.
That's part of the construction industry's accounting methods, right?
Yes, so it is not debt in a traditional sense, but rather liabilities associated with the progress on our projects and payables. We don't really carry much debt. With regard to our project finance, each project stands on its own. But none of the projects are off-balance sheet. As an engineering/construction firm, we have a steady stream of costs that we're incurring that we owe and pay to people. Depending on the progress of our projects, you're either [recording that] in the billings-in-excess or costs-in-excess.
Black & Veatch files its financial resulting using U.S. generally accepted accounting principles, but as a private company you are not required to do that.
Yes we are.
What do you mean?
We file in GAAP because we are an employee-owned company, because of our bankers, because our shareholders. I can't imagine not using U.S. GAAP. Now if you're segueing to the [international financial reporting standards], that's a different story. But yes, we use generally accepted accounting principles because they best reflect where we are financially.
What about IFRS? Do your projects outside of the country make it necessary for you to use IFRS?
There are certain parts of the world where we file statutory statements that differ from U.S. GAAP, but our consolidated statements are filed in U.S. GAAP. In some way, IFRS will potentially close the gaps in reporting between some of our foreign statutory entities, but those are really on a case-by-case basis.
Do you have a strong feelings, one way or the other, about the United States mandating IFRS?
I think in some ways it is a good idea to have one set of accounting rules and practices. But I have to qualify that by saying some of the more controversial questions about IFRS have not yet been decided, and I wouldn't want the U.S. to mandate something before we get those issues worked out. It's important to make certain that we are moving in a direction that's going to give us the outcome we originally desired.
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