EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We derived the following summary financial and operating data for the five years
ended December 31, 1998 through 2002 from our audited consolidated financial
statements. You should read this information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements, including the related notes, appearing
elsewhere in this Annual Report.
(In thousands, except share and employee data)
YEAR ENDED DECEMBER 31, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,148,478 $ 1,081,824 $ 611,691 $ 674,386 $ 775,692
Cost of revenues 992,927 945,048 542,721 596,695 703,351
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 155,551 136,776 68,970 77,691 72,341
Selling and administrative expenses 73,155 67,519 41,913 48,997 46,471
Intangibles amortization 2,529 5,819 599 514 500
Other operating income, net (1) (1,818) (691) (2,401) (2,788) (991)
Special charges (2) 3,972 9,686 55,664 - -
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 77,713 54,443 (26,805) 30,968 26,361
Interest expense (7,114) (8,392) (5,187) (2,980) (3,488)
Interest income 1,595 1,854 430 766 1,616
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority interest 72,194 47,905 (31,562) 28,754 24,489
Income tax (expense) benefit (20,233) (13,480) 4,859 (8,061) (7,347)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 51,961 34,425 (26,703) 20,693 17,142
Minority interest in income (1,812) (2,503) (1,341) (1,171) (105)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 50,149 31,922 (28,044) 19,522 17,037
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations: (3)
Loss from discontinued operations, net of taxes - (2,321) (5,731) (1,138) -
Loss on disposal of discontinued operations,
net of taxes - (9,898) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) (5) (6) $ 50,149 $ 19,703 $ (33,775) $ 18,384 $ 17,037
=============================================================================================================================
PER SHARE DATA (2) (5) (6)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss)--basic
Income (loss) from continuing operations $ 1.16 $ 0.74 $ (1.49) $ 0.89 $ 0.70
Loss from discontinued operations - (0.28) (0.31) (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.16 $ 0.46 $ (1.80) $ 0.84 $ 0.70
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss)--diluted
Income (loss) from continuing operations $ 1.12 $ 0.71 $ (1.49) $ 0.87 $ 0.70
Loss from discontinued operations - (0.27) (0.31) (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.12 $ 0.44 $ (1.80) $ 0.82 $ 0.70
- -----------------------------------------------------------------------------------------------------------------------------
Dividends $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 740,436 $ 648,265 $ 538,415 $ 336,773 $ 348,709
Long-term debt 75,000 75,000 101,800 25,000 5,000
Total shareholders' equity 282,147 212,223 155,747 104,410 101,656
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities $ 72,030 $ 105,796 $ 4,085 $ 22,461 $ 50,824
Cash flows from investing activities (36,957) (35,775) (65,567) (8,911) (2,142)
Cash flows from financing activities 16,985 (27,034) 50,618 (779) (53,286)
- -----------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 19,661 $ 25,105 $ 16,838 $ 17,698 $ 17,722
Capital expenditures 23,927 8,917 6,353 13,379 12,249
- -----------------------------------------------------------------------------------------------------------------------------
OTHER DATA
- -----------------------------------------------------------------------------------------------------------------------------
Number of employees:
Salaried 2,152 2,054 1,676 1,371 1,525
Hourly and craft 4,770 5,204 3,618 4,257 4,928
New business taken (4) $ 1,641,128 $ 1,160,374 $ 680,776 $ 712,973 $ 760,989
Backlog (4) 1,310,987 835,255 597,350 507,472 507,783
- -----------------------------------------------------------------------------------------------------------------------------
1
FOOTNOTES FOR PREVIOUS TABLE
(1) Other operating income, net generally represents gains on the sale of
property, plant and equipment.
(2) In 2002, we recognized special charges of $4.0 million. Included in the
2002 special charges were $3.4 million for personnel costs including severance
and personal moving expenses associated with the relocation of our
administrative offices, $0.5 million for integration costs related to
integration initiatives associated with the Pitt-Des Moines, Inc. ("PDM")
Divisions acquisition and $0.4 million for facilities costs relating to the
closure and relocation of facilities. During 2002 we also recorded income of
$0.4 million in relation to adjustments associated with the sale of our XL
Technology Systems, Inc. subsidiary. In 2001, we recognized special charges of
$9.7 million. Included in the 2001 special charges were $5.7 million for
personnel costs including severance and personal moving expenses associated with
the relocation, closure or downsizing of offices, and our voluntary resignation
offer; $2.8 million for facilities and other charges related to the sale,
closure, downsizing or relocation of operations; and $1.2 million for
integration costs primarily related to integration initiatives associated with
the PDM Divisions acquisition. In 2000, we recognized special charges of $55.7
million. Included in the 2000 special charges were $22.2 million for payments
associated with our voluntary resignation offer, severance and other
benefits-related costs; $5.3 million in facilities-related expenses and a $28.2
million non-cash valuation allowance against a net long-term receivable for the
Indonesian Tuban (T.P.P.I.) Project. See Note 4 to our Consolidated Financial
Statements for additional details on special charges.
(3) During the second quarter of 2001, we decided to discontinue our high
purity piping business, UltraPure Systems, due primarily to continuing weak
market conditions in the microelectronics industry. The loss on disposal of
discontinued operations of $9.9 million after tax includes the write-down of
equipment (net of proceeds), lease terminations, severance and other costs, and
losses during the phase-out period. As a result of this operation being
classified as discontinued, prior periods have been previously restated. Our
actions necessary to discontinue UltraPure Systems were essentially complete at
December 31, 2001.
(4) New business taken represents the value of new project commitments received
by us during a given period. Such commitments are included in backlog until work
is performed and revenue recognized or until cancellation. Backlog may also
fluctuate with currency movements.
(5) On January 22, 2003, we declared a two-for-one stock split effective in the
form of a stock dividend payable February 10, 2003 to stockholders of record at
the close of business on February 3, 2003. All share numbers and amounts have
been adjusted for the stock split for all periods presented.
(6) We changed our method of accounting for goodwill upon adoption of SFAS No.
142 on January 1, 2002. See Note 7 to our Consolidated Financial Statements.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is provided to assist readers in understanding our
financial performance during the periods presented and significant trends which
may impact our future performance. This discussion should be read in conjunction
with our Consolidated Financial Statements and the related notes thereto
included elsewhere in this Annual Report.
We are a global specialty engineering, procurement and construction company
serving customers in several primary end markets, including hydrocarbon
refining, natural gas, water and the energy sector in general. We have been
helping customers store and process the earth's natural resources for more than
100 years by supplying a comprehensive range of engineered steel structures and
systems. We offer a complete package of design, engineering, fabrication,
procurement, construction and maintenance services. Our projects include
hydrocarbon processing plants, liquefied natural gas (LNG) terminals and peak
shaving plants, bulk liquid terminals, water storage and treatment facilities,
and other steel structures and their associated systems. We have been
continuously engaged in the engineering and construction industry since our
founding in 1889. Our subsidiary Howe-Baker International, L.L.C.,
("Howe-Baker") organized in 1947 and acquired by us in 2000, is a global
technology company specializing in the engineering and construction of
hydrocarbon processing plants for customers in the hydrocarbon refining,
petrochemical and natural gas industries.
On January 22, 2003, we declared a two-for-one stock split effective in the form
of a stock dividend payable February 10, 2003 to stockholders of record at the
close of business on February 3, 2003. All share numbers and amounts have been
adjusted for the stock split for all periods presented.
RESULTS OF OPERATIONS
Our new business taken, revenues and income from operations in the following
geographic segments are as follows:
(In thousands)
YEARS ENDED DECEMBER 31, 2002 2001 2000
- ------------------------------------------------------------------------------
NEW BUSINESS TAKEN (1)
- ------------------------------------------------------------------------------
North America $ 1,014,375 $ 818,459 $ 384,346
Europe, Africa, Middle East 375,897 87,724 82,690
Asia Pacific 139,907 105,788 57,033
Central and South America 110,949 148,403 156,707
- ------------------------------------------------------------------------------
Total new business taken $ 1,641,128 $ 1,160,374 $ 680,776
==============================================================================
REVENUES
North America $ 801,624 $ 726,629 $ 304,520
Europe, Africa, Middle East 132,853 124,226 176,542
Asia Pacific 95,935 39,917 55,482
Central and South America 118,066 191,052 75,147
- ------------------------------------------------------------------------------
Total revenues $ 1,148,478 $ 1,081,824 $ 611,691
==============================================================================
INCOME (LOSS) FROM OPERATIONS
North America $ 49,413 $ 36,272 $ (6,238)
Europe, Africa, Middle East 3,032 (274) 2,169
Asia Pacific 1,950 (538) (26,155)
Central and South America 23,318 18,983 3,419
- ------------------------------------------------------------------------------
Total income (loss) from operations $ 77,713 $ 54,443 $ (26,805)
==============================================================================
(1) New business taken represents the value of new project commitments
received during a given period. Such commitments are included in backlog until
work is performed and revenue is recognized or until cancellation.
3
2002 VERSUS 2001
New Business Taken/Backlog--New business taken during 2002 was $1.6 billion
compared with $1.2 billion in 2001. Over 60% of the new business taken during
2002 was for contracts awarded in North America. During 2002, new business taken
increased 24% in the North America segment due primarily to increased awards of
engineering, procurement and construction ("EPC") contracts for the hydrocarbon
processing industries. Significant awards included a $109 million contract to
design and build a continuous catalytic regeneration Platformer/TM/ in New
Jersey and two other projects in the United States, each in excess of $50
million, one for a hydrogen plant and gasoline desulfurization unit, and another
for a hydrotreater. New business taken for our Europe, Africa, Middle East
("EAME") segment increased 328% during 2002 and included significant awards of a
$105 million gas/oil separation plant in Saudi Arabia and an $89 million LNG
expansion project in Nigeria. New business taken in our Asia Pacific ("AP")
segment increased 32% compared with 2001 and included the award of a
hydrotreater project in Australia and a refrigerated petrochemical storage
facility in China. New business taken in the Central and South America ("CSA")
segment decreased 25% during 2002 as a result of negative political and economic
conditions in certain Latin American markets, principally Venezuela. The
majority of 2002 new awards were for projects in the Caribbean region. We
anticipate new business in 2003 to range between $1.6 and $1.7 billion due to an
emerging upturn in the energy market, continued synergistic benefits from recent
acquisitions and increased demand for lump-sum, turnkey contracting.
Backlog increased $475.7 million or 57% to $1.3 billion at December 31, 2002.
Revenues--Revenues in 2002 of $1.1 billion rose 6% compared with 2001. Our
revenues fluctuate based on the changing project mix and are dependent on the
amount and timing of new awards, and on other matters such as project schedules.
During 2002, revenues increased 10% in the North America segment, 7% in the EAME
segment, 140% in the AP segment, but declined 38% in the CSA segment. The
increase in North America compared with 2001 was due primarily to higher levels
of EPC projects for the hydrocarbon processing industries. These process-related
revenues rose 52%, as backlog carried over from 2001 was put in place and strong
new business continued in 2002. Revenue growth in the AP segment resulted from
large projects beginning in Australia, while CSA's decrease resulted from
several large projects in Venezuela and the Caribbean nearing completion. We
anticipate that total revenues for 2003 will be between $1.3 and $1.5 billion.
Based on the current backlog, we expect the majority of the 2003 revenue growth
to come in the North America and EAME segments.
Gross Profit--Gross profit in 2002 was $155.6 million, or 13.5% of revenues,
compared with $136.8 million or 12.6% of revenues in 2001, reflecting continued
strong project execution, the growing mix of higher margin process-related EPC
work and stringent cost control.
Selling and Administrative Expenses--Selling and administrative expenses were
$73.2 million, or 6.4% of revenues in 2002 compared with $67.5 million, or 6.2%
of revenues in 2001. The increase compared with 2001 relates primarily to the
impact of acquired operations and higher insurance costs.
Special Charges--Special charges for 2002 were $4.0 million as compared to $9.7
million in 2001. During 2002 we recorded special charges of $3.4 million related
to the relocation of our Plainfield, Illinois office personnel to The Woodlands,
Texas. As many of our multinational customers in the hydrocarbon industry
maintain their U.S. headquarters or a significant presence in the Houston area,
we believe the move will enhance our ability to maintain and expand existing
customer relationships and build new ones. Additionally, we also recorded $0.4
million relating to the closure and relocation of facilities and $0.5 million
for integration activities associated with the acquisition of the Engineered
Construction and Water Divisions ("PDM Divisions") of Pitt-Des Moines, Inc.
("PDM"). During 2002 we also recorded income of $0.4 million in relation to
adjustments associated with the sale of our XL Technology Systems, Inc.
subsidiary. During 2001, we recorded special charges of $5.7 million for
personnel costs related to the relocation of our administrative office including
costs of senior executives who elected not to relocate, as well as
moving-related (which were expensed as incurred) and severance expenses, and our
voluntary resignation offer; $2.8 million for facilities and other charges,
including charges related to the sale, closure, downsizing or relocation of
operations; and $1.2 million for integration costs, primarily related to
integration initiatives associated with the PDM Divisions acquisitions. In
accordance with Emerging Issues Task Force ("EITF") 94-3, moving, replacement
personnel and integration costs have been expensed as incurred. For a further
discussion of the special charges, see Note 4 to the Consolidated Financial
Statements.
Income (Loss) from Operations--Income from operations in 2002 was $77.7 million,
representing a $23.3 million increase compared with 2001. The North America
segment benefited from a project mix that included increased levels of higher
margin EPC work. Storage related work declined in North America from 2001, but
the shortfall was more than offset by improvements in project execution and
control of overhead and administrative expenses. Higher volumes in the EAME
Segment, combined with continued cost control and excellent execution, enabled
the segment to post improved operating income. The AP segment improved compared
with the prior year, due principally to significantly higher volumes in
Australia. Despite lower new awards and revenues, the CSA segment reported
higher operating income due to the existing backlog of work and favorable
project execution, resulting in project cost savings. Our adoption of Statement
of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets"
as of January 1, 2002, resulted in the elimination of goodwill and other
indefinite lived intangibles amortization, which, in comparison with 2001,
benefited 2002 income from operations by $3.6 million.
Interest Expense and Interest Income--Interest expense decreased $1.3 million
from the prior year to $7.1 million for 2002, due to lower average debt levels
in 2002. Interest income decreased $0.3 million from 2001 to $1.6 million in
2002, attributable to lower interest on our long-term receivable during 2002.
4
Income Tax (Expense) Benefit--Income tax expense was $20.2 million and $13.5
million in 2002 and 2001, respectively. The effective tax rates for 2002 and
2001 were 28.0% and 28.1%, respectively.
Net Income--Net income for 2002 was $50.1 million, or $1.12 per diluted share,
compared with $19.7 million, or $0.44 per diluted share in 2001.
2001 VERSUS 2000
New Business Taken/Backlog--New business taken during 2001 was $1.2 billion
compared with $680.8 million in 2000. Over 70% of the new business taken during
2001 was for contracts awarded in North America. During 2001, new business taken
increased 113% in the North America segment primarily due to the acquisitions of
Howe-Baker International, L.L.C. ("Howe-Baker") and the PDM Divisions and
included the following significant awards: a cryogenic storage tank for an LNG
import terminal in the United States, an award for a gas-to-liquids processing
facility, a clean fuels revamp project valued in excess of $40 million, a
refinery relocation project, an oil sands project in Canada valued in excess of
$40 million, a contract for the erection of heat recovery steam generators for
an electric utility in the U.S. Northeast and a hydrogen plant in the U.S.
Northwest. New business taken in the AP segment increased 85% during 2001 and
included awards for an LNG expansion project in Australia valued at $65 million
and piping and mechanical work for an LNG expansion project in Malaysia. New
business taken in the EAME segment increased 6% during 2001. New business taken
in the CSA segment decreased 5% during 2001 (after increasing more than 200%
during 2000 compared with 1999) and included awards for a heavy oil tankage
project in Venezuela and a cryogenic natural gas plant in Peru.
Backlog at December 31, 2001 was $835.3 million compared with backlog at
December 31, 2000 of $597.4 million (including backlog of $125.1 million from
the Howe-Baker acquisition). Including the backlog acquired from the acquisition
of the PDM Divisions in February 2001, backlog would have increased to
approximately $741.5 million at December 31, 2000 on a pro forma basis.
Revenues--Revenues were $1.1 billion in 2001 compared with $611.7 million in
2000. The increase in revenues was due primarily to the additional revenue
stream generated by the acquisitions of Howe-Baker and the PDM Divisions. During
2001, revenues increased 154% in the CSA segment and 139% in the North America
segment, but declined 30% in the EAME segment and 28% in the AP segment. The
increase in revenues in the North America and CSA segments was due to the
acquired businesses and to the significant amount of work put in place in the
Caribbean and Venezuela.
Gross Profit--Gross profit increased $67.8 million to $136.8 million in 2001
from $69.0 million in 2000. Gross profit as a percentage of revenues was 12.6%
in 2001 and 11.3% in 2000 reflecting the significant cost savings achieved from
the PDM Divisions integration, the inclusion of higher margin business from
Howe-Baker and continued strong project execution.
Selling and Administrative Expenses--Selling and administrative expenses were
$67.5 million, or 6.2% of revenues, in 2001 compared with $41.9 million, or 6.9%
of revenues, in 2000. The 2001 selling and administrative expenses increased due
to the acquisitions and a $4.9 million increase in performance-based and
variable pay compared with 2000.
Special Charges--Special charges for 2001 were $9.7 million. During 2001, we
recorded special charges of $5.7 million for personnel costs related to the
relocation of our administrative office to The Woodlands, Texas, including costs
of senior executives who elected not to relocate, as well as moving-related
(which are expensed as incurred) and severance expenses, and our voluntary
resignation offer; $2.8 million for facilities and other charges, including
charges related to the sale, closure, downsizing or relocation of operations;
and $1.2 million for integration costs, primarily related to integration
initiatives associated with the PDM Divisions acquisition.
Income (Loss) from Operations--Income from operations was $54.4 million in 2001
compared with a $26.8 million loss in 2000. The North America segment results
benefited from the inclusion of Howe-Baker and the PDM Divisions, lower than
anticipated integration costs and good results from our Industrial, Water and
union construction operations in the U.S. and Canada. Despite very low volumes
in the EAME segment, focused cost control and excellent execution enabled the
segment to post modest operating income. Excluding poor economic performance in
Australia, the AP segment was profitable. The CSA segment benefited from several
large contracts in the field in the Caribbean and Venezuela in 2001. We have
experienced no material impact from the economic crisis in Argentina. The 2000
results included the recognition of $3.1 million of income related to a
favorable trial court decision from a claim against certain of our insurers to
recover legal fees expended in an environmental litigation. Intangibles
amortization increased to $5.8 million in 2001 compared with $0.6 million in
2000 primarily due to increased goodwill and other intangibles amortization
related to the acquisitions of Howe-Baker and the PDM Divisions.
Interest Expense and Interest Income--Interest expense increased $3.2 million to
$8.4 million in 2001 from $5.2 million in 2000. The increase was mostly due to
higher average debt levels in 2001. Interest income consisting primarily of
interest related to Howe-Baker's acquisition of Schedule A, Ltd. (see Note 12 to
our Consolidated Financial Statements) and interest earned on cash balances
increased to $1.9 million in 2001 compared with $0.4 million in 2000. Net
interest expense increased $1.7 million to $6.5 million in 2001 compared with
$4.8 million in 2000.
Income Tax (Expense) Benefit--We recorded income tax expense of $13.5 million in
2001 compared with a $4.9 million income tax benefit in 2000.
5
Loss from Discontinued Operations--During the second quarter of 2001, we decided
to discontinue our high purity piping business, UltraPure Systems, due primarily
to continuing weak market conditions in the microelectronics industry. The loss
from discontinued operations for the year 2001 was $2.3 million, net of taxes,
compared with a loss from discontinued operations of $5.7 million, net of taxes,
for 2000. The loss on disposal of discontinued operations for 2001 was $9.9
million, net of taxes. Our actions necessary to discontinue UltraPure Systems
were essentially complete at December 31, 2001.
Net Income--Net income for 2001 was $19.7 million, or $0.44 per diluted share,
compared with a net loss of $33.8 million, or $1.80 per diluted share, for 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, cash and cash equivalents equaled $102.5 million. During
2002, our operations generated $72.0 million of cash flows, attributable to
strong profitability and a decrease in working capital. Working capital, varies
from year to year and is primarily affected by the mix, stage of completion and
commercial terms of our construction contracts.
In 2002, we expended $23.9 million for capital expenditures, which included
$11.6 million for the initial land acquisition and development costs of our new
administrative office in Texas. Additionally, we reported proceeds of $4.6
million related to the sale of property and equipment. Our utilization of cash
also included $17.6 million relative to business acquisitions, inclusive of a
payment for contingent earnout obligations associated with the Howe-Baker
acquisition, final purchase price adjustments relative to the PDM Divisions
acquisitions as well as a payment for the purchase of TPA, Inc. We continue to
evaluate and selectively pursue opportunities for expansion of our business
through acquisition of complementary businesses. These acquisitions, if they
arise, may involve the use of cash or, depending upon the size and terms of the
acquisition, may require debt or equity financing.
Cash flows from financing activities were $17.0 million, which included $25.2
million of net proceeds generated from a public offering of our common stock on
July 1, 2002. The offering of just over 6 million shares consisted of 4.2
million secondary shares sold on behalf of a shareholder, WEDGE Engineering
B.V., an affiliate of WEDGE Group Incorporated, for which we received no
proceeds, and 2.01 million primary shares. Cash utilized for financing
activities included $5.8 million to settle short-term notes and $5.2 million for
cash dividends. In January 2003, we announced a two-for-one stock split in the
form of a stock dividend, as well as a 33% increase in our annual dividend from
$0.12 to $0.16 per share.
Our primary internal source of liquidity is cash flow generated from operations;
however, capacity under revolving credit agreements is also available, if
necessary, to fund operating or investing activities. We have a four-year $125
million revolving credit facility and a 364-day $50 million revolving credit
facility which terminate in August 2006 and August 2003, respectively. Both
facilities are committed and unsecured. As of year-end, no direct borrowings
existed under either facility, but we had issued $67.6 million of letters of
credit under the four-year facility. As of December 31, 2002, we had $107
million of available capacity under these facilities for future operating or
investing needs. For a further discussion of the revolving credit agreements,
see Note 9 to the Consolidated Financial Statements.
We also have various short-term, uncommitted revolving credit facilities across
several geographic regions of approximately $193.1 million. These facilities are
generally used to provide letters of credit or bank guarantees to customers in
the ordinary course of business, to support advance payments, as performance
guarantees or in lieu of retention on our contracts. At year-end, we had
available capacity of $75.7 million under these uncommitted facilities. In
addition to providing letters of credit or bank guarantees, we also issue surety
bonds in the ordinary course of business to support our performance on
contracts. For a further discussion of letters of credit and surety bonds see
Note 13 to the Consolidated Financial Statements.
6
As of December 31, 2002, the following commitments were in place to support our
ordinary course obligations:
Amounts of Commitments by Expiration Period
----------------------------------------------------------------------
(In thousands) Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------------------------------------------------------------------------------------------
Letters of Credit/Bank Guarantees $ 185,005 $ 70,170 $ 114,655 $ 143 $ 37
Surety Bonds 323,718 281,352 42,356 10 -
- ----------------------------------------------------------------------------------------------------------------
Total Commitments $ 508,723 $ 351,522 $ 157,011 $ 153 $ 37
================================================================================================================
Note: Includes $22,268 of letters of credit and surety bonds issued in support
of our insurance program.
Contractual obligations at December 31, 2002, are summarized below:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------------------------------------------------------------------------------------------------
Long-Term Debt/(1)/ $ 75,000 $ - $ 25,000 $ 50,000 $ -
Operating Leases 57,619 13,027 16,817 7,701 20,074
Obligations to Former Parent/(2)/ 19,565 3,453 6,445 6,445 3,222
- ----------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 152,184 $ 16,480 $ 48,262 $ 64,146 $ 23,296
================================================================================================================
/(1)/ Excludes interest accruing at a rate of 7.34%.
/(2)/ Excludes interest accruing at a rate of 7.50%.
We believe funds generated by operations, amounts available under existing
credit facilities and external sources of liquidity, such as the issuance of
debt and equity instruments, will be sufficient to finance capital expenditures
and working capital needs for the foreseeable future. For 2003, capital
expenditures are anticipated to be in the $30.0 to $35.0 million range, which
includes approximately $17.0 million for completion of our new administrative
office. However, we cannot give assurances that such funding will be available,
as our ability to generate cash flows from operations and our ability to access
funding under the revolving credit facilities may be impacted by a variety of
business, economic, legislative, financial and other factors which may be
outside of our control. Additionally, while we currently have a significant,
uncommitted bonding facility, primarily to support various commercial provisions
in our engineering and construction contracts, a termination or reduction of the
bonding facility could result in the utilization of letters of credit in lieu of
performance bonds, thereby reducing our available capacity under the revolving
credit facilities. Although we do not anticipate a reduction or termination of
the bonding facility, there is no guarantee that such a facility will be
available at reasonable terms to service our ordinary course obligations.
OFF-BALANCE SHEET ARRANGEMENTS
We use operating leases for facilities and equipment when they make economic
sense. In 2001, we entered into a sale (for approximately $14.0 million) and
leaseback transaction of our Plainfield, Illinois administrative office with a
lease term of 20 years. The leaseback structure is not subject to consolidation
and the future payments are accounted for as an operating lease. Rentals under
this and all other lease commitments are reflected in rental expense and future
rental commitments as summarized in Note 13 to our Consolidated Financial
Statements.
We have no other off-balance sheet arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange rates,
which may adversely affect our results of operations and financial condition. We
seek to minimize the risks from these foreign currency exchange rate
fluctuations through our regular operating and financing activities and, when
deemed appropriate, through our limited use of foreign currency forward
contracts. Our exposure to changes in foreign currency exchange rates arises
from receivables, payables and firm commitments from international transactions,
as well as intercompany loans utilized to finance non-U.S. subsidiaries. We do
not use financial instruments for trading or speculative purposes.
The carrying value of our cash and cash equivalents, accounts receivable,
accounts payable, notes payable and forward contracts approximates their fair
values because of the short-term nature of these instruments. At December 31,
2002 and 2001, the fair value of our fixed rate long-term debt was $80.7 million
and $76.7 million respectively based on current market rates for debt with
similar credit risk and maturities. See Note 10 to our Consolidated Financial
Statements for quantification of our financial instruments.
7
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations" (SFAS No. 141") and SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). These pronouncements changed the accounting for
business combinations, goodwill and intangible assets. SFAS No. 141 eliminates
the pooling-of-interests method of accounting for business combinations and
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of SFAS No. 141 were effective for any business
combination accounted for by the purchase method that was completed after June
30, 2001. SFAS No. 142 states goodwill and indefinite-lived intangible assets
are no longer amortized to earnings, but instead are reviewed for impairment at
least annually. The amortization of existing goodwill and indefinite-lived
intangible assets at June 30, 2001 has ceased at January 1, 2002. Goodwill on
acquisitions completed subsequent to June 30, 2001, is not amortized. Our
adoption of SFAS No. 142 resulted in no goodwill and indefinite-lived
intangibles amortization in 2002 compared with $4.2 million in 2001. In
connection with the adoption of these statements during the first quarter of
2002, we completed our goodwill impairment assessment and concluded that no
transitional impairment charge was necessary. Also, as of September 30, 2002, we
completed our annual impairment assessment and concluded that no impairment
charge was necessary.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated assets' retirement costs. The new standard was effective January 1,
2003, and is not anticipated to have a significant impact on our financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment and/or disposal of long-lived assets. We
adopted this statement effective January 1, 2002, and determined that it did not
have a significant impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." The purpose
of this statement is to update, clarify and simplify existing accounting
standards. We adopted this statement effective April 1, 2002, and determined
that it did not have a significant impact on our financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces
Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. This statement is effective for
our fiscal year beginning January 1, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." This standard permits two additional
transition methods for entities that adopt the fair-value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements in both annual and interim financial statements. We will continue
to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for stock
options. The amended disclosure requirements of SFAS No. 148 have been
incorporated into Note 15 to the Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements from Guarantees, Including Indirect Guarantees of
Indebtedness of Others". This interpretation of SFAS No. 5, 57 and 107, and
rescission of FASB Interpretation No. 34 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
interpretation are applicable for financial statements of interim or annual
periods ending after December 15, 2002. See Note 13 of our Consolidated
Financial Statements for the disclosure of guarantor relationships.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an on-going basis, based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
8
Revenue Recognition--We recognize revenues using the percentage-of-completion
method. Contract revenues are accrued based generally on the percentage that
costs-to-date bear to total estimated costs. We follow the guidance of Statement
of Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," for accounting policy relating to our use of the
percentage-of-completion method, estimating costs, revenue recognition and claim
recognition. The use of estimated cost to complete each contract, while the most
widely recognized method used for percentage-of-completion accounting, is a
significant variable in the process of determining income earned and is a
significant factor in the accounting for contracts. The cumulative impact of
revisions in total cost estimates during the progress of work is reflected in
the period in which these changes become known. Contract revenue reflects the
original contract price adjusted for agreed-upon change orders and estimated
minimum recoveries of claims. Although successful, this contracting model has
inherent risks. Losses expected to be incurred on contracts in progress are
charged to income as soon as such losses are known. A significant portion of our
work is performed on a fixed price or lump sum basis. The balance of projects is
primarily performed on variations of cost reimbursable and target price
approaches. Progress billings in accounts receivable are currently due and
exclude retentions until such amounts are due in accordance with contract terms.
We have a history of proven success in estimating and bidding lump sum, fixed
price contracts. However, due to the various estimates inherent in our contract
accounting, actual results could differ from those estimates.
Credit Extension--We extend credit to customers and other parties in the normal
course of business only after a review of the potential customer's credit
worthiness. Additionally, management reviews the commercial terms of all
significant contracts before entering into a contractual arrangement. We
regularly review outstanding receivables and provide for estimated losses
through an allowance for doubtful accounts. In evaluating the level of
established reserves, management makes judgments regarding the parties' ability
to make required payments, economic events and other factors. As the financial
condition of these parties change, circumstances develop or additional
information becomes available, adjustments to the allowance for doubtful
accounts may be required.
Estimated Reserves for Insurance Matters--We maintain insurance coverage for
various aspects of our business and operations. However, we retain a portion of
anticipated losses through the use of deductibles and self-insured retentions
for our exposures related to third-party liability and workers' compensation.
Management regularly reviews estimates of reported and unreported claims and
provides for losses through insurance reserves. As claims develop and additional
information becomes available, adjustments to loss reserves may be required.
Recoverability of Goodwill - Effective January 1, 2002, we adopted SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No. 142 states that goodwill and
indefinite-lived intangible assets are no longer to be amortized but are to be
reviewed annually for impairment. The goodwill impairment analysis required
under SFAS No. 142 requires us to allocate goodwill to our reporting units,
compare the fair value of each reporting unit with our carrying amount,
including goodwill, and then, if necessary, record a goodwill impairment charge
in an amount equal to the excess, if any, of the carrying amount of a reporting
unit's goodwill over the implied fair value of that goodwill. The primary method
that we employ to estimate these fair values is the discounted cash flow method.
This methodology is based, to a large extent, on assumptions about future events
which may or may not occur as anticipated, and such deviations could have a
significant impact on the estimated fair values calculated. These assumptions
include, but are not limited to, estimates of future growth rates, discount
rates and terminal values of reporting units. See further discussion in Note 7
to the Consolidated Financial Statements. Our goodwill balance at December 31,
2002 was $157.9 million.
Our significant accounting policies are more fully discussed in Note 2 to our
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. You should read
carefully any statements containing the words "expect," "believe," "anticipate,"
"project," "estimate," "predict," "intend," "should," "could," "may," "might,"
or similar expressions or the negative of any of these terms.
Forward-looking statements involve known and unknown risks and uncertainties.
Various factors, such as those listed under "Risk Factors," as set forth in our
Form 10-K, may cause our actual results, performance or achievements to be
materially different from those expressed or implied by any forward-looking
statements. Among the factors that could cause our results to differ are the
following:
. our ability to realize cost savings from expected execution
performance of contracts;
. the uncertain timing and funding of new contract awards, and project
cancellations and operations risks;
. a lack of expected growth in our primary end markets;
. cost overruns on fixed price contracts and risks associated with
percentage of completion accounting;
. increased competition;
. lack of necessary liquidity to finance expenditures prior to the
receipt of payment for the performance of contracts and to provide bid
and performance bonds and letters of credit securing our obligations
under our bids and contracts;
9
. risks inherent in our acquisition strategy and our ability to obtain
financing for proposed acquisitions;
. adverse outcomes of pending claims or litigation or the possibility of
new claims or litigation;
. proposed revisions to U.S. tax laws that seek to increase income taxes
payable by certain international companies;
. a continued downturn in the economy in general; and
. disruptions caused by possible war in the Middle East or terrorist
attacks in the United States or other countries in which we operate.
Additional factors which could cause actual results to differ from such
forward-looking statements are set forth in our Form 10-K for the year ended
December 31, 2002.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future performance or results. We are not
obligated to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. You should consider these
risks when reading any forward-looking statements.
10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Supervisory Board of Chicago Bridge & Iron Company
N.V.:
We have audited the accompanying consolidated balance sheet of Chicago Bridge &
Iron Company N.V. (a Netherlands corporation) and Subsidiaries (the Company) as
of December 31, 2002, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Company as of December 31, 2001 and for the years ended December 31, 2001 and
2000, prior to the revisions discussed in the Notes to the financial statements
as indicated below, were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those consolidated financial
statements in their report dated February 11, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As described in Notes 2 and 7 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill and other intangible assets upon the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of the Company as of
December 31, 2001, and for the years ended December 31, 2001 and 2000 were
audited by other auditors who have ceased operations. Such financial statements
have been revised to give effect to the following adjustments and
reclassifications:
. February 10, 2003 stock split (see Note 14). We audited the
adjustments described in Note 14 that were applied to revise the 2001
and 2000 financial statements for such stock split. Our audit
procedures included (1) comparing the amounts shown in the earnings
per share disclosures for 2001 and 2000 to the Company's underlying
accounting analysis obtained from management, (2) comparing the
previously reported shares outstanding and income statement amounts
per the Company's accounting analysis to the previously issued
financial statements, and (3) recalculating the additional shares to
give effect to the stock split and testing the mathematical accuracy
of the underlying analysis.
. Transitional disclosures for adoption of SFAS No. 142 (see Note 7). We
audited the adjustments described in Note 7 that were applied to
revise the 2001 and 2000 financial statements to include the
transitional disclosures required by SFAS No. 142, which was adopted
by the Company as of January 1, 2002. Our audit procedures with
respect to the disclosures in Note 7 with respect to 2001 and 2000
included (1) comparing the previously reported net income to the
previously issued financial statements and the adjustments to reported
net income representing amortization expense (including any related
tax effects) recognized in those periods related to goodwill and
intangible assets that are no longer being amortized and changes in
amortization periods for intangible assets that will continue to be
amortized as a result of initially applying SFAS No. 142 (including
any related tax effects) to the Company's underlying analysis obtained
from management, (2) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income and the
related earnings-per-share amounts and (3) comparing the separate
amounts for goodwill and other intangible assets for 2001 to the
Company's underlying analysis obtained from management, and (4)
testing the mathematical accuracy of the underlying analysis.
. Summarized disclosure of defined benefit plans (see Note 11). We
audited the adjustments that were applied to revise the 2001 and 2000
financial statements to include combined tabular disclosures of the
Company's defined benefit plans as permitted under SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," as compared to previous tabular presentation of each
defined benefit plan. Our audit procedures with respect to the 2001
and 2000 disclosures in Note 11 included (1) comparing the previously
reported tabular presentation of each defined benefit plan to a
combining schedule prepared by management, and (2) testing the
mathematical accuracy of the underlying analysis.
In our opinion, the adjustments, transitional disclosures and
reclassifications to the 2001 and 2000 financial statements and disclosures
described above have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 and 2000 financial
statements of the Company other than with respect to such adjustments,
transitional disclosures and reclassifications, accordingly, we do not
express an opinion or any form of assurance on the 2001 and 2000 financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
February 13, 2003
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC
ACCOUNTANT'S REPORTS
The following reports are copies of reports previously issued by Arthur
Andersen, LLP ("Andersen"). The reports have not been reissued by Andersen. As
discussed in Note 7 "Goodwill and Other Intangibles", the Company has presented
the transitional disclosures for 2001 and 2000 required by SFAS No. 142, and as
discussed in Note 14 "Shareholders' Equity", the Company has adjusted prior
periods for the stock split for all periods presented. Additionally, the Company
revised the 2001 and 2000 financial statements to include combined tabular
disclosures of the Company's defined benefit plans as permitted under SFAS No.
132. The Andersen report does not extend to these changes to the 2001 and 2000
consolidated financial statements.
To the Shareholders and the Supervisory Board of Chicago Bridge & Iron Company
N.V.:
We have audited the accompanying consolidated balance sheets of CHICAGO
BRIDGE & IRON COMPANY N.V. (a Netherlands corporation) and SUBSIDIARIES as of
December 31, 2001 and 2000, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America and The Netherlands. Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CHICAGO BRIDGE & IRON
COMPANY N.V. and SUBSIDIARIES as of December 31, 2001 and 2000 and the results
of its operations and cash flows for each of the three years ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
ARTHUR ANDERSEN
Amsterdam, The Netherlands
February 11, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE SUPPLEMENTAL SCHEDULE TO
CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders and the Supervisory Board of Chicago Bridge & Iron Company
N.V.:
We have audited in accordance with generally accepted auditing standards in
the United States of America and The Netherlands the consolidated financial
statements of CHICAGO BRIDGE & IRON COMPANY N.V. (a Netherlands corporation) and
SUBSIDIARIES, included in the Company's 2001 Annual Report to Shareholders
incorporated by reference in this Form 10-K, and have issued our report thereon
dated February 11, 2002. Our audits were conducted for the purpose of forming an
opinion on those statements taken as a whole. Supplemental Schedule V. [retitled
supplemental Schedule II. in the 2002 Form 10-K] (the "Schedule") to the
consolidated financial statements included on page 31 [page 32 in the 2002 Form
10-K] Form 10-K is the responsibility of the Company's management. The Schedule
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
Schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen
Amsterdam, The Netherlands
February 11, 2002
11
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Revenues $ 1,148,478 $ 1,081,824 $ 611,691
Cost of revenues 992,927 945,048 542,721
- --------------------------------------------------------------------------------------------------------
Gross profit 155,551 136,776 68,970
Selling and administrative expenses 73,155 67,519 41,913
Intangibles amortization (Note 7) 2,529 5,819 599
Other operating income, net (1,818) (691) (2,401)
Special charges (Note 4) 3,972 9,686 55,664
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations 77,713 54,443 (26,805)
Interest expense (7,114) (8,392) (5,187)
Interest income 1,595 1,854 430
- --------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority interest 72,194 47,905 (31,562)
Income tax (expense) benefit (Note 16) (20,233) (13,480) 4,859
- --------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 51,961 34,425 (26,703)
Minority interest in income (1,812) (2,503) (1,341)
- --------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 50,149 31,922 (28,044)
- --------------------------------------------------------------------------------------------------------
Discontinued operations (Note 5):
Loss from discontinued operations, net of taxes - (2,321) (5,731)
Loss on disposal of discontinued operations, net of taxes - (9,898) -
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 50,149 $ 19,703 $ (33,775)
========================================================================================================
- --------------------------------------------------------------------------------------------------------
Net income (loss) per share (Note 2)
Basic
Income (loss) from continuing operations $ 1.16 $ 0.74 $ (1.49)
Loss from discontinued operations - (0.28) (0.31)
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.16 $ 0.46 $ (1.80)
- --------------------------------------------------------------------------------------------------------
Diluted
Income (loss) from continuing operations $ 1.12 $ 0.71 $ (1.49)
Loss from discontinued operations - (0.27) (0.31)
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.12 $ 0.44 $ (1.80)
- --------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
12
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 102,536 $ 50,478
Accounts receivable, net of allowance for doubtful accounts of $2,274 in 2002 and $1,256 in 2001 172,933 144,625
Contracts in progress with earned revenues exceeding related progress billings (Note 6) 76,211 71,549
Deferred income taxes 17,105 20,526
Assets held for sale 1,958 1,958
Other current assets 11,680 17,917
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 382,423 307,053
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net (Note 8) 109,271 105,998
Long-term receivable (Note 12) 19,785 19,785
Deferred income taxes (Note 16) 8,277 21,475
Goodwill (Note 7) 157,903 138,444
Other Intangibles, net of accumulated amortization of $4,967 in 2002 and $2,438 in 2001 (Note 7) 33,556 35,509
Other non-current assets 29,221 20,001
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 740,436 $ 648,265
===========================================================================================================================
LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------
Notes payable (Note 9) $ 14 $ 155
Current maturity of long-term debt (Note 9) - 5,700
Accounts payable 84,413 73,636
Accrued liabilities (Note 8) 74,655 69,320
Contracts in progress with progress billings exceeding related earned revenues (Note 6) 122,357 99,306
Income taxes payable 5,631 9,154
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 287,070 257,271
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 9) 75,000 75,000
Other non-current liabilities (Note 8) 62,461 69,343
Minority interest in subsidiaries (Note 12) 33,758 34,428
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 458,289 436,042
===========================================================================================================================
Commitments and Contingencies (Note 13) - -
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Common stock, Euro .01 par value; authorized: 70,000,000 in 2002 and 2001;
issued: 44,565,172 in 2002 and 2001; outstanding: 44,325,744 in 2002
and 41,959,642 in 2001 210 210
Additional paid-in capital 245,916 241,559
Retained earnings 68,064 23,102
Stock held in Trust (Note 14) (12,332) (14,301)
Treasury stock, at cost (2,836) (25,279)
Accumulated other comprehensive income (loss) (Note 14) (16,875) (13,068)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 282,147 212,223
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 740,436 $ 648,265
===========================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
13
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 50,149 $ 19,703 $ (33,775)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Special charges, net of deferred income taxes of $1,350, $3,104 and $11,559 2,622 6,582 44,105
Payments related to special charges (5,954) (14,785) (7,069)
Depreciation and amortization 19,661 25,105 16,838
Gain on sale of property and equipment (1,123) (691) (2,401)
Loss on discontinued operations - 12,219 5,731
Change in operating assets and liabilities (see below) 6,675 60,819 (10,426)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 72,030 108,952 13,003
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in discontinued operating activities - (3,156) (8,918)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 72,030 105,796 4,085
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Cost of business acquisitions, net of cash acquired (17,588) (47,848) (56,469)
Capital expenditures (23,927) (8,917) (6,353)
Proceeds from sale of assets held for sale - 13,992 -
Proceeds from sale of property and equipment 4,558 2,788 4,915
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing investing activities (36,957) (39,985) (57,907)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) discontinued investing activities - 4,210 (7,660)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (36,957) (35,775) (65,567)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Decrease in notes payable (5,841) (721) (578)
Proceeds from private placement - 75,000 -
Net (repayment)/borrowing under revolving credit facility - (96,100) 71,100
Issuance of common stock 25,207 45,920 -
Purchase of treasury stock (668) (49,103) (18,757)
Issuance of treasury stock 3,474 3,197 1,060
Dividends paid (5,187) (5,227) (2,220)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) continuing financing activities 16,985 (27,034) 50,605
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued financing activities - - 13
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 16,985 (27,034) 50,618
- ------------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash and cash equivalents 52,058 42,987 (10,864)
Change in cash and cash equivalents of discontinued operations - 40 (42)
Cash and cash equivalents, beginning of the year 50,478 7,451 18,357
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 102,536 $ 50,478 $ 7,451
==============================================================================================================================
CHANGE IN OPERATING ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
(Increase)/decrease in receivables, net $ (26,874) $ 36,854 $ 8,247
Decrease/(increase) in contracts in progress, net 18,389 39,120 (3,602)
Increase/(decrease) in accounts payable 10,690 (16,100) (2,386)
- ------------------------------------------------------------------------------------------------------------------------------
Change in contract capital 2,205 59,874 2,259
Decrease/(increase) in other current assets 6,559 (8,677) (1,544)
Increase/(decrease) in income taxes payable and deferred income taxes 9,711 9,769 (3,118)
Increase/(decrease) in accrued and other non-current liabilities 197 6,829 (7,039)
Increase in other (11,997) (6,976) (984)
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 6,675 $ 60,819 $ (10,426)
==============================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
- ------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 7,750 $ 6,851 $ 5,921
Cash paid for income taxes 8,450 2,258 7,140
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
14
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Stock Held in Trust
----------------------- Additional -----------------------
Number of Paid-In Retained Number of
Shares Amount Capital Earnings Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 20,546 $ 67 $ 93,393 $ 44,621 1,411 $ (12,700)
Comprehensive (loss) - - - (33,775) - -
Dividends to common shareholders - - - (2,220) - -
Long-Term Incentive Plan amortization - - 2,969 - - -
Issuance of common stock for acquisition 16,293 35 104,655 - - -
Issuance of common stock to Trust 600 1 4,457 - 600 (4,458)
Stock held in Trust - - 35 - 4 (35)
Purchase of treasury stock (2,367) - - - - -
Issuance of treasury stock 386 - (2,037) - - -
Cancellation of treasury stock - (12) (29,152) - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 35,458 91 174,320 8,626 2,015 (17,193)
Comprehensive income (loss) - - - 19,703 - -
Dividends to common shareholders - - - (5,227) - -
Long-Term Incentive Plan amortization - - 1,125 - - -
Issuance of common stock for acquisition 11,412 24 89,953 - - -
Conversion of common stock to Euro - 106 (106) - - -
Issuance of treasury stock to Trust 94 - 508 - 94 (1,310)
Release of Trust shares - - (4,202) - (508) 4,202
Purchase of treasury stock (5,372) - - - - -
Issuance of treasury stock 368 - (50) - - -
Cancellation of treasury stock - (11) (19,989) - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 41,960 210 241,559 23,102 1,601 (14,301)
Comprehensive income (loss) - - - 50,149 - -
Dividends to common shareholders - - - (5,187) - -
Long-Term Incentive Plan amortization - - 756 - - -
Issuance of treasury stock to Trust 43 - 88 - 43 (641)
Release of Trust shares - - (2,610) - (194) 2,610
Purchase of treasury stock (50) - - - - -
Issuance of treasury stock 2,373 - 6,123 - - -
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 44,326 $ 210 $ 245,916 $ 68,064 1,450 $ (12,332)
======================================================================================================================
Treasury Stock Accumulated
----------------------- Other Total
Number of Comprehensive Shareholders'
Shares Amount Income (Loss) Equity
- --------------------------------------------------------------------------------------------------
Balance at January 1, 2000 2,045 $ (13,729) $ (7,242) $ 104,410
Comprehensive (loss) - - (2,630) (36,405)
Dividends to common shareholders - - - (2,220)
Long-Term Incentive Plan amortization - - - 2,969
Issuance of common stock for acquisition - - - 104,690
Issuance of common stock to Trust - - - -
Stock held in Trust - - - -
Purchase of treasury stock 2,367 (18,757) - (18,757)
Issuance of treasury stock (386) 3,097 - 1,060
Cancellation of treasury stock (3,999) 29,164 - -
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2000 27 (225) (9,872) 155,747
Comprehensive income (loss) - - (3,196) 16,507
Dividends to common shareholders - - - (5,227)
Long-Term Incentive Plan amortization - - - 1,125
Issuance of common stock for acquisition - - - 89,977
Conversion of common stock to Euro - - - -
Issuance of treasury stock to Trust (94) 802 - -
Release of Trust shares - - - -
Purchase of treasury stock 5,372 (49,103) - (49,103)
Issuance of treasury stock (368) 3,247 - 3,197
Cancellation of treasury stock (2,332) 20,000 - -
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,605 (25,279) (13,068) 212,223
Comprehensive income (loss) - - (3,807) 46,342
Dividends to common shareholders - - - (5,187)
Long-Term Incentive Plan amortization - - - 756
Issuance of treasury stock to Trust (43) 553 - -
Release of Trust shares - - - -
Purchase of treasury stock 50 (668) - (668)
Issuance of treasury stock (2,373) 22,558 - 28,681
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2002 239 $ (2,836) $ (16,875) $ 282,147
==================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
15
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. ORGANIZATION AND NATURE OF OPERATIONS
Organization - Chicago Bridge & Iron Company N.V., a corporation organized under
the laws of The Netherlands, and Subsidiaries, is a global specialty
engineering, procurement and construction company serving customers in several
primary end markets, including hydrocarbon refining, natural gas, water and the
energy sector in general. We have been helping customers store and process the
earth's natural resources for more than 100 years by supplying a comprehensive
range of engineered steel structures and systems. We offer a complete package of
design, engineering, fabrication, procurement construction and maintenance
services including hydrocarbon processing plants, liquefied natural gas (LNG)
terminals and peak shaving plants, bulk liquid terminals, water storage and
treatment facilities, and other steel structures and their associated systems.
We have been continuously engaged in the engineering and construction industry
since our founding in 1889. Our subsidiary Howe-Baker International, L.L.C.,
acquired in 2000, is a global technology company specializing in the engineering
and construction of hydrocarbon processing plants for customers in the refining,
petrochemical and natural gas industries, which was organized and began
operations in 1947.
Nature of Operations - Projects for the worldwide petroleum and petrochemical
industry accounted for a majority of our revenues in 2002, 2001 and 2000.
Numerous factors influence capital expenditure decisions in this industry, which
are beyond our control. Therefore, no assurance can be given that our business,
financial condition and results of operations will not be adversely affected
because of reduced activity due to the price of oil or changing taxes, price
controls and laws and regulations related to the petroleum and petrochemical
industry.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Consolidation--These financial statements are prepared
in accordance with accounting principles generally accepted in the United States
of America. The consolidated financial statements include all majority owned
subsidiaries. Significant intercompany balances and transactions are eliminated
in consolidation. Investments in non-majority owned affiliates are accounted for
by the equity method. For the years ended 2002 and 2001 we did not have any
non-majority owned affiliates.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosed amounts of contingent assets and
liabilities, and the reported amounts of revenues and expenses. We believe the
most significant estimates and assumptions are associated with revenue
recognition on engineering and construction contracts, recoverability tests that
must be periodically performed with respect to goodwill and intangible asset
balances, valuation of accounts receivable, as well as the determination of
liabilities related to self insurance programs. If the underlying estimates and
assumptions upon which the financial statements are based change in the future,
actual amounts may differ from those included in the accompanying consolidated
financial statements.
Revenue Recognition--Revenues are recognized using the percentage-of-completion
method. Contract revenues are accrued based generally on the percentage that
costs-to-date bear to total estimated costs. We follow the guidance of Statement
of Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," for accounting policy relating to our use of the
percentage-of-completion method, estimating costs, revenue recognition and claim
recognition. The use of estimated cost to complete each contract, while the most
widely recognized method used for percentage-of-completion accounting, is a
significant variable in the process of determining income earned and is a
significant factor in the accounting for contracts. The cumulative impact of
revisions in total cost estimates during the progress of work is reflected in
the period in which these changes become known. Due to the various estimates
inherent in our contract accounting, actual results could differ from those
estimates.
Contract revenue reflects the original contract price adjusted for agreed upon
change orders and estimated minimum recoveries of claims. At December 31, 2002
and 2001, we had net outstanding claims recognized of $5,946 and $5,400,
respectively. Losses expected to be incurred on contracts in progress are
charged to income as soon as such losses are known.
A significant portion of our work is performed on a fixed price or lump sum
basis. The balance of projects is primarily performed on variations of cost
reimbursable and target price approaches. Progress billings in accounts
receivable are currently due and exclude retentions until such amounts are due
in accordance with contract terms. Cost of revenues includes direct contract
costs such as material and construction labor, and indirect costs which are
attributable to contract activity.
Precontract Costs--Precontract costs are generally charged to cost of revenues
as incurred, but, in certain cases, may be deferred to the balance sheet if
specific probability criteria are met. There were no precontract costs deferred
as of December 31, 2002 or 2001.
Research and Development--Expenditures for research and development activities,
which are charged to expense as incurred, amounted to $3,056 in 2002, $1,650 in
2001 and $1,570 in 2000.
Depreciation and Amortization--Property and equipment are recorded at cost and
depreciated on a straight-line basis over their estimated useful lives:
buildings and improvements, 10 to 40 years; plant and field equipment, 2 to 20
years. Renewals and betterments,
16
which substantially extend the useful life of an asset, are capitalized and
depreciated. Depreciation expense was $17,132 in 2002, $19,286 in 2001 and
$16,239 in 2000.
Goodwill is no longer amortized in accordance with SFAS No. 142 (see "New
Accounting Standards" below). Finite-lived other intangibles are amortized on a
straight-line basis over 3 to 15 years, while other intangibles with indefinite
useful lives are not amortized.
Impairment of Long-Lived Assets--Management reviews goodwill and indefinite
lived intangibles for impairment at least annually, or whenever circumstances
indicate that the carrying amount may not be recoverable. When an evaluation is
performed, the estimated cash flows associated with the asset are compared to
the asset's carrying amount to determine if impairment exists.
Management reviews tangible assets and finite lived intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If an evaluation is required, the estimated cash flows
associated with the asset will be compared to the asset's carrying amount to
determine if impairment exists. See Note 7 for additional discussion relative to
intangibles impairment testing.
Per Share Computations--Basic earnings per share (EPS) is calculated by dividing
income (loss) from continuing operations, income (loss) from discontinued
operations and net income (loss) by the weighted average number of common shares
outstanding for the period, which includes stock held in trust. Diluted EPS
reflects the assumed conversion of all dilutive securities, consisting of
employee stock options, restricted shares, directors deferred fee shares and
warrants. Excluded from our per share calculations for 2002 were 357,714 shares,
as they were considered antidilutive.
The following schedule reconciles the income and shares utilized in the basic
and diluted EPS computations:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 50,149 $ 31,922 $ (28,044)
Loss from discontinued operations - (12,219) (5,731)
- ---------------------------------------------------------------------------------------------------
Net income (loss) 50,149 19,703 (33,775)
- ---------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 43,176,888 43,249,692 18,811,578
Effect of stock options 1,503,004 1,363,598 *
Effect of restricted shares 9,480 44,848 *
Effect of directors deferred fee shares 47,166 40,662 *
Effect of warrants - 35,030 -
Effect of performance shares - - *
- ---------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 44,736,538 44,733,830 18,811,578
===================================================================================================
Net income (loss) per share
- ---------------------------------------------------------------------------------------------------
Basic
Income (loss) from continuing operations $ 1.16 $ 0.74 $ (1.49)
Loss from discontinued operations - (0.28) (0.31)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 1.16 $ 0.46 $ (1.80)
===================================================================================================
Diluted
Income (loss) from continuing operations $ 1.12 $ 0.71 $ (1.49)*
Loss from discontinued operations - (0.27) (0.31)*
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 1.12 $ 0.44 $ (1.80)*
===================================================================================================
* In 2000, the effect of stock options, restricted shares, directors deferred
fee shares and performance shares were not included in the calculation of
diluted earnings per share as they were antidilutive due to the net loss for the
year.
Cash Equivalents--Cash equivalents are considered to be all highly liquid
securities with original maturities of three months or less.
Concentrations of Credit Risk--The majority of accounts receivable and contract
work in progress are from clients in the petroleum and petrochemical industries
around the world. Most contracts require payments as projects progress or in
certain cases advance payments. We generally do not require collateral, but in
most cases can place liens against the property, plant or equipment constructed
or terminate the contract if a material default occurs. We maintain reserves for
potential credit losses.
Foreign Currency--The nature of our business activities involves the management
of various financial and market risk, including those related to changes in
currency exchange rates. The primary effects of foreign currency translation
adjustments are recognized in shareholders' equity in accumulated other
comprehensive income (loss) as cumulative translation adjustment, net of tax.
Foreign currency exchange gains/(losses) are included in the consolidated
statements of income, and were $2,340 in 2002, $128 in 2001 and $1,481 in 2000.
17
Financial Instruments--Although we do not engage in currency speculation, we
periodically use forward contracts to mitigate certain operating exposures, as
well as hedge intercompany loans utilized to finance non-U.S. subsidiaries.
Gains or losses on these forward contracts due to changes in fair value are
included in the consolidated statements of income. These forward contracts are
reported at their fair market value and are included in accrued liabilities on
the accompanying balance sheet. Our other financial instruments are not
significant.
Stock Plans--We account for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of our stock at the date of the grant over the
amount an employee must pay to acquire the stock, subject to any vesting
provisions. See Note 15 for additional discussion relative to our stock plans.
Had compensation expense for the Employee Stock Purchase Plan and stock options
granted under the Incentive Plans been determined consistent with the fair value
method of FASB Statement No. 123 (using the Black-Scholes pricing model), our
net income and net income per common share would have been reduced to the
following pro forma amounts.
2002 2001 2000
- --------------------------------------------------------------------------------
Net Income (Loss)
- --------------------------------------------------------------------------------
As reported from continuing
operations $50,149 $ 31,922 $(28,044)
As reported from discontinued
operations - (12,219) (5,731)
- --------------------------------------------------------------------------------
As reported net income 50,149 19,703 (33,775)
================================================================================
Pro forma from continuing
operations 46,661 28,652 (29,206)
Pro forma from discontinued
operations - (12,219) (5,731)
- --------------------------------------------------------------------------------
Pro forma net income 46,661 16,433 (34,937)
================================================================================
Net Income (Loss) Per Share - Basic
- --------------------------------------------------------------------------------
As reported from continuing
operations $ 1.16 $ 0.74 $ (1.49)
As reported from discontinued
operations - (0.28) (0.31)
- --------------------------------------------------------------------------------
As reported net income 1.16 0.46 (1.80)
================================================================================
Pro forma from continuing
operations 1.08 0.66 (1.55)
Pro forma from discontinued
operations - (0.28) (0.30)
- --------------------------------------------------------------------------------
Pro forma net income 1.08 0.38 (1.85)
================================================================================
Net Income (Loss) Per Share - Diluted
- --------------------------------------------------------------------------------
As reported from continuing
operations $ 1.12 $ 0.71 $ (1.49)
As reported from discontinued
operations - (0.27) (0.31)
- --------------------------------------------------------------------------------
As reported net income 1.12 0.44 (1.80)
================================================================================
Pro forma from continuing
operations 1.04 0.64 (1.55)
Pro forma from discontinued
operations - (0.27) (0.30)
- --------------------------------------------------------------------------------
Pro forma net income 1.04 0.37 (1.85)
================================================================================
Using the Black-Scholes option-pricing model, the fair value of each option
grant is estimated on the date of grant based on the following weighted-average
assumptions:
2002 2001 2000
- --------------------------------------------------------------------------------
Risk-free interest rate 4.74% 5.18% 5.44%
Expected dividend yield 0.86% 0.97% 1.45%
Expected volatility 42.73% 42.27% 41.03%
Expected life in years 6 10 10
Income Taxes--Our financial statement reporting of income taxes has
been prepared under SFAS No. 109, "Accounting for Income Taxes." Under SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases using tax rates in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided to offset any net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
Reclassification of Prior Year Balances--Certain prior year balances have been
reclassified to conform with the current year presentation.
New Accounting Standards--In June 2001, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standard ("SFAS") No. 141
"Business Combinations" (SFAS No. 141") and SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). These pronouncements changed the accounting
for business combinations, goodwill and intangible assets. SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS No. 141 were effective for
any business combination accounted for by the purchase method that was completed
after June 30, 2001. SFAS No. 142 states goodwill and indefinite-lived
intangible assets are no longer amortized to earnings, but instead are reviewed
for impairment at least annually. The amortization of existing goodwill and
indefinite-lived intangible assets at June 30, 2001 has ceased at January 1,
2002. Goodwill on acquisitions completed subsequent to June 30, 2001, is not
amortized. Our adoption of SFAS No. 142 resulted in no goodwill and
indefinite-lived intangibles amortization in 2002 compared with $4,196 in 2001
and $587 in 2000. In connection with the adoption of these statements during the
first quarter of 2002, we completed our goodwill impairment assessment and
concluded that no transitional impairment charge was necessary. Also, as of
September 30, 2002, we completed our annual impairment assessment and concluded
that no impairment charge was necessary. See Note 7 for additional discussion
relative to our annual impairment assessment.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated assets' retirement costs. The new standard was effective January 1,
2003, and is not anticipated to have a significant impact on our financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment and/or disposal of long-lived assets. We
adopted this statement effective January 1, 2002, and determined that it did not
have a significant impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." The purpose
of this statement is to update, clarify and simplify existing accounting
standards. We adopted this statement effective April 1, 2002, and determined
that it did not have a significant impact on our financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces
Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. This statement is effective for
our fiscal year beginning January 1, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." This standard permits two additional
transition methods for entities that adopt the fair-value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements in both annual and interim financial statements. We will continue
to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for stock
options. The amended disclosure requirements of SFAS No. 148 have been
incorporated into Note 15 to the Consolidated Financial Statements.
18
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". This interpretation of SFAS No. 5, 57 and 107, and
rescission of FASB Interpretation No. 34 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
interpretation are applicable for financial statements of interim or annual
periods ending after December 15, 2002. See Note 13 for the disclosure of
guarantor relationships.
3. ACQUISITIONS
2002
On February 5, 2002, we purchased the assets and assumed certain liabilities of
TPA, Inc. for $4,658. The acquired business is a full-service
engineering/procurement/construction company specializing in sulfur removal and
recovery technologies for the refining, gas processing and chemical
manufacturing industries. The purchase price was allocated to the net assets
acquired based upon their estimated fair market values at the date of
acquisition and the balance of approximately $3,360 and $1,200 was recorded as
goodwill and other intangibles, respectively. Financial information has not been
disclosed separately as the amounts were not material to our overall financial
condition or results of operations.
The balances included in the Consolidated Balance Sheets related to acquisitions
completed in the last year are based upon preliminary information and are
subject to change when additional information concerning final asset and
liability valuations is obtained. Material changes to the preliminary
allocations are not anticipated.
Also during 2002, we increased our purchase consideration by $7,596 related to
contingent earnout obligations associated with the Howe-Baker acquisition and
$5,334 for final purchase price adjustments related to the PDM Divisions
acquisition discussed below (see also Note 7).
2001
On November 30, 2001, we purchased Morse Construction Group, Inc. ("Morse") for
approximately $3,000. The purchase price was allocated to the net assets
acquired based upon their estimated fair market values at the date of
acquisition and the balance of approximately $1,366 was recorded as goodwill.
Morse designs, fabricates and erects steel structures, including storage tanks.
This acquisition enables us to continue to grow our U.S. water and industrial
tank business and provides us with access to a geographic area where we expect
to establish a stronger presence. Financial information has not been disclosed
separately as the amounts were not material to our overall financial condition
or results of operations.
On February 7, 2001, we purchased substantially all of the assets (the "Assets")
of the Pitt-Des Moines Inc. ("PDM") Divisions. The Divisions have been
integrated with our current business units and the Assets continue to be used in
the same lines of business. Our integrated groups adopted the names previously
used by the Divisions. The Engineered Construction Division, headquartered in
Houston, engineers, fabricates and constructs storage tanks and systems, process
systems, and unique plate structures for the petroleum, petrochemical,
cryogenic, liquid natural gas, defense and aerospace industries. The Water
Division, headquartered in Pittsburgh, designs, fabricates and constructs water
storage tanks including conventional styles such as ground storage reservoirs
and standpipes, steel elevated tanks and composite elevated tanks as well as
unique projects involving one-of-a-kind tanks designed for specific
applications.
Under the terms of the transaction, which was negotiated based on our stock
prices prevailing during the 45 days before closing, we provided consideration
of 5,696,344 shares of our stock (including 565,150 collar shares for price
protection, if required) and $40,000 in cash. PDM was obligated to remit to us
net proceeds from the disposition of these shares in excess of $44,000. The
source of funds for the cash portion of the purchase price was a private
placement of 1,675,384 shares of our stock to Farinvest, Ltd., an affiliate of
WEDGE Group Incorporated ("WEDGE"), (for a price of $13,600) and 3,247,692
shares of our stock plus a warrant to purchase 503,196 shares of our stock at an
exercise price of Guilders ("NLG") .01 per share to First Reserve Fund VIII,
L.P. ("First Reserve") (for a total price of $26,400), plus a warrant for
500,000 shares of our stock, subject to decrease depending on the number of
shares repurchased from PDM by us prior to June 30, 2001. Shareholder agreements
with PDM, WEDGE and First Reserve included standstill provisions, registration
rights and restrictions with respect to voting rights. First Reserve exercised
the warrant to purchase 503,196 shares on February 22, 2001. On March 15, 2001,
we called 1,049,562 shares from PDM priced at $9,000 and a return of the 565,150
collar shares issued for price protection. We sold these 1,614,712 shares at
$8.88 (less expenses), based on an agreement entered into on February 23, 2001,
to an unaffiliated group of investors for a total price of $14,300. Under a
shareholder agreement with PDM entered into concurrently with the acquisition of
the PDM Divisions, PDM had the right to require us to repurchase the remaining
4,081,632 shares at $8.58 per share, for a total price of $35,000. We had
certain rights to call these shares prior to June 28, 2001. We repurchased these
shares from PDM in June 2001 for $35,000. We funded the purchase in part from
the proceeds of the sale and leaseback of our administrative office. This
acquisition was accounted for under the purchase method of accounting. The
purchase price has been allocated to assets acquired and liabilities assumed
based on estimated fair values at the date of acquisition and the balance of
approximately $48,345 was recorded as goodwill and $387 as other intangibles.
Goodwill was amortized on a straight-line basis over 40 years through December
31, 2001. The PDM Divisions are included in our results of operations effective
February 1, 2001. The pro forma results for the year ended December 31, 2001,
assuming the acquisition had been made at the beginning of the year, would not
be materially different from reported results.
19
The following presents our (unaudited) pro forma results of operations for the
year ended December 31, 2000 as if the PDM Divisions had been combined as of
January 1, 2000. These pro forma results do not purport to be indicative of the
combined results of operations that would have occurred had the acquisition been
made as of January 1, 2000 or results which may occur in the future. These
results also included the pro forma amounts from the Howe-Baker acquisition.
PRO FORMA (UNAUDITED)
YEAR ENDED
DECEMBER 31, 2000
- ------------------------------------------------------------------------------
Revenues $ 1,061,174
Loss from continuing operations (15,809)
Loss per share from continuing operations
Basic $ (0.35)
Diluted (0.35)
- ------------------------------------------------------------------------------
2000
On December 28, 2000, we acquired Howe-Baker International, L.L.C. from WEDGE, a
private investment firm that owned 100% of Howe-Baker. Howe-Baker is a leading
U.S.-based engineering and construction firm specializing in the design and
construction of hydrocarbon processing plants for customers in the refining,
petrochemical and natural gas processing industries. Under the terms of the
transaction, we paid $28,000 in cash, issued 16,293,330 shares (valued at
$104,990 at $6.4438 per share) to WEDGE and assumed certain liabilities
(including $5,700 in long-term debt). These consideration amounts exclude the
value of future earnout obligations assumed in the transaction. Under the
purchase agreement, an upward adjustment in purchase price of $15,000 was made
based on the actual level of cash in Howe-Baker working capital on the closing
date. Immediately following the transaction, WEDGE sold 8,646,666 shares of our
stock to First Reserve at a price of $8.13 per share. First Reserve purchased an
additional 1,060,000 shares from WEDGE for which we provided a warrant to First
Reserve for the purchase of 164,236 shares of our stock at an exercise price of
NLG .01 per share. Shareholder agreements with WEDGE and First Reserve include
board representations, standstill provisions, registration rights and
restrictions with respect to voting rights. The cash portion of the purchase
price was funded out of borrowings under our revolving credit facility. This
acquisition was accounted for under the purchase method of accounting. The
purchase price has been allocated to assets acquired and liabilities assumed
based on estimated fair values at the date of acquisition and the balance of
approximately $91,400 was recorded as goodwill and $37,300 as other intangibles.
Goodwill was amortized on a straight-line basis over 40 years through December
31, 2001. The results of operations for Howe-Baker are included in our results
of operations effective January 1, 2001.
The following presents our (unaudited) pro forma results of operations for the
year ended December 31, 2000 as if Howe-Baker had been combined as of January 1,
2000. These pro forma results do not purport to be indicative of the combined
results of operations that would have occurred had the acquisition been made as
of January 1, 2000 or of results which may occur in the future.
PRO FORMA (UNAUDITED)
YEAR ENDED
DECEMBER 31, 2000
- ------------------------------------------------------------------------------
Revenues $ 848,560
Loss from continuing operations (19,239)
Loss per share from continuing operations
Basic $ (0.55)
Diluted (0.55)
- ------------------------------------------------------------------------------
On May 17, 2000, we purchased the assets and assumed certain liabilities of
Pacific Pure Water Asia Pte Ltd. ("Pacific Pure") for approximately $2,300.
Pacific Pure provides ultra pure systems for customers in the microelectronics,
pharmaceutical and biotechnology industries. The purchase price has been
allocated to assets acquired and liabilities assumed based on estimated fair
values at the date of acquisition and the balance of approximately $1,800 was
recorded as goodwill. This acquisition was accounted for under the purchase
method of accounting. Goodwill was amortized on a straight-line basis over seven
years through December 31, 2001. Pro forma financial information has not been
presented, as the amounts were not significant. These operations were part of
our UltraPure Systems business that were discontinued during 2001 (Note 5).
On January 28, 2000, we purchased the assets and assumed certain liabilities of
the business now known as CB&I Trusco Tank ("Trusco") for approximately $9,400.
Trusco designs, fabricates and erects steel structures, including storage and
shop-built tanks, and services municipal and industrial customers primarily in
the water, wastewater and petroleum markets on the U.S. West Coast. The purchase
price has been allocated to assets acquired and liabilities assumed based on
estimated fair values at the date of acquisition and the balance of
approximately $1,500 was recorded as goodwill. This acquisition was accounted
for under the purchase method of accounting. Goodwill was amortized on a
straight-line basis over 40 years through December 31, 2001. Pro forma financial
information has not been presented, as the amounts were not significant.
20
4. SPECIAL CHARGES
We record costs for special charges in accordance with EITF 94-3. Moving,
replacement personnel and integration costs are recorded as special charges as
incurred. Our accrued expense balances and activity relating to special charges
for the years ended December 31, 2002, 2001 and 2000 were as follows:
PERSONNEL FACILITIES TUBAN PROJECT
COSTS AND OTHER INTEGRATION VALUATION ALLOWANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
Special charges $ 22,182 $ 5,282 $ - $ 28,200 $ 55,664
Cash Payments (6,646) (423) - - (7,069)
Non-cash activities (4,662) (4,021) - (28,200) (36,883)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 10,874 $ 838 $ - $ - $ 11,712
Special charges 5,697 2,819 1,170 - 9,686
Cash payments (12,671) (944) (1,170) - (14,785)
Non-cash activities 911 (1,429) - - (518)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 4,811 $ 1,284 $ - $ - $ 6,095
Special charges 3,428 18/(1)/ 526 - 3,972
Cash payments (4,618) (810) (526) - (5,954)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 3,621 $ 492 $ - $ - $ 4,113
=================================================================================================================
/1/ Includes a $360 non-cash credit associated with the sale of our XL
Technology Systems, Inc. subsidiary as described below.
Personnel Costs--Personnel costs include severance and personal moving expenses
associated with the relocation, closure or downsizing of offices, and a
voluntary resignation offer (the "Offer"); as more fully described below. During
2002, we recorded personnel costs of $3,428, primarily consisting of $2,688 to
relocate our Plainfield, Illinois administrative office to The Woodlands, Texas
("the Move"), $360 of costs to relocate our welding lab facility personnel from
Houston, Texas to Plainfield, Illinois, and $270 of additional costs relative to
the Offer. Accrued expenses of $522 associated with the Move are anticipated to
be paid during 2003, while obligations of $808 and $2,229 associated with the
Offer are anticipated to be paid during 2003 and 2004, respectively. During
2001, we recorded charges for personnel costs of $5,271 related to the Move,
including costs associated with the separation of senior executives who elected
not to relocate, as well as moving-related (including a $1,089 non-cash charge
related to interest-free loans to senior executives for relocation home
purchases) and severance expenses. Personnel moving and replacement costs were
expensed as incurred and totaled $1,334. We charged $2,014 of severance for the
involuntary termination of approximately 50 employees in the United States and
18 employees in non-U.S. operations and personal moving expenses during 2001. We
had anticipated the wind-up of a defined benefit plan during 2000; however,
market and cost considerations resulted in the reversal of this decision and the
$2,000 non-cash charge during the fourth quarter of 2001. In connection with the
Offer, $412 of additional charges were incurred during 2001.
In October 2000, we presented the Offer to 156 of our U.S. and U.S. expatriate
salaried employees who had accumulated a combination of years of service and age
that added up to at least 80. We recorded a special charge in the fourth quarter
of $13,400 ($127 non-cash) for the anticipated payments associated with 107
employees accepting the Offer. The remaining Offer liability accrued in 2000 was
substantially paid during 2001. In 2000, we recorded severance and other charges
of $4,277 ($30 non-cash) reflecting our commitment to plans primarily associated
with our integration of Howe-Baker. The plans included reorganization costs,
primarily severance related. Severance charges related to the involuntary
termination of approximately 48 employees in the United States and 120 employees
in non-U.S. operations. The $4,505 of other benefits-related charges included
non-cash costs of $2,505 related to our Long-Term Incentive Plan resulting from
change of control provisions triggered as a result of our acquisition of
Howe-Baker. The remaining $2,000 non-cash charge was attributable to our
anticipated wind-up of a defined benefit plan.
Facilities and Other--Facilities and other include charges related to the sale,
closure, downsizing or relocation of operations. During 2002, we recorded
facility and other costs of $378, which included $191 to relocate our welding
lab facility from Houston, Texas to Plainfield, Illinois and $116 to move our
Texas administrative facility offices to The Woodlands, Texas. Also during 2002,
we recorded income of $360 in relation to adjustments associated with the sale
of our XL Technology Systems, Inc. subsidiary. The remaining accrued expense
balance is anticipated to be paid during 2003. During the fourth quarter of 2000
we recorded charges of $5,282, reflecting our commitment to downsize or lower
costs at five facilities worldwide and other exit costs including non-cash asset
write-downs of $4,021 and lease terminations of $188. The net carrying amount
for these assets was $15,235 at December 31, 2000. Facility moving costs were
expensed as incurred and totaled $423. During the second quarter of 2001, we
completed the sale and leaseback of our Plainfield, Illinois administrative
office, one of the three facilities anticipated to be sold at December 31, 2000.
Two facilities remain unsold at December 31, 2002. The net carrying amount for
these assets was $2,782 at December 31, 2002. We anticipate selling these assets
in 2003 or 2004. The relocation from the two leased facilities was completed
during 2001. We incurred charges of $1,219 (including a $171 non-cash reduction
to asset write-downs and $38 for lease terminations) during 2001 related to the
five facilities previously discussed and two additional relocations. Facility
moving costs were expensed as incurred and totaled $920. In the fourth quarter
of 2001, we recorded a non-cash charge of $1,600 for the anticipated sale of our
XL Technology Systems, Inc. subsidiary to management employees, which was
completed in the first quarter of 2002.
21
Integration--During 2002, we recorded integration costs of $526, which included
$216 to integrate our safety program with the acquired PDM Divisions and $289 to
integrate our engineering practices with those of the acquired PDM Divisions.
These costs were expensed as incurred. In 2001, we recorded charges of $1,170
relative to these initiatives. No further integration costs relative to the PDM
Divisions acquisition are anticipated to be incurred in 2003.
Tuban Project Valuation Allowance--In November 2000, we were carrying a net
$28,200 long-term receivable on our balance sheet related to the Tuban
(T.P.P.I.) Project, which is located in Indonesia, and had approximately $50,000
remaining in our backlog for the Tuban Project. We recognized a charge of
$28,200 in the fourth quarter of 2000 as a full valuation allowance against this
net long-term receivable and removed the $50,000 for the Tuban Project from our
backlog as we determined that the realizability of this long-term receivable and
backlog was no longer probable. This decision was based on our assessment of the
status of the Tuban Project and the extended period of time that the Tuban
Project had been suspended. While we continue to believe the Tuban Project could
return to viability with improvement in the political situation, we further
believe that it was appropriate to establish this valuation allowance to
properly reflect the current status in our financial statements.
5. DISCONTINUED OPERATIONS
During the second quarter of 2001, we decided to discontinue our high purity
piping business, UltraPure Systems ("UPS"), due primarily to continuing weak
market conditions in the microelectronics industry. The losses from discontinued
operations for the year ended December 31, 2001 were $2,321 (net of tax benefit
of $355) and for the year ended December 31, 2000 were $5,731 (net of tax
benefit of $2,161). The loss on disposal of discontinued operations of $9,898
(net of tax benefit of $2,338) includes the write-down of equipment (net of
proceeds), lease terminations, severance and other costs, and losses during the
phase-out period. Revenues for these operations were $15,913 for the year ended
December 31, 2001 and $22,417 for the year ended December 31, 2000. As a result
of these operations being classified as discontinued, prior periods have been
previously restated.
We sold our UPS Puerto Rican subsidiary to former management in July 2001 and
sold the business assets and operations of UPS's North Carolina operations in
August 2001. Our actions necessary to discontinue UPS were essentially complete
at December 31, 2001.
6. CONTRACTS IN PROGRESS
Contract terms generally provide for progress billings based on completion of
certain phases of the work. The excess of revenues recognized for construction
contracts over progress billings on contracts in progress is reported as a
current asset and the excess of progress billings over revenues recognized on
contracts in progress is reported as a current liability as follows:
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
CONTRACTS IN PROGRESS
- -----------------------------------------------------------------------------------------------------------------------------
Revenues recognized on contracts in progress $ 2,019,931 $ 1,762,129
Billings on contracts in progress (2,066,077) (1,789,886)
- -----------------------------------------------------------------------------------------------------------------------------
$ (46,146) $ (27,757)
=============================================================================================================================
Shown on balance sheet as:
Contracts in progress with earned revenues exceeding related progress billings $ 76,211 $ 71,549
Contracts in progress with progress billings exceeding related earned revenues (122,357) (99,306)
- -----------------------------------------------------------------------------------------------------------------------------
$ (46,146) $ (27,757)
=============================================================================================================================
7. GOODWILL AND OTHER INTANGIBLES
GOODWILL
General--At December 31, 2002 and 2001, our goodwill balance was $157,903 and
$138,444, respectively, attributable to the excess of the purchase price over
the fair value of assets acquired relative to acquisitions within our North
America segment.
Aggregate goodwill acquired during 2002 of $21,058 primarily relates to the
purchase of TPA, final adjustments to the purchase price allocation for the PDM
Divisions and Morse, and contingent earnout obligations associated with the
Howe-Baker acquisition. Accumulated amortization of goodwill at December 31,
2001 was $6,749.
Impairment Testing--Under the provisions of SFAS No. 142, goodwill balances were
required to be tested based upon a transitional impairment test in the first
interim period in which this statement was initially applied. In connection with
the adoption of this statement during the first quarter of 2002, we completed
our goodwill impairment assessment and concluded that no transitional impairment
charge was necessary. In addition to the transitional impairment test, SFAS No.
142 requires the performance of an annual goodwill impairment test in the year
that this statement is initially applied in its entirety. We elected to perform
our annual impairment test as of September 30, 2002 and determined that no
impairment charge was necessary. Impairment testing was accomplished by
comparing an estimate of discounted future cash flows to the net book value of
each reporting unit. Multiples of each reporting unit's EBITDA were also
utilized in our analysis as a comparative measure.
22
Pro Forma Information--The following table provides comparative results for the
years ended December 31, 2002, 2001, and 2000 for the effects resulting from our
adoption of SFAS No. 142:
2002 2001 2000
------------- ------------- -------------
Net income $ 50,149 $ 19,703 $ (33,775)
Add back: Goodwill and other indefinite lived intangibles
amortization (Net of taxes of $1,469 and $205) - 2,727 382
------------- ------------- -------------
Pro forma net income $ 50,149 $ 22,430 $ (33,393)
============= ============= =============
Net income per share
Basic:
Net income $ 1.16 $ 0.46 $ (1.80)
Goodwill and other indefinite lived intangibles
amortization, net of taxes - 0.06 0.02
------------- ------------- -------------
Pro forma net income $ 1.16 $ 0.52 $ (1.78)
============= ============= =============
Diluted:
Net income 1.12 $ 0.44 $ (1.80)
Goodwill and other indefinite lived intangibles
amortization, net of taxes - 0.06 0.02
------------- ------------- -------------
Pro forma net income $ 1.12 $ 0.50 $ (1.78)
============= ============= =============
OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, the following table provides information
concerning our other intangible assets for the years ended December 31, 2002 and
2001:
2002 2001
--------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- -------------
Amortized intangible assets
Technology (3 to 11 years) $ 6,221 $ (2,487) $ 5,021 $ (1,188)
Non-compete agreements (4 to 8 years) 4,810 (1,766) 4,810 (883)
Strategic alliances, customer contracts, patents
(3 to 11 years) 2,775 (714) 2,775 (367)
-------------- ------------ -------------- -------------
Total $ 13,806 $ (4,967) $ 12,606 $ (2,438)
============== ============ ============== =============
Unamortized intangible assets
Tradenames $ 24,717 $ 25,341
============== ==============
The change in other intangibles compared with 2001 primarily relates to the
purchase of TPA and final adjustments to the purchase price allocation for prior
acquisitions. Intangible amortization for the years ended 2002, 2001 and 2000
were $2,529, $1,623 and $12 respectively. For the years ended 2003, 2004, 2005,
2006 and 2007, amortization of existing intangibles is anticipated to be $2,513,
$1,830, $1,554, $687 and $687, respectively.
23
8. SUPPLEMENTAL BALANCE SHEET DETAIL
2002 2001
- ---------------------------------------------------------------------------------------
COMPONENTS OF PROPERTY AND EQUIPMENT
Land and improvements $ 20,837 $ 14,604
Buildings and improvements 40,421 34,362
Plant and field equipment 130,103 128,459
- ---------------------------------------------------------------------------------------
Total property and equipment 191,361 177,425
Accumulated depreciation (82,090) (71,427)
- ---------------------------------------------------------------------------------------
Net property and equipment $ 109,271 $ 105,998
=======================================================================================
COMPONENTS OF ACCRUED LIABILITIES
Payroll, vacation, bonuses and profit-sharing $ 25,225 $ 22,422
Self-insurance/retention reserves 8,199 6,643
Interest payable 3,169 3,507
Postretirement benefit obligations 4,237 2,711
Pension obligation 1,880 1,817
Discontinued operations, net 1,367 1,450
Voluntary resignation offer 3,099 1,170
Contract cost and other accruals 27,479 29,600
- ---------------------------------------------------------------------------------------
Accrued liabilities $ 74,655 $ 69,320
=======================================================================================
COMPONENTS OF OTHER NON-CURRENT LIABILITIES
Postretirement benefit obligations $ 27,902 $ 29,443
Self-insurance/retention reserves 13,046 12,193
Pension obligation 9,476 10,692
Other 12,037 17,015
- ---------------------------------------------------------------------------------------
Other non-current liabilities $ 62,461 $ 69,343
- ---------------------------------------------------------------------------------------
9. DEBT
The following summarizes our outstanding debt at December 31:
2002 2001
- ------------------------------------------------------------------------------------------------------
CURRENT:
NOTES:
Notes payable $ 14 $ 155
6.0% Notes payable with accrued interest and principal
due June 2002 - 5,700
REVOLVING CREDIT FACILITIES:
$50.0 million 364-day revolver expiring August 2003. Interest
at prime plus a margin or the British Bankers Association
settlement rate plus a margin as described below - -
- ------------------------------------------------------------------------------------------------------
Notes payable and current maturity of long-term debt $ 14 $ 5,855
- ------------------------------------------------------------------------------------------------------
LONG-TERM:
NOTES:
7.34% Senior Notes maturing July 2007. Principal due in equal annual
installments of $25 million from 2005 through 2007.
Interest payable semi-annually $ 75,000 $ 75,000
REVOLVING CREDIT FACILITIES:
$125.0 million four-year revolver expiring August 2006. Interest
at prime plus a margin or the British Bankers Association
settlement rate plus a margin as described below - -
- ------------------------------------------------------------------------------------------------------
Long-term debt 75,000 75,000
- ------------------------------------------------------------------------------------------------------
Notes payable consist primarily of short-term loans borrowed under commercial
credit facilities. These borrowings had a weighted average interest rate of 2.5%
and 1.3% at December 31, 2002 and 2001, respectively.
24
In August 2002, we entered into a new four-year $125,000 unsecured revolving
credit facility and a new 364-day $50,000 unsecured revolving credit facility,
both of which can be utilized for letters of credit and debt borrowings. These
facilities replaced two revolving credit facilities with comparable terms and
borrowing capacities. The new facilities provide for the annual extension of the
termination date, subject to mutual agreement between us and the bank group. In
addition to interest on debt borrowings, we are assessed quarterly commitment
fees on the unutilized portion of the credit facilities as well as letter of
credit fees on outstanding instruments. The interest, letter of credit fee and
commitment fee percentages are based upon our quarterly leverage ratio. The
facilities contain certain restrictive covenants including minimum levels of net
worth, interest coverage, fixed charge and leverage ratios, among other
restrictions. The facilities also place restrictions on us with regard to
subsidiary indebtedness, sales of assets, liens, investments, type of business
conducted, and mergers and acquisitions, among other restrictions. We were in
compliance with all covenants at December 31, 2002.
In July 2001, we completed a $75,000 private placement of senior notes to a
group of institutional investors. The notes contain a number of restrictive
covenants, including minimum levels of net worth and debt and fixed charge
ratios, among other restrictions. The notes also place restrictions on us with
regard to investments, other debt, subsidiary indebtedness, sales of assets,
liens, nature of business conducted and mergers, among other restrictions. We
were in compliance with all covenants at December 31, 2002.
Capitalized interest was insignificant in 2002, 2001 and 2000.
10. FINANCIAL INSTRUMENTS
Forward Contracts--At December 31, 2002 our forward contracts to hedge
intercompany loans, which matured within eight days following the year end, are
summarized as follows:
WEIGHTED AVERAGE
CURRENCY SOLD CURRENCY PURCHASED CONTRACT AMOUNT CONTRACT RATE
- ---------------------------------------------------------------------------------------------
Euros U.S. Dollars $ 2,639 1.00
British Pounds U.S. Dollars 925 0.64
Canadian Dollars U.S. Dollars 1,232 1.57
U.S. Dollars Australian Dollars 12,182 1.79
- ---------------------------------------------------------------------------------------------
At December 31, 2002 our forward contracts to hedge certain operating exposures,
which mature within the next seven months, included $2,585 and $269 to buy Euros
and sell South African Rand, respectively. These contracts were not designated
as "hedges" under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities."
The counterparties to our forward contracts are major financial institutions,
which we continually evaluate as to their creditworthiness. We have never
experienced, nor do we anticipate, nonperformance by any of our counterparties.
Fair Value--The carrying value of our cash and cash equivalents, accounts
receivable, accounts payable, notes payable and forward contracts approximates
their fair values because of the short-term nature of these instruments. At
December 31, 2002 and 2001, the fair value of our long-term debt was $80,748 and
$76,700 respectively based on current market rates for debt with similar credit
risk and maturities.
25
11. RETIREMENT BENEFITS
Defined Contribution Plans--We sponsor two contributory defined contribution
plans for eligible employees which consist of a voluntary pre-tax salary
deferral feature, a matching contribution, and a profit-sharing contribution in
the form of cash or our common stock to be determined annually. For the years
ended December 31, 2002, 2001 and 2000, we expensed $10,989, $9,464 and $7,897,
respectively, for these plans.
In addition, we sponsor several other defined contribution plans that cover
salaried and hourly employees for which we do not provide matching
contributions. The cost of these plans to us was not significant in 2002, 2001
and 2000.
Defined Benefit Plans--We currently sponsor various defined benefit pension
plans covering certain employees of our North American operations. Through the
Howe-Baker acquisition in 2000, we assumed an unfunded non-qualified plan for a
select group of former and current Howe-Baker employees. Additionally, in
connection with the PDM Divisions acquisition in 2001, we assumed three funded
qualified noncontributory plans. The following tables reflect combined
information for our defined benefit plans:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 180 $ 163 $ -
Interest cost 973 968 501
Expected return on plan assets (1,354) (1,449) (1,108)
Amortization of prior service costs 8 - -
Recognized net actuarial loss/(gain) 102 207 (115)
Settlement loss due to distribution of surplus to members - - 521
- --------------------------------------------------------------------------------------------------------------------------
Net periodic pension income $ (91) $ (111) $ (201)
==========================================================================================================================
2002 2001
- ------------------------------------------------------------------------------------------------------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 14,547 $ 9,549
Acquisition - 4,921
Service cost 180 163
Interest cost 973 968
Actuarial loss 1,110 758
Benefits paid (1,318) (1,443)
Currency translation 87 (369)
- ------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 15,579 $ 14,547
- ------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS 2002 2001
- ------------------------------------------------------------------------------------------------------
Fair value at beginning of year $ 17,429 $ 14,134
Acquisition - 5,508
Actual loss on plan assets (1,089) (345)
Benefits paid (1,318) (955)
Employer contribution 43 (219)
Currency translation 156 (694)
- ------------------------------------------------------------------------------------------------------
Fair value at end of year $ 15,221 $ 17,429
- ------------------------------------------------------------------------------------------------------
Funded status $ (356) $ 2,882
Unrecognized net prior service costs 94 100
Unrecognized net actuarial losses (gains) 4,870 (339)
Accrued settlement - 2,000
- ------------------------------------------------------------------------------------------------------
Net amount recognized $ 4,608 $ 4,643
======================================================================================================
Amounts recognized in the balance sheet consist of:
Prepaid pension costs $ 7,274 $ 7,027
Accrued benefit liability (4,057) (2,569)
Accumulated other comprehensive income, before taxes 1,391 185
- ------------------------------------------------------------------------------------------------------
Net amount recognized $ 4,608 $ 4,643
- ------------------------------------------------------------------------------------------------------
26
The defined benefit plans assets consist of cash, short-term fixed income funds
and long-term investments, including equity and fixed-income securities. The
significant assumptions used in determining our pension expense and the related
pension obligations were:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Discount rate 5.75 - 6.75% 6.25 - 7.25% 7.00 - 7.50%
Rate of compensation increase * * *
Long-term rate of return on plan assets 7.25-8.50% 7.50 - 9.00% 7.50%
- ----------------------------------------------------------------------------------------------------------
* The rate of compensation increase is not applicable as benefits under certain
of our defined benefit plans are based upon years of service, while remaining
defined benefit plans primarily cover retirees, whereby future compensation is
not a factor.
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $8,571, $8,478 and $4,747 for 2002, respectively,
and $5,930, $5,803 and $3,335 for 2001, respectively.
In 2000, we anticipated the wind up of a Canadian subsidiary's plan and
recognized a $2,000 special charge reflecting the estimated termination value of
the pension assets. However, market and cost considerations resulted in the
reversal of this decision and special charge in 2001.
We made contributions to certain union sponsored multi-employer pension plans of
$4,689, $5,097 and $4,249 in 2002, 2001 and 2000, respectively. Benefits under
these defined benefit plans are generally based on years of service and
compensation levels. Under U.S. legislation regarding such pension plans, a
company is required to continue funding its proportionate share of a plan's
unfunded vested benefits in the event of withdrawal (as defined by the
legislation) from a plan or plan termination. We participate in a number of
these pension plans, and the potential obligation as a participant in these
plans may be significant. The information required to determine the total amount
of this contingent obligation, as well as the total amount of accumulated
benefits and net assets of such plans, is not readily available.
Postretirement Health Care and Life Insurance Benefits--We provide certain
health care and life insurance benefits for our retired employees through two
health care and life insurance benefit programs. Retiree health care benefits
are provided under an established formula, which limits costs based on prior
years of service of retired employees. These plans may be changed or terminated
by us at any time.
The following tables reflect information for our assumed and current employees:
COMPONENTS OF NET PERIODIC POSTRETIREMENT BENEFIT COST 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Service cost $ 999 $ 778 $ 214
Interest cost 1,453 1,234 582
Unrecognized prior service cost (101) (101) (108)
Recognized net actuarial gain 1 (14) (12)
- --------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2,352 $ 1,897 $ 676
==========================================================================================================================
CHANGE IN POSTRETIREMENT BENEFIT OBLIGATION 2002 2001
- ------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 18,659 $ 11,063
Service cost 999 778
Interest cost 1,453 1,234
Actuarial loss 3,020 225
Effect of plan change - 104
Retiree contributions 686 675
Benefits paid (2,107) (1,532)
Acquisition 897 6,112
- ------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 23,607 $ 18,659
======================================================================================================
Funded status (23,607) (18,659)
Unrecognized prior service cost (776) (878)
Unrecognized net actuarial loss /(gain) 2,962 (56)
- -------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ (21,421) $ (19,593)
======================================================================================================
The significant assumptions used in determining the other postretirement benefit
expense were a discount rate of 7.25% in 2002, 7.50% in 2001 and 7.75% in 2000
and health care cost trend rates projected at annual rates ranging from 10.5% in
2003 down to 5.0% in 2011. The acquisition amounts in 2002 reflect the addition
of the TPA employees to our postretirement benefit programs. The assumption
change in 2001 relates to the addition of life insurance benefits for certain
personnel under a program assumed in connection with the Howe-Baker acquisition.
The acquisition amounts in 2001 reflect the addition of the PDM Divisions
employees to our postretirement benefit programs.
The medical plan for retirees, other than those covered by the Howe-Baker
program, offers a defined dollar benefit; therefore, a one percentage point
increase or decrease in the assumed rate of medical inflation would not affect
the accumulated postretirement benefit obligation, service cost and interest
cost. Under the Howe-Baker program, increasing/(decreasing) the assumed health
care cost trends by one percentage point is estimated to increase/(decrease) the
accumulated postretirement benefit obligation at December 31, 2002 by
27
$1,622 and ($1,376), and the total of the service interest cost components of
net postretirement health care cost for the year then ended by $228 and ($186).
Obligations to Former Parent--In connection with the 1997 reorganization and
initial public offering, we agreed to make fixed payments to our former parent
to fund certain defined benefit and postretirement benefit obligations. The
remaining obligations were $8,689 and $10,876 at December 31, 2002, for defined
benefit and postretirement benefit obligations, respectively. As of December 31,
2001, the defined benefit and postretirement benefit obligations were $10,137
and $12,561, respectively. These obligations are payable with interest ratably
through December 2008. Interest expense accruing at a contractual rate of 7.5%
per year associated with the defined benefit obligations totaled $747, $855 and
$963 for 2002, 2001 and 2000, respectively, and the postretirement benefit
obligation, also accruing interest at 7.5%, totaled $925, $1,058 and $1,193 for
2002, 2001 and 2000, respectively.
12. MINORITY INTEREST AND RELATED LONG-TERM RECEIVABLE
As part of our acquisition of Howe-Baker, we assumed $27,000 of minority
interest related to Howe-Baker's acquisition of Schedule A, Ltd. ("Schedule A")
on October 1, 1998. Effective on this date, Schedule A was admitted as a partner
in Howe-Baker, LP ("HBLP"). Howe-Baker contributed $19,785 to HBLP and Schedule
A contributed contracts in process and its net operating assets ($4,886) and
intangible assets ($22,114). At closing, HBLP loaned to Schedule A $19,785
(carried as a long-term receivable on the balance sheet). Interest accrues at
LIBOR plus a variable rate of interest of 1.9% through June 1, 2003, 2.9%
through June 1, 2004, 3.9% through June 1, 2005, and 4.9% through the date of
maturity of June 1, 2006. Interest is payable semiannually.
Beginning January 1, 2003, and ending May 1, 2006, Schedule A has the option to
require HBLP to redeem, or Howe-Baker to purchase, all or part of Schedule A's
partnership interest in HBLP. Any partnership interest not voluntarily redeemed
or sold by Schedule A prior to May 1, 2006 will be mandatorily redeemed on that
date. Schedule A has the right to exercise its option in whole, or the right may
be exercised proportionately by Schedule A on behalf of a Schedule A partner.
The consideration to be paid for Schedule A's partnership interest will be
$19,785, plus an additional amount based on the profitability of Howe-Baker
throughout the option period as calculated in accordance with the terms of the
related option agreement. The additional undiscounted consideration was
estimated to be $8,981 as of December 31, 2002 and $6,083 as of December 31,
2001, resulting in a total redemption price for the Schedule A partnership
interest of approximately $28,766 as of December 31, 2002 and $25,868 as of
December 31, 2001.
13. COMMITMENTS AND CONTINGENCIES
Leases--Certain facilities and equipment, including project-related field
equipment, are rented under operating leases that expire at various dates
through 2021. Rent expense on operating leases totaled $17,617, $15,188, and
$12,156 in 2002, 2001, and 2000, respectively.
In June 2001, we entered into a sale-leaseback arrangement of our Plainfield,
Illinois office with net proceeds of $13,992. The difference between the book
value and sale price resulted in a gain, which was deferred and is being
amortized over the 20-year life of the lease.
Future minimum payments under non-cancelable operating leases having initial
terms of one year or more are as follows:
AMOUNT
- -------------------------------------------------------------------
2003 $ 13,027
2004 10,542
2005 6,275
2006 4,844
2007 2,857
Thereafter 20,074
- -------------------------------------------------------------------
$ 57,619
- -------------------------------------------------------------------
In the normal course of business, we enter into lease agreements with
cancellation provisions as well as agreements with initial terms of less than
one year. The costs related to these leases have been reflected in rent expense
but have been appropriately excluded from the future minimum payments presented
above. Amounts related to assets under capital lease were immaterial for the
periods presented.
Antitrust Proceedings--On October 25, 2001, the U.S. Federal Trade Commission
("FTC") announced its decision to file an administrative complaint ("the
Complaint") challenging our February 2001 acquisition of certain assets of the
Engineered Construction Division of PDM. The Complaint alleges that the
acquisition violated Federal antitrust laws by substantially lessening
competition in certain field erected specialty industrial storage tank related
work in the United States: LNG tanks, LPG tanks, LIN/LOX/LAR tanks, and thermal
vacuum chambers. The FTC is seeking various remedies, including an order that
would require us to divest sufficient assets and personnel to re-establish two
distinct and separate viable and competing businesses engaged in the design,
engineering, fabrication, construction, and sale of the relevant product lines.
28
We believe the Complaint is without merit. A hearing before an FTC
administrative law judge was completed on January 16, 2003 and we are awaiting
the decision of the FTC judge. We expect the impact of the FTC proceeding on our
earnings will be minimal in 2003. While we are unable at this time to assess the
ultimate outcome of the litigation or potential effect of any divestiture order
or other remedy on our business, financial condition and results of operations,
certain of the remedies currently proposed by the FTC, if implemented, could
have a material adverse effect on the Company.
Environmental Matters--Our facilities have operated for many years and
substances, which currently are or might be considered hazardous, were used and
disposed of at some locations, which will or may require us to make expenditures
for remediation. In addition, we have agreed to indemnify parties to whom we
have sold facilities for certain environmental liabilities arising from acts
occurring before the dates those facilities were transferred. We are aware of no
manifestation by a potential claimant of awareness by such claimant of a
possible claim or assessment with respect to such facilities. We do not consider
it to be probable that a claim will be asserted with respect to such facilities
which claim is reasonably possible to have an unfavorable outcome, which in each
case would be material to us. We believe that any potential liability for these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
We do not anticipate incurring material capital expenditures for environmental
controls or for investigation or remediation of environmental conditions during
the current or succeeding fiscal year. Nevertheless, we can give no assurance
that we, or entities for which we may be responsible, will not incur liability
in connection with the investigation and remediation of facilities we currently
(or formerly) own or operate or other locations in a manner that could
materially and adversely affect us.
Other--We are a defendant in a number of other lawsuits arising in the normal
course of our business. We believe that an estimate of the possible loss or
range of possible loss relating to such matters cannot be made. While it is
impossible at this time to determine with certainty the ultimate outcome of
these lawsuits and although no assurance can be given with respect thereto,
based on information currently available to us and our belief as to the
reasonable likelihood of the outcomes of such matters, our management believes
that adequate provision has been made for probable losses with respect thereto.
We believe that the ultimate outcome, after provisions therefore, will not have
a material adverse effect, either individually or in the aggregate, on our
business, financial condition or results of operations. The adequacy of reserves
applicable to the potential costs of being engaged in litigation and potential
liabilities resulting from litigation is reviewed as developments in the
litigation warrant.
Letters of Credit/Bank Guarantees/Surety Bonds
Ordinary Course Commitments--In the ordinary course of business, we may obtain
surety bonds and letters of credit, which we provide to our customers to secure
advance payment, our performance under the contracts or in lieu of retention
being withheld on our contracts. In the event of our non-performance under a
contract and an advance being made by a bank pursuant to a draw on a letter of
credit, the advance would become a borrowing under a credit facility and thus a
direct obligation of the Company. Where a surety incurs such a loss, an
indemnity agreement between the parties and the Company may require payment from
our excess cash or a borrowing under our revolving credit facilities. When a
contract is completed, the contingent obligation terminates and the bonds or
letters of credit returned. At December 31, 2002, we had provided $486,455 of
surety bonds and letters of credit to support our contracting activities in the
ordinary course of business. This amount fluctuates based on the mix and level
of contracting activity.
Insurance--We have elected to retain portions of losses, if any, through the use
of deductibles and self-insured retentions for our exposures related to
third-party liability and workers' compensation. Liabilities in excess of these
amounts are the responsibilities of an insurance carrier. To the extent we are
self-insured for these exposures, reserves (Note 8) have been provided based on
management's best estimates with input from our legal and insurance advisors.
Changes in assumptions, as well as changes in actual experience, could cause
these estimates to change in the near term. Our management believes that the
reasonably possible losses, if any, for these matters, to the extent not
otherwise disclosed and net of recorded reserves, will not be material to our
financial position or results of operations. At December 31, 2002, we had
outstanding surety bonds and letters of credit of $22,268 relating to our
insurance program.
14. SHAREHOLDERS' EQUITY
Stock Split-- On January 22, 2003, we declared a two-for-one stock split
effective in the form of a stock dividend payable February 10, 2003 to
stockholders of record at the close of business on February 3, 2003. All share
numbers and amounts have been adjusted for the stock split for all periods
presented.
Stock Held in Trust--During 1999, we established a Trust to hold 1,411,120
unvested restricted stock units (valued at $9.00 per share) for two executive
officers. The restricted stock units, which vested in March 2000, entitle the
participants to receive one common share for each stock unit on the earlier of
(i) the first business day after April 1, 2004, (ii) the first business day
after termination of employment, or (iii) a change of control. These shares are
considered outstanding for basic and diluted EPS computations. The total value
of the shares placed in the Trust was $12,735.
During 2001, 272,314 restricted stock units were distributed from the Trust in
connection with the departure of a former executive.
From time to time, we grant restricted shares to key employees under our
Long-Term Incentive Plan. The restricted shares are transferred to the trust and
held until the vesting restrictions lapse, at which time the shares are released
from the Trust and distributed to the employees.
29
Treasury Stock - Under Dutch law and our Articles of Association, we may hold no
more than 10% of our issued share capital at any time. In order to allow
implementation of proposed repurchases of our share capital authorized by the
shareholders which might be in excess of 10% (and up to 30%), we must dispose of
or cancel shares which have been repurchased. From time to time, we request
authority from our shareholders at the Annual General Meeting of Shareholders to
cancel up to 20% of the current issued share capital in multiple tranches, with
no tranche to exceed 10%. We cancelled shares in 2001 and 2000.
Accumulated Other Comprehensive Income (Loss)--The components of accumulated
other comprehensive income (loss) are as follows:
CURRENCY UNREALIZED MINIMUM ACCUMULATED OTHER
TRANSLATION LOSS ON DEBT PENSION LIABILITY COMPREHENSIVE
ADJUSTMENT SECURITIES ADJUSTMENT INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ (7,242) $ - $ - $ (7,242)
Change in 2000 (net of tax of $1,416) (2,630) - - (2,630)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 (9,872) - - (9,872)
Change in 2001 (net of tax of $1,402, $254 and $65) (2,603) (473) (120) (3,196)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 (12,475) (473) (120) (13,068)
Change in 2002 (net of tax of $1,507, $56 and $487) (2,798) (105) (904) (3,807)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ (15,273) $ (578) $ (1,024) $ (16,875)
==================================================================================================================================
The unrealized loss on debt securities resulted from a mark-to-market loss on a
cash flow hedge for the private placement debt issuance (Note 9). The minimum
pension liability adjustment relates to the acquired PDM Divisions pension plan
liabilities (Note 11).
15. STOCK PLANS
Employee Stock Purchase Plan--During 2001, the shareholders adopted an employee
stock purchase plan under which sale of 1,000,000 shares of our common stock has
been authorized. Employees may purchase shares at a discount on a quarterly
basis through regular payroll deductions of up to 8% of their compensation. The
shares are purchased at 85% of the closing price per share on the first trading
day following the end of the calendar quarter. As of December 31, 2002, 794,860
shares remain available for purchase.
Long-Term Incentive Plans--Under our 1997 and 1999 Long-Term Incentive Plans, as
amended (the "Incentive Plans"), we can issue shares in the form of stock
options, performance shares or restricted shares. Of the 8,363,510 shares
authorized for grant under the Incentive Plans, 2,264,446 shares remain
available for grant at December 31, 2002.
Stock Options--Stock options are generally granted at the fair market value on
the date of grant and expire after 10 years. Options granted to executive
officers and other key employees typically vest over a three to four year
period, while options granted to Supervisory Directors vest over a one-year
period. The following table summarizes the changes in stock options for the
years ended December 31, 2002, 2001 and 2000:
WEIGHTED AVERAGE
STOCK OPTIONS EXERCISE PRICE PER SHARE EXERCISE PRICE PER SHARE
- ----------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2000 1,711,362 $ 4.60 - $ 9.00 $ 7.92
Granted 2,388,498 $ 7.35 - $ 8.35 $ 8.22
Forfeited (55,332) $ 6.57 - $ 9.00 $ 8.21
Exercised (4,750) $ 6.57 $ 6.57
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 4,039,778 $ 4.60 - $ 9.00 $ 8.12
Granted 293,580 $ 10.50 - $ 17.05 $ 12.63
Forfeited (38,960) $ 8.35 $ 8.35
Exercised (365,078) $ 4.60 - $ 9.00 $ 8.17
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 3,929,320 $ 4.60 - $ 17.05 $ 8.45
Granted 944,672 $ 12.50 - $ 16.07 $ 14.05
Forfeited (18,866) $ 6.75 - $ 16.93 $ 11.67
Exercised (215,788) $ 6.57 $ 9.00 $ 8.25
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 4,639,338 $ 4.60 $ 17.05 $ 9.59
================================================================================================================
The weighted average fair value of options granted during 2002, 2001 and 2000
was $12.40, $13.16 and $8.36, respectively. The number of outstanding fixed
stock options exercisable at December 31, 2001 and 2000 was 939,820 and 658,486,
respectively. These options had a weighted average exercise price of $7.84 and
$7.82 at December 31, 2001 and 2000, respectively.
During 2000, the vesting of 331,276 outstanding options was accelerated due to
either change of control provisions triggered by the Howe-Baker acquisition or
the voluntary resignation offer as fully described in Note 4.
30
The following summarizes information about stock options outstanding at December
31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
$4.60 - $6.75 543,650 6.0 $ 6.53 469,534 $ 6.52
$7.34 - $11.00 3,004,480 7.0 8.52 1,715,434 8.47
$11.43 - $17.05 1,091,208 9.1 14.04 62,578 14.53
- -----------------------------------------------------------------------------------------------------------------------
4,639,338 7.4 $ 9.59 2,247,546 $ 8.23
=======================================================================================================================
31
Restricted Shares--Restricted shares generally vest over four years. Total
compensation expense of $756, $1,125 and $2,969 was recognized in 2002, 2001 and
2000, respectively. Certain performance shares, which were targeted to vest over
three years, subject to achievement of specific Company goals, were converted to
time-vested restricted shares during 2000. The following table shows the changes
in restricted shares:
2002 2001 2000
- --------------------------------------------------------------------------------------------
Shares subject to restriction at beginning of year 476,814 600,336 371,946
Restricted share grants 43,840 110,366 150,410
Restricted share distributions (193,796) (232,128) (108,884)
Restricted share forfeitures (840) (1,760) (12,600)
Performance shares converted to restricted shares - - 199,464
- --------------------------------------------------------------------------------------------
Shares subject to restriction at end of year 326,018 476,814 600,336
============================================================================================
16. INCOME TAXES
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
SOURCES OF INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. 32,896 3,277 (23,874)
Non-U.S. 39,298 44,628 (7,688)
- ---------------------------------------------------------------------------------------------------------------------------------
Total 72,194 47,905 (31,562)
=================================================================================================================================
INCOME TAX (EXPENSE) BENEFIT
- ---------------------------------------------------------------------------------------------------------------------------------
Current Income Taxes
U.S. (736) 0 0
Non-U.S. (6,512) (7,438) (4,046)
- ---------------------------------------------------------------------------------------------------------------------------------
(7,248) (7,438) (4,046)
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes
U.S. (11,614) (2,392) 7,285
Non-U.S. (1,371) (3,650) 1,620
- ---------------------------------------------------------------------------------------------------------------------------------
(12,985) (6,042) 8,905
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income Tax (Expense) Benefit (20,233) (13,480) 4,859
=================================================================================================================================
RECONCILIATION OF INCOME TAXES AT THE STATUTORY RATE AND INCOME TAX (EXPENSE) BENEFIT
- ---------------------------------------------------------------------------------------------------------------------------------
Tax (Expense) Benefit at Statutory Rate (25,268) (16,767) 11,047
State Income Taxes (479) (478) 0
Non-U.S. Statutory Tax Rate Differential 7,782 4,541 (5,408)
Other, net (2,268) (776) (780)
- ---------------------------------------------------------------------------------------------------------------------------------
Income Tax (Expense) Benefit (20,233) (13,480) 4,859
=================================================================================================================================
Effective Tax Rate 28.0% 28.1% (15.0%)
Our statutory rate was The Netherlands' rate of 35% in 2002, 2001 and 2000.
The principal temporary differences included in deferred income taxes reported
on the December 31, 2002 and 2001 balance sheets were:
32
2002 2001
- ------------------------------------------------------------------------------
CURRENT DEFERRED TAXES
- ------------------------------------------------------------------------------
Tax Benefit of U.S. Operating Losses and Credits 3,585 7,000
Contracts 7,487 5,561
Employee Benefits 1,541 4,937
Voluntary Resignation Offer 918 744
Insurance 83 83
Other 3,491 2,201
- ------------------------------------------------------------------------------
17,105 20,526
- ------------------------------------------------------------------------------
NON-CURRENT DEFERRED TAXES
- ------------------------------------------------------------------------------
Employee Benefits 6,485 11,629
Non-U.S. Activity 10,106 8,378
Insurance 7,167 3,904
Other (4,895) 7,229
- ------------------------------------------------------------------------------
18,863 31,140
Depreciation (10,586) (9,665)
- ------------------------------------------------------------------------------
Net Deferred Tax Assets 25,382 42,001
==============================================================================
As of December 31, 2002, we had U.S. net operating loss carryforwards ("NOL's")
of approximately $20,285, $18,300 of which are subject to limitation under
Internal Revenue Code Section 382. The U.S. NOL's will expire from 2012 to 2021.
We did not record any Netherlands deferred income taxes on indefinitely
reinvested undistributed earnings of our subsidiaries and affiliates at December
31, 2002. If any such undistributed earnings were distributed, the Netherlands
participation exemption should become available under current law to
significantly reduce or eliminate any resulting Netherlands income tax
liability.
17. SEGMENT INFORMATION
We manage our operations by four geographic segments: North America; Europe,
Africa, Middle East; Asia Pacific; and Central and South America. Each
geographic segment offers similar services.
The Chief Executive Officer evaluates the performance of these four segments
based on revenues and income from operations excluding special charges. Each
segment's performance reflects the allocation of corporate costs, which were
based primarily on revenues. No customer accounted for more than 10% of
revenues. Intersegment revenues are not material.
The following table presents revenues by geographic segment:
2002 2001 2000
- --------------------------------------------------------------------------
REVENUES
- --------------------------------------------------------------------------
North America $ 801,624 $ 726,629 $ 304,520
Europe, Africa, Middle East 132,853 124,226 176,542
Asia Pacific 95,935 39,917 55,482
Central and South America 118,066 191,052 75,147
- --------------------------------------------------------------------------
Total revenues $ 1,148,478 $ 1,081,824 $ 611,691
==========================================================================
The following table indicates revenues for individual countries in excess of 10%
of consolidated revenues during any of the three years ended December 31, 2002,
based on where we performed the work:
2002 2001 2000
- ----------------------------------------------------------------------------
United States $ 750,935 $ 665,217 $ 242,024
The following tables present income from operations, assets and capital
expenditures by geographic segment:
33
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS, EXCLUDING SPECIAL CHARGES
- ------------------------------------------------------------------------------------------------------
North America $ 52,100 $ 42,161 $ 15,398
Europe, Africa, Middle East 3,603 1,402 5,468
Asia Pacific 2,270 (203) 3,298
Central and South America 23,712 20,769 4,695
- ------------------------------------------------------------------------------------------------------
Total income from operations, excluding special charges $ 81,685 $ 64,129 $ 28,859
======================================================================================================
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Special Charges (Note 4) $ 3,972 $ 9,686 $ 55,664
- ------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- ------------------------------------------------------------------------------------------------------
North America $ 49,413 $ 36,272 $ (6,238)
Europe, Africa, Middle East 3,032 (274) 2,169
Asia Pacific 1,950 (538) (26,155)
Central and South America 23,318 18,983 3,419
- ------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 77,713 $ 54,443 $ (26,805)
======================================================================================================
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
North America $ 581,046 $ 501,538 $ 389,958
Europe, Africa, Middle East 85,474 59,228 81,182
Asia Pacific 31,246 25,786 23,605
Central and South America 42,670 61,713 43,670
- ------------------------------------------------------------------------------------------------------
Total assets $ 740,436 $ 648,265 $ 538,415
======================================================================================================
Our revenues earned and assets attributable to operations in The Netherlands
were not significant in any of the three years ended December 31, 2002. Our
long-lived assets are considered to be net property and equipment. Approximately
74% of these assets were located in the United States for the year ended
December 31, 2002, while the other 26% were strategically located throughout the
world.
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
- ------------------------------------------------------------------------------------------------------
North America $ 20,123 $ 7,448 $ 4,981
Europe, Africa, Middle East 2,718 779 736
Asia Pacific 1,037 56 343
Central and South America 49 634 293
- ------------------------------------------------------------------------------------------------------
Total capital expenditures $ 23,927 $ 8,917 $ 6,353
======================================================================================================
Although we manage our operations by the four geographic segments, revenues by
project type are shown below:
34
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
REVENUES
- ------------------------------------------------------------------------------------------------------
Process Plants $ 318,832 $ 209,434 $ -
Flat Bottom Tanks 286,345 313,879 234,049
Elevated Tanks 149,404 145,143 61,998
Specialty and Other Structures 127,801 71,995 54,150
Low Temperature/Cryogenic Tanks and Systems 90,687 135,392 90,481
Repairs and Modifications 77,516 84,468 79,045
Pressure Vessels 61,776 51,397 45,951
Turnarounds 36,117 70,116 46,017
- ------------------------------------------------------------------------------------------------------
Total revenues $ 1,148,478 $ 1,081,824 $ 611,691
======================================================================================================
18. QUARTERLY OPERATING RESULTS AND COMMON STOCK DIVIDENDS (UNAUDITED)
Quarterly Operating Results--The following table sets forth our selected
unaudited consolidated income statement information on a quarterly basis for the
two years ended December 31, 2002:
QUARTER ENDED 2002 March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------
Revenues $ 259,272 $ 284,686 $ 275,831 $ 328,689
Gross profit 35,090 38,138 38,267 44,056
Net income 10,258 12,394 13,174 14,323
Net income per share - basic 0.24 0.29 0.30 0.32
Net income per share - diluted 0.24 0.28 0.29 0.31
Common dividends per share 0.03 0.03 0.03 0.03
QUARTER ENDED 2001 March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------
Revenues $ 235,368 $ 263,857 $ 277,774 $ 304,825
Gross profit 28,295 32,657 34,015 41,809
Income from continuing operations 5,405 7,206 8,020 11,291
Loss from discontinued operations (1,939) (10,280) - -
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,466 $ (3,074) $ 8,020 $ 11,291
- -------------------------------------------------------------------------------------------------------
Net income per share--basic
Income from continuing operations $ 0.13 $ 0.15 $ 0.19 $ 0.27
Loss from discontinued operations (0.05) (0.22) - -
- -------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.08 $ (0.07) $ 0.19 $ 0.27
- -------------------------------------------------------------------------------------------------------
Net income per share--diluted
Income from continuing operations $ 0.13 $ 0.15 $ 0.18 $ 0.26
Loss from discontinued operations (0.05) (0.21) - -
- -------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 0.08 $ (0.06) $ 0.18 $ 0.26
- -------------------------------------------------------------------------------------------------------
Common dividends per share $ 0.03 $ 0.03 $ 0.03 $ 0.03
- -------------------------------------------------------------------------------------------------------
Shareholder Information--Our Common Stock is traded on the New York Stock
Exchange. We delisted from the Euronext Amsterdam Exchange during 2001, as
minimal shares were traded there. As of February 2003, we had approximately
4,400 shareholders. The following table presents the range of Common Stock
prices on the New York Stock Exchange for the years ended December 31, 2002 and
2001:
35
RANGE OF COMMON STOCK PRICES
QUARTER ENDED 2002 March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------
High $ 14.92 $ 16.50 $ 15.00 $ 15.12
Low 12.20 12.93 11.57 11.58
Close 14.86 14.10 12.00 15.10
- ----------------------------------------------------------------------------
QUARTER ENDED 2001 March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------
High $ 13.68 $ 19.30 $ 17.41 $ 13.35
Low 8.38 11.85 9.53 9.80
Close 11.88 16.93 9.98 13.35
- ----------------------------------------------------------------------------
36