Exhibit 13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We derived the following summary financial and operating data for the five years
ended December 31, 1999 through 2003 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 per share and employee data)
YEARS ENDED DECEMBER 31, 2003 2002 2001 2000 1999
- ------------------------------------------------ ----------- ------------ ------------ ---------- -----------
INCOME STATEMENT DATA
Revenues $ 1,612,277 $ 1,148,478 $ 1,081,824 $ 611,691 $ 674,386
Cost of revenues 1,415,715 992,927 945,048 542,721 596,695
----------- ------------ ------------ ---------- -----------
Gross profit 196,562 155,551 136,776 68,970 77,691
Selling and administrative expenses 93,506 73,155 67,519 41,913 48,997
Intangibles amortization 2,548 2,529 5,819 599 514
Other operating income, net (1) (2,833) (1,818) (691) (2,401) (2,788)
Exit costs / Special charges (2) - 3,972 9,686 55,664 -
----------- ------------ ------------ ---------- -----------
Income (loss) from operations 103,341 77,713 54,443 (26,805) 30,968
Interest expense (6,579) (7,114) (8,392) (5,187) (2,980)
Interest income 1,300 1,595 1,854 430 766
----------- ------------ ------------ ---------- -----------
Income (loss) before taxes and minority interest 98,062 72,194 47,905 (31,562) 28,754
Income tax (expense) benefit (29,713) (20,233) (13,480) 4,859 (8,061)
----------- ------------ ------------ ---------- -----------
Income (loss) before minority interest 68,349 51,961 34,425 (26,703) 20,693
Minority interest in income (2,395) (1,812) (2,503) (1,341) (1,171)
----------- ------------ ------------ ---------- -----------
Income (loss) from continuing operations 65,954 50,149 31,922 (28,044) 19,522
----------- ------------ ------------ ---------- -----------
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) (6) $ 65,954 $ 50,149 $ 19,703 $ (33,775) $ 18,384
=========== ============ ============ ========== ===========
PER SHARE DATA (2) (5) (6)
Net income (loss)--basic
Income (loss) from continuing operations $ 1.46 $ 1.16 $ 0.74 $ (1.49) $ 0.89
Loss from discontinued operations - - (0.28) (0.31) (0.05)
----------- ------------ ------------ ---------- -----------
Net income (loss) $ 1.46 $ 1.16 $ 0.46 $ (1.80) $ 0.84
----------- ------------ ------------ ---------- -----------
Net income (loss)--diluted
Income (loss) from continuing operations $ 1.39 $ 1.12 $ 0.71 $ (1.49) $ 0.87
Loss from discontinued operations - - (0.27) (0.31) (0.05)
----------- ------------ ------------ ---------- -----------
Net income (loss) $ 1.39 $ 1.12 $ 0.44 $ (1.80) $ 0.82
----------- ------------ ------------ ---------- -----------
Dividends $ 0.16 $ 0.12 $ 0.12 $ 0.12 $ 0.12
----------- ------------ ------------ ---------- -----------
BALANCE SHEET DATA
Goodwill $ 219,033 $ 157,903 $ 138,444 $ 132,426 $ 18,010
Total assets $ 929,486 $ 740,436 $ 648,265 $ 538,415 $ 336,773
Long-term debt $ 75,000 $ 75,000 $ 75,000 $ 101,800 $ 25,000
Total shareholders' equity $ 389,164 $ 282,147 $ 212,223 $ 155,747 $ 104,410
----------- ------------ ------------ ---------- -----------
CASH FLOW DATA
Cash flows from operating activities $ 90,366 $ 72,030 $ 105,796 $ 4,085 $ 22,461
Cash flows from investing activities $ (102,030) $ (36,957) $ (35,775) $ (65,567) $ (8,911)
Cash flows from financing activities $ 22,046 $ 16,985 $ (27,034) $ 50,618 $ (779)
----------- ------------ ------------ ---------- -----------
OTHER FINANCIAL DATA
Gross profit percentage 12.2% 13.5% 12.6% 11.3% 11.5%
Depreciation and amortization $ 21,431 $ 19,661 $ 25,105 $ 16,838 $ 17,698
Capital expenditures $ 31,286 $ 23,927 $ 8,917 $ 6,353 $ 13,379
----------- ------------ ------------ ---------- -----------
OTHER DATA
Number of employees:
Salaried 2,895 2,152 2,054 1,676 1,371
Hourly and craft 7,337 4,770 5,204 3,618 4,257
New business taken (4) $ 1,708,210 $ 1,641,128 $ 1,160,374 $ 680,776 $ 712,973
Backlog (4) $ 1,590,381 $ 1,310,987 $ 835,255 $ 597,350 $ 507,472
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. These commitments are included in backlog until
work is performed and revenue is 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 paid 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 ("EPC")
company serving customers in several primary end markets, including hydrocarbon
refining, natural gas, water and the energy sector in general. We have been
helping our 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, offshore structures, pipelines, 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.
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, 2003 2002 2001
- ---------------------------------- ------------- ------------- -------------
NEW BUSINESS TAKEN (1)
North America $ 1,105,369 $ 1,014,375 $ 818,459
Europe, Africa, Middle East 380,493 375,897 87,724
Asia Pacific 147,238 139,907 105,788
Central and South America 75,110 110,949 148,403
============= ============= =============
Total new business taken $ 1,708,210 $ 1,641,128 $ 1,160,374
============= ============= =============
REVENUES
North America $ 970,851 $ 801,624 $ 726,629
Europe, Africa, Middle East 329,947 132,853 124,226
Asia Pacific 218,201 95,935 39,917
Central and South America 93,278 118,066 191,052
============= ============= =============
Total revenues $ 1,612,277 $ 1,148,478 $ 1,081,824
============= ============= =============
INCOME (LOSS) FROM OPERATIONS
North America $ 67,762 $ 49,413 $ 36,272
Europe, Africa, Middle East 17,384 3,032 (274)
Asia Pacific 6,000 1,950 (538)
Central and South America 12,195 23,318 18,983
============= ============= =============
Total income from operations $ 103,341 $ 77,713 $ 54,443
============= ============= =============
(1) New business taken represents the value of new project commitments received
by us during a given period. These commitments are included in backlog until
work is performed and revenue is recognized or until cancellation.
2003 VERSUS 2002
NEW BUSINESS TAKEN/BACKLOG -- New business taken during 2003 was $1.7 billion,
compared with $1.6 billion in 2002. Approximately 65% of the new business taken
during 2003 was for contracts awarded in North America. During 2003, new
business taken increased 9% in the North America segment due primarily to
increased awards of EPC contracts for the hydrocarbon industries. Significant
awards in the United States included two LNG expansion projects, one in excess
of $90 million and another in excess of $80 million, and a $65 million
hydrotreater project. New business taken for the Europe, Africa, Middle East
("EAME") segment approximated 2002, with significant awards including a $95
million LNG terminal project in Russia, a $50 million tankage project in Oman
and a $50 million liquefied petroleum gas ("LPG") storage project in Qatar. New
business taken in our Asia Pacific ("AP") segment increased 5%, with significant
awards including a refrigerated storage project in Australia and a butane
storage facility in China. New business taken in the Central and South America
("CSA") segment decreased 32% during 2003 as a result of continued negative
political and economic conditions in certain Latin American markets, principally
Venezuela. We anticipate new business in 2004 to range between $1.8 and $1.9
billion due to our established position and global presence in the markets we
serve. Our strength in growing markets, such as LNG and clean fuels, together
with the increased demand for lump sum, turnkey contracting, continues to
differentiate us from our competitors. Synergistic benefits from recent
acquisitions are also expected to favorably impact 2004.
Backlog increased $279.4 million or 21% to $1.6 billion at December 31, 2003.
3
REVENUES -- Revenues in 2003 of $1.6 billion rose 40% compared with 2002. The
growth over 2002 was primarily attributable to the strong backlog going into
2003, as projects moved into the field construction phase. 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
2003, revenues increased 21% in the North America segment, 148% in the EAME
segment, 127% in the AP segment, but declined 21% in the CSA segment. The
increase in the North America segment related primarily to higher volumes of
process-related work as backlog carried over from 2002 was put in place and
strong new business continued in 2003. Revenue growth in the EAME segment
resulted from large projects under way in Saudi Arabia and Nigeria and the
inclusion of post-acquisition revenues from the John Brown Hydrocarbons Limited
("John Brown") acquisition made on May 30, 2003. The increase in the AP segment
related to large projects under way in China and Australia, while CSA's decrease
was a result of lower new awards in certain Latin American markets. We
anticipate that total revenues for 2004 will be between $1.7 and $1.8 billion.
Based upon the current backlog, we expect the majority of the 2004 revenue
growth to come in the North America and EAME segments.
GROSS PROFIT -- Gross profit in 2003 was $196.6 million, or 12.2% of revenues,
compared with $155.6 million or 13.5% of revenues, in 2002. Gross profit as a
percentage of revenues fell as a result of timing and mix of projects being
executed. Based on the current mix of projects in backlog, 2004 gross profit as
a percentage of revenues is anticipated to be in line with 2003 levels.
SELLING AND ADMINISTRATIVE EXPENSES -- Selling and administrative expenses were
$93.5 million, or 5.8% of revenues, in 2003, compared with $73.2 million, or
6.4% of revenues, in 2002. The absolute dollar increase compared with 2002
related primarily to higher incentive compensation program costs, higher
insurance costs and the impact of acquired operations.
EXIT COSTS/SPECIAL CHARGES -- There were no exit costs/special charges incurred
during 2003 compared with $4.0 million in 2002. During 2002 we recorded special
charges of $3.4 million related to the relocation of our Plainfield, Illinois
office personnel to The Woodlands, Texas. 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. Moving, replacement personnel and integration costs have been
expensed as incurred. For a further discussion of the special charges, see Note
4 to our Consolidated Financial Statements.
INCOME FROM OPERATIONS -- Income from operations in 2003 was $103.3 million,
representing a $25.6 million increase compared with 2002. The North America,
EAME and AP segments benefited from higher revenues and continued cost control
of overhead and administrative expenses. Operating income declined in the CSA
segment due to lower revenues and the recognition in 2002 of cost savings on
several major contracts nearing completion.
INTEREST EXPENSE AND INTEREST INCOME -- Interest expense decreased $0.5 million
from the prior year to $6.6 million for 2003, due to lower average debt levels
in 2003. Interest income decreased $0.3 million from 2002 to $1.3 million in
2003.
INCOME TAX EXPENSE -- Income tax expense was $29.7 million and $20.2 million in
2003 and 2002, respectively. The effective tax rates for 2003 and 2002 were
30.3% and 28.0%, respectively. The rate increased in 2003 as a larger portion of
earnings were generated in North America. As of December 31, 2003, we had U.S.
net operating loss carryforwards ("NOLs") of approximately $17.6 million, of
which $13.4 million is subject to limitation under Internal Revenue Code Section
382. The U.S. NOLs will expire from 2019 to 2021.
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
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 in our
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 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 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.
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. 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.
4
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 related 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 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 acquisition.
INCOME 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 Standards ("SFAS") 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.
INCOME TAX EXPENSE -- 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, cash and cash equivalents totaled $112.9 million. During
2003, our operations generated $90.4 million of cash flows, primarily
attributable to strong profitability.
In 2003, we incurred $31.3 million for capital expenditures, which included
$15.6 million for the construction costs of our new administrative office in
Texas. For 2004, capital expenditures are anticipated to be in the $20.0 to
$25.0 million range. Additionally, we reported proceeds of $8.3 million related
to the sale of assets held for sale and property and equipment. Our utilization
of cash also included approximately $54.0 million to fund our acquisitions of
Petrofac, Inc. ("Petrofac") and John Brown and a $3.4 million payment for
earnout obligations associated with a 2000 acquisition.
In connection with our acquisition of Howe-Baker International, L.L.C.
("Howe-Baker") in 2000, we assumed Howe-Baker's minority interest associated
with a majority-owned subsidiary and two earnout arrangements which are
contingent upon the performance of the underlying acquired entities. One of the
arrangements which has and will continue to require us to make cash payments to
the previous owners expires in July 2004 while the other arrangement was
scheduled to expire on or before December 31, 2008 ("2008 Earnout"), subject to
certain of our call rights and the put rights of the previous owners. In 2003,
we exercised our call option to purchase the remaining minority interest and
also negotiated final settlement of the 2008 Earnout. Total consideration for
the purchase of the minority interest and the 2008 Earnout was $20.6 million
cash and satisfaction of a $19.8 million receivable due from the minority
holder.
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.
Net cash flows provided by financing activities were $22.0 million including
proceeds from a public offering of 9.9 million shares of our common stock. The
offering consisted of 8.9 million secondary shares, for which we received no
proceeds, and 1.0 million primary shares. We utilized the proceeds from the
primary shares of approximately $20.3 million for general corporate purposes,
including settlement of the 2008 Earnout. Cash dividends of $7.3 million were
paid during 2003.
Our primary internal source of liquidity is cash flow generated from operations.
Capacity under revolving credit agreements is also available, if necessary, to
fund operating or investing activities. We have a three-year $233.3 million
revolving credit facility and a five-year $116.7 million letter of credit
facility, which terminate in August 2006 and August 2008, respectively. Both
facilities are committed and unsecured. As of December 31, 2003, no direct
borrowings existed under the revolving credit facility, but we had issued
5
$135.1 million of letters of credit under the three-year facility and $0.3
million under the five-year facility. As of December 31, 2003, we had $214.6
million of available capacity under these facilities. The facilities contain
certain restrictive covenants including minimum levels of net worth, 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, 2003.
We also have various short-term, uncommitted revolving credit facilities across
several geographic regions of approximately $236.6 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 December 31, 2003, we
had available capacity of $81.6 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 contract performance.
For a further discussion of letters of credit and surety bonds, see Note 13 to
our Consolidated Financial Statements.
Our $75.0 million of senior notes also contain a number of restrictive
covenants, including a maximum leverage ratio and 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, 2003.
As of December 31, 2003, 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 $ 290,286 $ 119,631 $ 161,009 $ 9,646 $ -
Surety Bonds 365,033 275,085 89,763 185 -
-------------- ----------------- ------------- -------------- -------------
Total Commitments $ 655,319 $ 394,716 $ 250,772 $ 9,831 $ -
============== ================= ============= ============== =============
Note: Includes $17,808 of letters of credit issued in support of our insurance
program.
Contractual obligations at December 31, 2003, are summarized below:
PAYMENTS DUE BY PERIOD
(In thousands) Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- --------------------------------- -------------- ----------------- ------------- -------------- -------------
Long-Term Debt (1) $ 75,000 $ - $ 50,000 $ 25,000 $ -
Operating Leases 52,719 15,765 12,551 5,979 18,424
Other Non-Current Liabilities (2) 16,222 3,332 6,445 6,445 -
Purchase Obligations (3) - - - - -
-------------- ----------------- ------------- -------------- -------------
Total Contractual Obligations $ 143,941 $ 19,097 $ 68,996 $ 37,424 $ 18,424
============== ================= ============= ============== =============
(1) Excludes interest accruing at a rate of 7.34%.
(2) Amounts represent other non-current liabilities reflected on our
consolidated balance sheet where both the timing and amount of payment streams
are known. Included are certain retirement benefit obligations. Amounts do not
include payments for defined benefit obligations, other postretirement benefit
obligations, self-insurance/retention reserves, and various other obligations,
as amounts have not been determined beyond one year.
(3) In the ordinary course of business, we enter into purchase commitments to
satisfy our requirements for materials and supplies for contracts that have been
awarded. These purchase commitments, that are to be recovered from our
customers, are generally settled in less than one year. We do not enter into
long-term purchase commitments on a speculative basis for fixed or minimum
quantities.
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,
the settlement of earnout obligations, the settlement of commitments and
contingencies (as fully described in Note 13 to our Consolidated Financial
Statements) and working capital needs for the foreseeable future. However, there
can be no assurance 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 can be no assurance that such a facility will be
available at reasonable terms to service our ordinary course obligations.
We are a defendant in a number of lawsuits arising in the normal course of
business, including among others, lawsuits wherein plaintiffs allege exposure to
asbestos due to work we may have performed at various locations. We have never
been a manufacturer, distributor or supplier of asbestos products, and we have
in place appropriate insurance coverage for the type of work that we have
performed. During 2003, we were named as a defendant in additional
asbestos-related lawsuits. To date, we have been able to dismiss
6
or settle all such claims without a material impact on our operating results or
financial position and do not currently believe that the asserted claims will
have a material adverse effect on our future results of operations or financial
position. As a matter of standard policy, we continually review our litigation
accrual and as further information is known on pending cases, increases or
decreases, as appropriate, may be recorded in accordance with SFAS No. 5,
"Accounting for Contingencies."
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.
One exposure to fluctuating exchange rates relates to the effects of translating
the financial statements of our non-U.S. subsidiaries, which are denominated in
currencies other than the U.S. dollar, into the U.S. dollar. The foreign
currency translation adjustments are recognized in shareholders' equity in
accumulated other comprehensive income (loss) as cumulative translation
adjustment, net of tax. We generally do not hedge our exposure to potential
foreign currency translation adjustments.
Another form of foreign currency exposure relates to our non-U.S. subsidiaries'
normal contracting activities. We generally try to limit our exposure to foreign
currency fluctuations in most of our engineering and construction contracts
through provisions that require client payments in U.S. dollars or other
currencies corresponding to the currency in which costs are incurred. As a
result, we generally do not need to hedge foreign currency cash flows for
contract work performed. However, where construction contracts do not contain
foreign currency provisions, we use forward exchange contracts to hedge foreign
currency transaction exposure. The gains and losses on these contracts offset
changes in the value of the related exposures. As of December 31, 2003, the
notional amount of cash flow hedge contracts outstanding was $23.2 million, and
the fair value of these contracts was approximately $2.0 million. The terms of
these contracts generally do not exceed one year.
In circumstances where intercompany loans and or borrowings are in place with
non-U.S. subsidiaries, we will also use forward contracts. If the timing or
amount of foreign-denominated cash flows varies, we incur foreign exchange gains
or losses, which are included in the consolidated statements of income. We do
not use financial instruments for trading or speculative purposes.
We maintain operations and have construction projects in Venezuela, which
continued to experience negative political and economic conditions during 2003.
As a result, the Venezuelan Bolivar, which devalued more than 85% against the
U.S. dollar in 2002, was subject to trading restrictions in 2003. As of December
31, 2003, we had $0.8 million of net assets in Venezuela that are subject to
foreign currency translation adjustments. As noted above, the exposure on our
construction projects is generally limited by contractual provisions. However,
we will continue to face currency exposure on our net assets.
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,
2003 and 2002, the fair value of our fixed rate long-term debt was $82.0 million
and $80.7 million, respectively, based on the 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.
NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("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. Our adoption of this statement effective January 1, 2003, did not have a
significant impact on our financial statements for the year ended December 31,
2003.
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 was to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Our adoption of this statement
effective January 1, 2003, did not have a significant impact on our financial
statements for the year ended December 31, 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
7
requirements in both annual and interim financial statements. We will continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for stock
options. The disclosure requirements of SFAS No. 148 are presented in our Stock
Plans discussion in Note 2 to our Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which is an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." The
interpretation states that certain variable interest entities may be required to
be consolidated into the results of operations and financial position of the
entity that is the primary beneficiary. The change may be made prospectively
with a cumulative-effect adjustment in the period first applied or by restating
previously issued financial statements. Our adoption of this interpretation
effective July 1, 2003, did not have a significant impact on our financial
statements for the year ended December 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
provides clarification on financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. This statement is
effective for contracts entered into or modified after June 30, 2003, and was
applied prospectively. Our adoption of this statement effective July 1, 2003,
did not have a significant impact on our financial statements for the year ended
December 31, 2003.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revised
standard requires annual and interim disclosures in addition to those in the
original standard concerning the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. This statement is effective for fiscal years ending after
December 15, 2003. See Note 11 to our Consolidated Financial Statements for the
revised disclosure requirements of SFAS No. 132.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1 ("FSP
106-1"), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," which provides
temporary guidance concerning the recently enacted Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act"). SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," requires presently
enacted changes in laws that will take effect in future periods to be taken into
account in measuring current period postretirement benefit cost and the
accumulated projected benefit obligation ("APBO"). FSP 106-1 allows companies
that sponsor affected postretirement benefit plans to elect to defer recognizing
the effects of the Act on postretirement benefit expense and on the APBO
pursuant to SFAS No. 106. We have elected to defer accounting for the effects of
the Act until 2004.
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:
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 the
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
include retentions to be collected within one year. Contract retentions
collectible beyond one year are included in other non-current assets. 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
creditworthiness. 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.
8
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," which 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 our Consolidated Financial Statements. Our goodwill balance at December 31,
2003, was $219.0 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. In
addition to the material risks listed under "Risk Factors," as set forth in our
Form 10-K, that may cause our actual results, performance or achievements to be
materially different from those expressed or implied by any forward-looking
statements, the following factors could also cause our results to differ from
such statements:
- our ability to realize cost savings from our expected
execution performance of contracts;
- the uncertain timing and the funding of new contract awards,
and project cancellations and operations risks;
- the expected growth in our primary end markets does not occur;
- cost overruns on fixed price contracts, and risks associated
with percentage of completion accounting;
- changes in the costs of or delivery schedule for components
and materials;
- 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;
- 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 downturn in the economy in general; and
- disruptions caused by war in the Middle East or terrorist
attacks in the United States or other countries in which we
operate.
Although we believe the expectations reflected in our 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.
9
INDEPENDENT AUDITORS' REPORT
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 (the Company) as
of December 31, 2003 and 2002, and the related consolidated statements of
income, shareholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 2003 and 2002
consolidated financial statements based on our audits. The consolidated
financial statements as of December 31, 2001 and for the year then ended, before
the adjustments and reclassifications 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 the 2001
consolidated financial statements in their report dated February 11, 2002.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements present
fairly, in all material respects, the financial position of Chicago Bridge &
Iron Company N.V. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 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 Chicago Bridge &
Iron Company N.V. and subsidiaries as of December 31, 2001, were audited by
other auditors who have ceased operations. Those 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 financial statements
for such stock split. Our audit procedures included (1) comparing the amounts
shown in the earnings per share disclosures for 2001 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
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
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 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 disclosures
in
10
Note 11 included (1) comparing the previously reported tabular presentation of
each defined benefit plan to a combining schedule prepared by the Company's
management, and (2) testing the mathematical accuracy of the underlying
analysis.
In our opinion, the adjustments, transitional disclosures and reclassifications
to the 2001 consolidated 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 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 other form
of assurance on the 2001 financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
March 9, 2004
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 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 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 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
11
CHICAGO BRIDGE & IRON COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------- ----------- ----------- -----------
Revenues $ 1,612,277 $ 1,148,478 $ 1,081,824
Cost of revenues 1,415,715 992,927 945,048
----------- ----------- -----------
Gross profit 196,562 155,551 136,776
Selling and administrative expenses 93,506 73,155 67,519
Intangibles amortization (Note 7) 2,548 2,529 5,819
Other operating income, net (2,833) (1,818) (691)
Exit costs / special charges (Note 4) - 3,972 9,686
----------- ----------- -----------
Income from operations 103,341 77,713 54,443
Interest expense (6,579) (7,114) (8,392)
Interest income 1,300 1,595 1,854
----------- ----------- -----------
Income before taxes and minority interest 98,062 72,194 47,905
Income tax expense (Note 16) (29,713) (20,233) (13,480)
----------- ----------- -----------
Income before minority interest 68,349 51,961 34,425
Minority interest in income (2,395) (1,812) (2,503)
----------- ----------- -----------
Income from continuing operations 65,954 50,149 31,922
----------- ----------- -----------
Discontinued operations (Note 5):
Loss from discontinued operations, net of taxes - - (2,321)
Loss on disposal of discontinued operations, net of taxes - - (9,898)
----------- ----------- -----------
Net income $ 65,954 $ 50,149 $ 19,703
=========== =========== ===========
Net income (loss) per share (Note 2)
Basic
Income from continuing operations $ 1.46 $ 1.16 $ 0.74
Loss from discontinued operations - - (0.28)
----------- ----------- -----------
Net income $ 1.46 $ 1.16 $ 0.46
----------- ----------- -----------
Diluted
Income from continuing operations $ 1.39 $ 1.12 $ 0.71
Loss from discontinued operations - - (0.27)
----------- ----------- -----------
Net income $ 1.39 $ 1.12 $ 0.44
----------- ----------- -----------
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, 2003 2002
- --------------------------------------------------------------- --------- ----------
ASSETS
Cash and cash equivalents $ 112,918 $ 102,536
Accounts receivable, net of allowance for doubtful accounts
of $1,178 in 2003 and $2,274 in 2002 200,521 194,334
Contracts in progress with costs and estimated earnings 142,235 48,423
exceeding related progress billings (Note 6)
Deferred income taxes (Note 16) 23,509 17,856
Assets held for sale - 1,958
Other current assets 33,244 11,680
--------- ----------
Total current assets 512,427 376,787
--------- ----------
Property and equipment, net (Note 8) 124,505 109,271
Long-term receivable (Note 12) - 19,785
Deferred income taxes (Note 16) - 7,526
Goodwill (Note 7) 219,033 157,903
Other intangibles, net of accumulated amortization of $7,494 in 30,949 33,556
2003 and $4,967 in 2002 (Note 7)
Other non-current assets 42,572 35,608
--------- ----------
Total assets $ 929,486 740,436
========= ==========
LIABILITIES
Notes payable (Note 9) $ 1,901 $ 14
Accounts payable 143,258 84,413
Accrued liabilities (Note 8) 95,237 74,655
Contracts in progress with progress billings exceeding related 130,497 122,357
costs and estimated earnings (Note 6)
Income taxes payable 5,359 5,631
--------- ----------
Total current liabilities 376,252 287,070
--------- ----------
Long-term debt (Note 9) 75,000 75,000
Deferred income taxes (Note 16) 10,179 -
Other non-current liabilities (Note 8) 71,983 62,461
Minority interest in subsidiaries (Note 12) 6,908 33,758
--------- ----------
Total liabilities 540,322 458,289
--------- ----------
Commitments and contingencies (Note 13) - -
SHAREHOLDERS' EQUITY
Common stock, Euro .01 par value; shares authorized: 80,000,000
in 2003 and 2002; shares issued: 46,697,732 in 2003 and
44,565,172 in 2002; shares outstanding: 46,694,415
in 2003 and 44,325,744 in 2002 475 210
Additional paid-in capital 283,625 245,916
Retained earnings 126,521 68,064
Stock held in Trust (Note 14) (11,719) (12,332)
Treasury stock, at cost (108) (2,836)
Accumulated other comprehensive loss (Note 14) (9,630) (16,875)
--------- ----------
Total shareholders' equity 389,164 282,147
--------- ----------
Total liabilities and shareholders' equity $ 929,486 $ 740,436
========= ==========
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, 2003 2002 2001
- -------------------------------------------------------------------------------- ---------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 65,954 $ 50,149 $ 19,703
Adjustments to reconcile net income to net cash provided by operating activities:
Exit costs/special charges, net of deferred income taxes of $0, $1,350, and $3,104 - 2,622 6,582
Payments related to exit costs/special charges (1,511) (5,954) (14,785)
Depreciation and amortization 21,431 19,661 25,105
Gain on sale of property and equipment (2,833) (1,123) (691)
Loss on discontinued operations - - 12,219
Change in operating assets and liabilities (see below) 7,325 6,675 60,819
---------- --------- --------
Net cash provided by continuing operating activities 90,366 72,030 108,952
---------- --------- --------
Net cash used in discontinued operating activities - - (3,156)
---------- --------- --------
Net cash provided by operating activities 90,366 72,030 105,796
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of business acquisitions, net of cash acquired (79,029) (17,588) (47,848)
Capital expenditures (31,286) (23,927) (8,917)
Proceeds from sale of assets held for sale 4,935 - 13,992
Proceeds from sale of property and equipment 3,350 4,558 2,788
---------- --------- --------
Net cash used in continuing investing activities (102,030) (36,957) (39,985)
---------- --------- --------
Net cash provided by discontinued investing activities - - 4,210
---------- --------- --------
Net cash used in investing activities (102,030) (36,957) (35,775)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (13) (5,841) (721)
Proceeds from private placement - - 75,000
Net repayment under revolving credit facility - - (96,100)
Issuance of common stock 27,084 25,207 45,920
Purchase of treasury stock (2,029) (668) (49,103)
Issuance of treasury stock 4,261 3,474 3,197
Dividends paid (7,257) (5,187) (5,227)
---------- --------- --------
Net cash provided by/(used in) financing activities 22,046 16,985 (27,034)
---------- --------- --------
Increase in cash and cash equivalents 10,382 52,058 42,987
Change in cash and cash equivalents of discontinued operations - - 40
Cash and cash equivalents, beginning of the year 102,536 50,478 7,451
---------- --------- --------
Cash and cash equivalents, end of the year $ 112,918 $ 102,536 $ 50,478
========== ========= ========
CHANGE IN OPERATING ASSETS AND LIABILITIES
Decrease/(increase) in receivables, net $ 10,614 $ (26,874) $ 36,854
(Increase)/decrease in contracts in progress, net (80,479) 18,389 39,120
Increase/(decrease) in accounts payable 49,048 10,690 (16,100)
(Increase)/decrease in other current assets (7,679) 6,559 (8,677)
Increase in income taxes payable and deferred income taxes 12,701 9,711 9,769
Increase in accrued and other non-current liabilities 21,904 197 6,829
Decrease/(increase) in other 1,216 (11,997) (6,976)
---------- --------- --------
Total $ 7,325 $ 6,675 $ 60,819
========== ========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 7,341 $ 7,750 $ 6,851
Cash paid for income taxes $ 16,557 $ 8,450 $ 2,258
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, 2001 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)
Comprehensive income (loss) - - - 65,954 - -
Stock dividends to common shareholders - 240 - (240) - -
Dividends to common shareholders - - - (7,257) - -
Long-Term Incentive Plan amortization - - 3,962 - - -
Issuance of treasury stock to Trust 5 - 18 - 5 (70)
Issuance of common stock to Trust 40 1 869 - 40 (870)
Release of Trust shares - - (1,553) - (130) 1,553
Purchase of treasury stock (192) - - - - -
Issuance of treasury stock 423 - (2,567) - - -
Issuance of common stock 2,092 24 36,980 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 46,694 $ 475 $ 283,625 $126,521 1,365 $(11,719)
- ---------------------------------------------------------------------------------------------------------------------------
Treasury Stock Accumulated
------------------- Other Total
NUMBER OF Comprehensive Shareholders'
SHARES Amount Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------
Balance at January 1, 2001 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
Comprehensive income (loss) - - 7,245 73,199
Stock dividends to common shareholders - - - -
Dividends to common shareholders - - - (7,257)
Long-Term Incentive Plan amortization - - - 3,962
Issuance of treasury stock to Trust (5) 52 - -
Issuance of common stock to Trust - - - -
Release of Trust shares - - - -
Purchase of treasury stock 192 (4,152) - (4,152)
Issuance of treasury stock (423) 6,828 - 4,261
Issuance of common stock - - - 37,004
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 3 $ (108) $ (9,630) $ 389,164
- ----------------------------------------------------------------------------------------------------
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 technology and
specialty engineering, procurement and construction ("EPC") company serving
customers in several primary end markets, including hydrocarbon refining,
petrochemical, 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, offshore structures, pipelines, 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.
NATURE OF OPERATIONS--Projects for the worldwide petroleum and petrochemical
industry accounted for a majority of our revenues in 2003, 2002 and 2001.
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 2003 and 2002 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 the
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, 2003
and 2002, we had net outstanding claims recognized of $6,970 and $5,946,
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 at December 31, 2003 and 2002 were currently due and included
retentions totaling $32,533 and $21,401, respectively to be collected within one
year. Contract retentions collectible beyond one year at December 31, 2003 and
2002, totaled $11,254 ($7,938 anticipated to be collected in 2005 and $3,316 in
2006) and $6,387, respectively and were included in other non-current assets.
Cost of revenues includes direct contract costs such as material and
construction labor, and indirect costs which are attributable to contract
activity.
Cost and estimated earnings to date in excess of progress billings on contracts
in process are classified as current assets, and progress billings in excess of
cost and estimated earnings to date are classified as current liabilities.
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, 2003 or 2002.
16
RESEARCH AND DEVELOPMENT--Expenditures for research and development activities,
which are charged to expense as incurred, amounted to $4,403 in 2003, $3,056 in
2002 and $1,650 in 2001.
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, which substantially extend the useful life of
an asset, are capitalized and depreciated. Depreciation expense was $18,883 in
2003, $17,132 in 2002 and $19,286 in 2001.
Goodwill and indefinite-lived intangibles are no longer amortized in accordance
with the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 142 (see Note 7). Finite-lived other
intangibles are amortized on a straight-line basis over 3 to 11 years, while
other intangibles with indefinite useful lives are not amortized.
IMPAIRMENT OF LONG-LIVED ASSETS--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 or
asset group will be compared to the asset's carrying amount to determine if
impairment exists. See Note 7 for additional discussion relative to goodwill and
indefinite-lived intangibles impairment testing.
PER SHARE COMPUTATIONS--Basic earnings per share ("EPS") is calculated by
dividing income from continuing operations, income (loss) from discontinued
operations and net income 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/performance shares, directors deferred
fee shares and warrants. No shares were considered antidilutive for 2003.
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:
2003 2002 2001
---- ---- ----
Income from continuing operations $ 65,954 $ 50,149 $ 31,922
Loss from discontinued operations
- - (12,219)
----------- ----------- -----------
Net income $ 65,954 $ 50,149 $ 19,703
----------- ----------- -----------
Weighted average shares outstanding - basic 45,314,808 43,176,888 43,249,692
Effect of stock options/restricted shares/performance shares 2,162,881 1,512,484 1,408,446
Effect of directors deferred fee shares 49,312 47,166 40,662
Effect of warrants - - 35,030
----------- ----------- -----------
Weighted average shares outstanding - diluted 47,527,001 44,736,538 44,733,830
=========== =========== ===========
Net income (loss) per share
Basic
Income from continuing operations $ 1.46 $ 1.16 $ 0.74
Loss from discontinued operations - - (0.28)
----------- ----------- -----------
Net income $ 1.46 $ 1.16 $ 0.46
=========== =========== ===========
Diluted
Income from continuing operations $ 1.39 $ 1.12 $ 0.71
Loss from discontinued operations - - (0.27)
----------- ----------- -----------
Net income $ 1.39 $ 1.12 $ 0.44
=========== =========== ===========
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 risks, 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 as cumulative translation adjustment, net of tax. Foreign
currency exchange gains/(losses) are included in the consolidated statements of
income, and were $1,002 in 2003, $2,340 in 2002 and $128 in 2001.
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.
Forward contracts utilized to mitigate operating exposures are generally
designated as "cash flow hedges" under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Therefore, gains and losses associated with
marking these instruments to market are included in
17
accumulated other comprehensive income (loss) on our consolidated balance sheet.
Gains or losses on forward contracts to hedge intercompany loans are included in
the consolidated statements of income. 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. Reported net income does not include any compensation expense
associated with stock options, but does include compensation expense associated
with restricted stock and performance share awards. See Note 15 for additional
discussion relative to our stock plans.
Had compensation expense for the Employee Stock Purchase Plan and Long-Term
Incentive Plans been determined consistent with the fair value method of SFAS
No. 123, "Accounting for Stock-Based Compensation" (using the Black-Scholes
pricing model for stock options), our net income and net income per common share
would have reflected the following pro forma amounts:
2003 2002 2001
---- ---- ----
Net Income, as reported $ 65,954 $ 50,149 $ 19,703
Add: Stock-based compensation for restricted
stock and performance share awards included in
reported net income, net of tax 2,397 457 681
Deduct: Stock-based compensation determined
under the fair value method, net of tax (5,340) (3,945) (3,951)
---------- ---------- ----------
Pro forma net income $ 63,011 $ 46,661 $ 16,433
========== ========== ==========
BASIC EPS
As reported $ 1.46 $ 1.16 $ 0.46
Pro forma $ 1.39 $ 1.08 $ 0.38
---------- ---------- ----------
DILUTED EPS
As reported $ 1.39 $ 1.12 $ 0.44
Pro forma $ 1.33 $ 1.04 $ 0.37
---------- ---------- ----------
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:
2003 2002 2001
---- ---- ----
Risk-free interest rate 3.28% 4.74% 5.18%
Expected dividend yield 1.05% 0.86% 0.97%
Expected volatility 48.52% 42.73% 42.27%
Expected life in years 6 6 10
INCOME TAXES--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 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. Our
adoption of this statement effective January 1, 2003, did not have a significant
impact on our financial statements for the year ended December 31, 2003.
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.
18
146 replaces Issue 94-3. SFAS No. 146 was to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Our adoption of this
statement effective January 1, 2003, did not have a significant impact on our
financial statements for the year ended December 31, 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 APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for stock options. The disclosure
requirements of SFAS No. 148 are presented above in our Stock Plans discussion.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which is an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." The
interpretation states that certain variable interest entities may be required to
be consolidated into the results of operations and financial position of the
entity that is the primary beneficiary. The change may be made prospectively
with a cumulative-effect adjustment in the period first applied or by restating
previously issued financial statements. Our adoption of this interpretation
effective July 1, 2003, did not have a significant impact on our financial
statements for the year ended December 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
provides clarification on financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. This statement is
effective for contracts entered into or modified after June 30, 2003 and was
applied prospectively. Our adoption of this statement effective July 1, 2003,
did not have a significant impact on our financial statements for the year ended
December 31, 2003.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revised
standard requires annual and interim disclosures in addition to those in the
original standard concerning the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. This statement is effective for fiscal years ending after
December 15, 2003. See Note 11 for the revised disclosure requirements of SFAS
No. 132.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1 ("FSP
106-1"), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," which provides
temporary guidance concerning the recently enacted Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act"). SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," requires presently
enacted changes in laws that will take effect in future periods to be taken into
account in measuring current period postretirement benefit cost and the
accumulated projected benefit obligation ("APBO"). FSP 106-1 allows companies
that sponsor affected postretirement benefit plans to elect to defer recognizing
the effects of the Act on postretirement benefit expense and on the APBO
pursuant to SFAS No. 106. We have elected to defer accounting for the effects of
the Act until 2004.
3. ACQUISITIONS
2003
On April 29, 2003, we acquired certain assets and assumed certain liabilities of
Petrofac Inc. ("Petrofac"), an EPC company serving the hydrocarbon processing
industry for consideration of $26,255, including transaction costs, of which
$24,355 was paid during 2003. The remaining $1,900, which is reflected as notes
payable on the December 31, 2003 Consolidated Balance Sheet, is payable in
monthly installments through the second quarter of 2004. The acquired operations
located in Tyler, Texas, have been fully integrated within our North America
segment's CB&I Howe-Baker unit and expand our capacity to engineer, fabricate
and install EPC projects for the oil refining, oil production, gas treating and
petrochemical industries.
On May 30, 2003, we acquired certain assets and assumed certain liabilities of
John Brown Hydrocarbons Limited ("John Brown"), for consideration of $29,984,
including transaction costs, net of cash acquired. John Brown provides
comprehensive engineering, program and construction management services for the
offshore, onshore and pipeline sectors of the hydrocarbon industry, as well as
for LNG terminals and flue gas desulfurization plants. The acquired operations,
located in London, Moscow, the Caspian Region and Canada, have been integrated
into our Europe, Africa, Middle East ("EAME") segment. This addition strengthens
our international engineering and execution platform and expands our
capabilities into the upstream oil and gas sector.
The purchase prices, including transaction costs, for the above acquisitions
were allocated to the net assets acquired based upon their estimated fair market
values on the date of acquisition and the balance of approximately $45,000 was
recorded as goodwill. The net assets and operating results have been included in
our financial statements from the respective dates of the acquisitions.
Pro-forma financial information has not been disclosed separately as the amounts
were not material to our overall financial condition or results of operations.
19
The following table summarizes the initial purchase price allocation of Petrofac
and John Brown net assets acquired at the date of acquisition:
2003
----
Current assets $ 28,032
Property, plant and equipment 4,306
Goodwill 44,777
Current liabilities 14,332
Non-current liabilities 6,544
--------
$ 56,239
--------
The balances included in the Consolidated Balance Sheets related to acquisitions
completed in the last 12 months are based upon preliminary information and are
subject to change when additional information concerning final asset and
liability valuations is obtained.
Also during 2003, we increased our purchase consideration by $17,901 related to
contingent earnout obligations associated with the Howe-Baker International
L.L.C. ("Howe-Baker") acquisition (see also Note 7).
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 EPC 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.
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.
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 was not 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. 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, LNG, 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,
20
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.
4. EXIT COSTS / SPECIAL CHARGES
Effective January 1, 2003, we were required to record costs for exit or disposal
activities in accordance with SFAS No. 146. Moving replacement personnel and
integration costs will be recorded as incurred. However, there were no exit or
disposal activities initiated after January 1, 2003. Prior to January 1, 2003 we
recorded special charges in accordance with EITF 94-3. Our accrued expense
balances and activity relating to special charges for the years ended December
31, 2003, 2002 and 2001 were as follows:
PERSONNEL FACILITIES
COSTS AND OTHER INTEGRATION TOTAL
----- --------- ----------- -----
Balance at January 1, 2001 $ 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
Cash payments (1,511) - - (1,511)
--------- ---------- ----------- ----------
Balance at December 31, 2003 $ 2,110 $ 492 $ - $ 2,602
========= ========== =========== ==========
(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"). 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.
Previously accrued expenses of $170 associated with the Move and $1,341
associated with the Offer were paid during 2003, while obligations of $1,958
associated with the Offer and $30 associated with the Move are anticipated to be
paid during 2004. The remaining balance associated with personnel costs is
anticipated to be paid during 2005 and 2006. 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.
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
Fairbanks, 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 2004. During 2000, we
made a commitment to downsize or lower costs at five facilities worldwide
including non-cash asset write-downs and lease terminations. 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, 2003. The net
carrying amount for these assets was $2,782 at December 31, 2003. We anticipate
selling these assets in 2004 or 2005. 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.
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.
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 loss from discontinued
operations for the year ended December 31, 2001 was $2,321 (net of tax benefit
of $355). 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
21
during the phase-out period. Revenues for these operations were $15,913 for the
year ended December 31, 2001. 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 costs and estimated earnings for
construction contracts over progress billings on contracts in progress is
reported as a current asset and the excess of progress billings over costs and
estimated earnings on contracts in progress is reported as a current liability
as follows:
2003 2002
---- ----
CONTRACTS IN PROGRESS
Revenues recognized on contracts in progress $ 3,097,942 $ 2,019,931
Billings on contracts in progress (3,086,204) (2,093,865)
------------ -----------
11,738 (73,934)
============ ===========
Shown on balance sheet as:
Contracts in progress with costs and estimated earnings exceeding related progress
billings 142,235 48,423
Contracts in progress with progress billings exceeding related costs and estimated
earnings $ (130,497) $ (122,357)
------------ -----------
11,738 (73,934)
============ ===========
7. GOODWILL AND OTHER INTANGIBLES
GOODWILL
General--At December 31, 2003 and 2002, our goodwill balance was $219,033 and
$157,903, respectively, attributable to the excess of the purchase price over
the fair value of assets acquired relative to acquisitions within our North
America and EAME segments.
Aggregate goodwill acquired during 2003 of $61,130 primarily relates to the
acquisitions of Petrofac and John Brown, contingent earnout obligations
associated with the Howe-Baker acquisition, the impact of foreign currency
translation, and a reduction in accordance with SFAS No. 109, "Accounting for
Income Taxes," where tax goodwill exceeded book goodwill. At December 31, 2003,
goodwill expected to be deductible for tax purposes relative to these
acquisitions was $42,019.
The change in goodwill by segment for 2002 and 2003 is as follows:
NORTH AMERICA EAME TOTAL
------------- ---- -----
Balance at December 31, 2001 $ 138,444 $ - $ 138,444
Acquisitions and contingent earnout obligations 19,459 - 19,459
------------- ---------- ------------
Balance at December 31, 2002 157,903 - 157,903
Acquisitions and contingent earnout obligations 41,307 19,823 61,130
------------- ---------- ------------
Balance at December 31, 2003 $ 199,210 $ 19,823 $ 219,033
------------- ---------- ------------
Impairment Testing--SFAS No. 142 "Goodwill and Other Intangible Assets" 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 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. SFAS No. 142 prescribes a two-phase process for
testing of goodwill, which is performed annually, absent any indicators of
impairment. The first phase screens for impairment, while the second phase (if
necessary) measures impairment. We have elected to perform our annual analysis
during the fourth quarter of each year based upon goodwill balances as of the
end of the third calendar quarter. Upon completion of our 2003 impairment test,
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 earnings before
interest, taxes, depreciation and amortization were also utilized in our
analysis as a comparative measure. There can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
Pro Forma Information--The following table provides comparative results for the
years ended December 31, 2003, 2002, and 2001 for the effects resulting from our
adoption of SFAS No. 142:
22
2003 2002 2001
---- ---- ----
Net income $ 65,954 $ 50,149 $ 19,703
Add back: Goodwill and other indefinite-lived intangibles
amortization (Net of taxes of $1,469) - - 2,727
----------- ----------- -----------
Pro forma net income $ 65,954 $ 50,149 $ 22,430
=========== =========== ===========
Net income per share
Basic:
Net income $ 1.46 $ 1.16 $ 0.46
Goodwill and other indefinite-lived intangibles
amortization, net of taxes - - 0.06
----------- ----------- -----------
Pro forma net income $ 1.46 $ 1.16 $ 0.52
=========== =========== ===========
Diluted:
Net income $ 1.39 $ 1.12 $ 0.44
Goodwill and other indefinite-lived intangibles
amortization, net of taxes - - 0.06
----------- ----------- -----------
Pro forma net income $ 1.39 $ 1.12 $ 0.50
=========== =========== ===========
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, 2003 and
2002:
2003 2002
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets
Technology (3 to 11 years) $ 6,221 $ (3,795) $ 6,221 $ (2,487)
Non-compete agreements (4 to 8 years) 4,810 (2,648) 4,810 (1,766)
Strategic alliances, customer contracts, patents (3 to 11
years) 2,695 (1,051) 2,775 (714)
-------------- ------------ -------------- ------------
Total $ 13,726 $ (7,494) $ 13,806 $ (4,967)
============== ============ ============== ============
Unamortized intangible assets
Tradenames $ 24,717 $ 24,717
============== ==============
The change in other intangibles compared with 2002 primarily relates to
amortization. Intangible amortization for the years ended 2003, 2002 and 2001
was $2,548, $2,529 and $1,623, respectively. For the years ended 2004, 2005,
2006, 2007 and 2008, amortization of existing intangibles is anticipated to be
$1,823, $1,561, $694, $694 and $694, respectively.
23
8. SUPPLEMENTAL BALANCE SHEET DETAIL
2003 2002
---- ----
COMPONENTS OF PROPERTY AND EQUIPMENT
Land and improvements $ 21,860 $ 20,837
Buildings and improvements 52,776 40,421
Plant and field equipment 149,075 130,103
---------- -----------
Total property and equipment 223,711 191,361
Accumulated depreciation (99,206) (82,090)
---------- -----------
Net property and equipment $ 124,505 $ 109,271
========== ===========
COMPONENTS OF ACCRUED LIABILITIES
Payroll, vacation, bonuses and profit-sharing $ 34,692 $ 25,225
Self-insurance/retention reserves 11,387 8,199
Interest payable 2,622 3,169
Postretirement benefit obligations 5,286 4,237
Pension obligation 2,210 1,880
Discontinued operations, net 619 1,367
Voluntary resignation offer 1,958 3,099
Contract cost and other accruals 36,463 27,479
---------- -----------
Accrued liabilities $ 95,237 $ 74,655
========== ===========
COMPONENTS OF OTHER NON-CURRENT LIABILITIES
Postretirement benefit obligations $ 32,598 $ 27,902
Self-insurance/retention reserves 13,150 13,046
Pension obligation 9,556 9,476
Other 16,679 12,037
---------- -----------
Other non-current liabilities $ 71,983 $ 62,461
========== ===========
9. DEBT
The following summarizes our outstanding debt at December 31:
2003 2002
---- ----
CURRENT:
Notes payable $ 1,901 $ 14
---------- -----------
LONG-TERM:
NOTES:
7.34% Senior Notes maturing July 2007. Principal due in
equal annual installments of $25,000 from 2005 through 2007.
Interest payable semi-annually $ 75,000 $ 75,000
REVOLVING CREDIT FACILITIES:
$233,333 three-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 of $1,900 of remaining payments due in connection with our
acquisition of Petrofac, which are payable in monthly installments through the
second quarter of 2004, and $1 of short-term borrowings under commercial credit
facilities. The borrowings had a weighted average interest rate of 0% and 2.5%
at December 31, 2003 and 2002, respectively.
In August 2003, we terminated our existing revolving credit facilities and
replaced them with a committed and unsecured three-year $233,333 revolving
credit facility, which terminates in August 2006. As of December 31, 2003, no
direct borrowings existed under the facility, but we had issued $135,081 of
letters of credit against the facility. As of December 31, 2003, we had $98,252
of available capacity under the facility for future operating or investing
needs. The facility contains certain restrictive covenants including minimum
levels of net worth, fixed charge and leverage ratios, among other restrictions.
The facility also places restrictions on us with regard to subsidiary
indebtedness, sales of assets, liens, investments, type of business conducted,
and mergers and acquisitions, among other restrictions. In addition to interest
on debt borrowings, we are assessed quarterly commitment fees on the unutilized
portion of
24
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.
In August 2003, we also entered into a new $116,667 letter of credit facility,
which is subject to the same restrictions as the new $233,333 revolving credit
facility, and terminates in August 2008. Additionally, we have available various
other short-term, non-U.S. uncommitted revolving credit facilities of
approximately $236,563. 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 December 31, 2003, we had available capacity of $198,025 under
these facilities. We were in compliance with all covenants at December 31, 2003.
Our $75,000 of senior notes also 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, 2003.
Capitalized interest was insignificant in 2003, 2002 and 2001.
10. FINANCIAL INSTRUMENTS
FORWARD CONTRACTS--At December 31, 2003 our forward contracts to hedge
intercompany loans, which matured within seven days following the year end, are
summarized as follows:
WEIGHTED AVERAGE
CURRENCY SOLD CURRENCY PURCHASED CONTRACT AMOUNT CONTRACT RATE
------------- ------------------ --------------- -------------
Euros U.S. Dollars $ 5,792 0.83
U.S. Dollars British Pounds $ 7,437 0.58
U.S. Dollars Canadian Dollars $ 5,395 1.30
U.S. Dollars Australian Dollars $ 20,051 1.35
U.S. Dollars South African Rand $ 1,071 6.22
================== =============== ================
At December 31, 2003 our forward contracts to hedge certain operating exposures
included $23,197 to buy Euros at a weighted average contract rate of 0.86. These
contracts were designated as "cash flow hedges" under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." At December 31, 2003, the
fair value of these contracts was $2,026, and any hedge ineffectiveness was not
significant.
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, 2003 and 2002, the fair value of our long-term debt was $82,041 and
$80,748, respectively, based on current market rates for debt with similar
credit risk and maturities.
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, 2003, 2002 and 2001, we expensed $11,340, $10,989 and $9,464,
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 2003, 2002
and 2001.
DEFINED BENEFIT AND OTHER POSTRETIREMENT PLANS--We currently sponsor various
defined benefit pension plans covering certain employees of our North America
and EAME segments. In connection with the John Brown acquisition, we assumed
certain pension obligations related to its employees.
We also provide certain health care and life insurance benefits for our retired
employees through three health care and life insurance benefit programs. In
connection with the John Brown and Petrofac acquisitions in 2003 and TPA
acquisition in 2002, we assumed certain postretirement benefit obligations
related to their employees. 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.
We use a December 31 measurement date for the majority of our plans. During
2004, we expect to contribute $4,929 and $3,006 to our defined benefit and other
postretirement plans, respectively.
25
The following tables provide combined information for our defined benefit and
other postretirement plans:
COMPONENTS OF NET PERIODIC BENEFIT COST DEFINED BENEFIT PLANS OTHER POSTRETIREMENT PLANS
-------------------------- -----------------------------
2003 2002 2001 2003 2002 2001
-------- -------- ------ -------- -------- ---------
Service cost $ 2,898 $ 180 $ 163 $ 1,679 $ 999 $ 778
Interest cost 1,150 973 968 1,871 1,453 1,234
Expected return on plan assets (1,429) (1,354) (1,449) - - -
Amortization of prior service costs 9 8 - (101) (101) (101)
Recognized net actuarial loss (gain) 411 102 207 94 1 (14)
-------- -------- ------- -------- -------- ---------
Net periodic benefit expense (income) $ 3,039 $ (91) $ (111) $ 3,543 $ 2,352 $ 1,897
-------- -------- ------- -------- -------- ---------
CHANGE IN BENEFIT OBLIGATION
2003 2002 2003 2002
---------- -------- --------- --------
Benefit obligation at beginning of year $ 15,579 $ 14,547 $ 23,607 $ 18,659
Acquisition 3,857 - 7,009 897
Service cost 2,898 180 1,679 999
Interest cost 1,150 973 1,871 1,453
Actuarial loss 607 1,110 1,897 3,020
Effect of plan change - - (2,014) -
Plan participants' contributions 412 - 893 686
Benefits paid (1,404) (1,318) (3,507) (2,107)
Currency translation 2,201 87 266 -
---------- -------- --------- --------
Benefit obligation at end of year $ 25,300 15,579 $ 31,701 $ 23,607
---------- -------- --------- --------
CHANGE IN PLAN ASSETS
2003 2002 2003 2002
---------- -------- --------- --------
Fair value at beginning of year $ 15,221 $ 17,429 $ - $ -
Acquisition 3,555 - - -
Actual return (loss) on plan assets 3,064 (1,089) - -
Benefits paid (1,404) (1,318) (3,507) (2,107)
Employer contribution 2,153 43 2,614 1,421
Plan participants' contributions 412 - 893 686
Currency translation 2,951 156 - -
---------- -------- --------- ---------
Fair value at end of year $ 25,952 $ 15,221 $ - $ -
---------- -------- --------- ---------
Funded status $ 652 $ (356) $ (31,701) $ (23,607)
Unrecognized net prior service costs 106 94 (2,689) (776)
Unrecognized net actuarial loss 4,045 4,870 5,588 2,962
---------- -------- --------- ---------
Net amount recognized $ 4,803 $ 4,608 $ (28,802) $ (21,421)
========== ======== ========= =========
Amounts recognized in the balance
sheet consist of:
Prepaid benefit cost $ 8,151 $ 7,274 $ - $ -
Accrued benefit cost (4,525) (4,242) (28,802) (21,421)
Accumulated other comprehensive loss, before taxes 1,177 1,576 - -
---------- -------- --------- ---------
Net amount recognized $ 4,803 $ 4,608 $ (28,802) $ (21,421)
========== ======== ========= =========
The accumulated benefit obligation for all defined benefit plans was $23,821 and
$15,486 at December 31, 2003 and 2002, respectively.
The following table reflects information for defined benefit plans with an
accumulated benefit obligation in excess of plan assets:
DECEMBER 31,
2003 2002
---- ----
Projected benefit obligation $ 8,902 $ 8,571
Accumulated benefit obligation $ 8,851 $ 8,478
Fair value of plan assets $ 5,440 $ 4,747
--------- ---------
26
ADDITIONAL INFORMATION
DEFINED BENEFIT PLANS OTHER POSTRETIREMENT PLANS
--------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Decrease)/increase in minimum liability included in
other comprehensive income $ (399) $ 1,391 n/a n/a
Weighted-average assumptions used to determine benefit
obligations at December 31,
Discount rate 5.80% 6.30% 6.16% 7.25%
Rate of compensation increase (1) 4.45% n/a n/a n/a
Weighted-average assumptions used to determine net
periodic benefit cost for the years ended December 31,
Discount rate 5.69% 6.18% 6.21% 7.25%
Expected long-term return on plan assets (2) 7.26% 7.48% n/a n/a
Rate of compensation increase (1) 4.45% n/a n/a n/a
(1) The rate of compensation increase in the table relates solely to one defined
benefit plan. The rate of compensation increase for our other plans is not
applicable as benefits under certain plans are based upon years of service,
while the remaining plans primarily cover retirees, whereby future compensation
is not a factor.
(2) The expected long-term rate of return on the defined benefit plan assets was
derived using historical returns by asset category and expectations for future
capital market performance.
Defined Benefit Plans--The defined benefit plans' assets consist primarily of
short-term fixed income funds and long-term investments, including equity and
fixed-income securities. The following table provides weighted-average asset
allocations at December 31, 2003 and 2002, by asset category:
TARGET PLAN ASSETS
ASSET CATEGORY AT DECEMBER 31, ALLOCATIONS 2003 2002
- ------------------------------ ----------- ---- ----
Equity securities 60-80% 73% 61%
Debt securities 20-40% 23% 34%
Real estate 0-5% 2% 3%
Other 0-15% 2% 2%
----- --- ---
Total 100% 100% 100%
Our investment strategy for benefit plan assets is to maintain a diverse
portfolio to maximize a return over the long-term, subject to an appropriate
level of risk. Our defined benefit plans' assets are managed by external
investment managers with oversight by our internal investment committee.
Other Postretirement Plans--The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law on December 8, 2003.
As permitted under FSP 106-1, we elected to defer accounting for certain of the
effects of the Act pending issuance of final guidance and transition rules in
2004. We are currently reviewing the Act and the potential impact on our U.S.
postretirement medical plans. Accordingly, the accumulated postretirement
benefit obligation and net periodic benefit costs related to this plan do not
reflect the effects of the Act. Once final guidance is issued, previously
reported information is subject to change.
The medical plan for retirees, other than those covered by the Howe-Baker and
John Brown programs, 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 programs, health care cost trend rates
are projected at annual rates ranging from 8.9% in 2004 down to 5.0% in 2011.
Under the John Brown program, the assumed rate of health care cost inflation is
a level 8.5% per annum. Increasing/(decreasing) the assumed health care cost
trends by one percentage point for the Howe-Baker and John Brown programs is
estimated to increase/(decrease) the accumulated postretirement benefit
obligation at December 31, 2003 and the total of the service and interest cost
components of net postretirement health care cost for the year then ended as
follows:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost $ 487 $ (400)
Effect on postretirement benefit obligation $ 656 $ (573)
27
MULTI-EMPLOYER PENSION PLANS--We made contributions to certain union sponsored
multi-employer pension plans of $6,417, $4,689 and $5,097 in 2003, 2002 and
2001, 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.
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 $7,241 and $9,082 at December 31, 2003, for defined
benefit and postretirement benefit obligations, respectively. As of December 31,
2002, the defined benefit and postretirement benefit obligations were $8,689 and
$10,876, 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 $639, $747 and
$855 for 2003, 2002 and 2001, respectively, and the postretirement benefit
obligation, also accruing interest at 7.5% totaled $791, $925 and $1,058 for
2003, 2002 and 2001, respectively.
12. MINORITY INTEREST AND RELATED LONG-TERM RECEIVABLE
As part of our acquisition of Howe-Baker in 2000, we assumed Howe-Baker's
minority interest and contingent earnout obligation associated with a
majority-owned subsidiary. In 2003, Howe-Baker exercised its call option to
purchase the remaining minority interest and also negotiated final settlement of
the contingent earnout obligation. Total consideration for the purchase of the
minority interest and the earnout obligation was $20,612 cash and satisfaction
of a $19,785 receivable due from the minority holder.
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 $20,242, $17,617 and
$15,188 in 2003, 2002 and 2001, 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
------
2004 $ 15,765
2005 6,834
2006 5,717
2007 3,727
2008 2,252
Thereafter 18,424
--------
$ 52,719
========
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 leases were immaterial for the
periods presented.
ANTITRUST PROCEEDINGS--On October 25, 2001, the U.S. Federal Trade Commission
(the "FTC" or the "Commission") 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 that we acquired together
with certain assets of the Water Division of PDM (The Engineered Construction
and Water Divisions of PDM are hereafter sometimes referred to as the "PDM
Divisions"). The FTC's Complaint alleged that the acquisition violated Section 7
of the Clayton Antitrust Act and Section 5 of the Federal Trade Commission Act
by threatening to substantially lessen competition in four specific markets in
which both we and PDM had competed in the United States: liquefied natural gas
storage tanks and associated facilities constructed in the United States;
liquefied nitrogen, liquefied oxygen and liquefied argon storage tanks
constructed in the United States; liquefied petroleum gas storage tanks
constructed in the United States; and field erected thermal vacuum chambers
(used for the testing of satellites) constructed in the United States. The FTC's
Complaint asserted that the consequence of the acquisition will be increased
prices in these four markets.
A trial before an FTC Administrative Law Judge was concluded on January 16,
2003. On June 12, 2003, the FTC Administrative Law Judge issued his ruling. The
ruling found that our acquisition of PDM assets threatens to substantially
lessen competition in the four markets identified above in which both CB&I and
PDM participated. As a result of this finding by the FTC Administrative Law
Judge, we have been ordered to divest within 180 days of a final order all
physical assets, intellectual property and any uncompleted
28
construction contracts of the PDM Divisions that we acquired from PDM to a
purchaser approved by the FTC that is able to utilize those assets as a viable
competitor.
We believe the FTC Administrative Law Judge's ruling is inconsistent with the
law and facts presented at trial. We have appealed the ruling to the full
Federal Trade Commission. In addition, the FTC Staff has appealed the
sufficiency of the remedies contained in the ruling to the full Federal Trade
Commission. Pending issuance of a final order by the Commission, we are subject
to an interim order designed to preserve the status quo of the PDM assets,
including a requirement that we notify the FTC 60 days before taking any action
to dispose of any PDM assets at our Provo, Utah fabrication facility. On
November 12, 2003, oral arguments were held before the Commission, which will
issue its decision in due course. Until the FTC order becomes final, we expect
the impact on our earnings will be minimal. However, the remedies contained in
the order, if implemented, could have an adverse effect on us, including an
expense relating to a potential write-down of the net book value of the divested
assets. If additional remedies sought by the FTC staff are also implemented by
the Full Commission, there may be additional adverse financial effects on us.
In addition, we were served with a subpoena for documents on July 23, 2003, by
the Philadelphia office of the U.S. Department of Justice, Antitrust Division.
The subpoena seeks documents that are in part related to matters that were the
subject of testimony in the FTC administrative law trial, as well as documents
relating to our Water Division. We are cooperating fully with the investigation.
We cannot assure you that proceedings will not result from this investigation.
ENVIRONMENTAL MATTERS--Our operations are subject to extensive and changing U.S.
federal, state and local laws and regulations and laws outside the U.S.
establishing health and environmental quality standards, including those
governing discharges and pollutants into the air and water and the management
and disposal of hazardous substances and wastes. This exposes us to potential
liability for personal injury or property damage caused by any release, spill,
exposure or other accident involving such substances or wastes.
In connection with the historical operation of our facilities, substances which
currently are or might be considered hazardous were used or disposed of at some
sites that 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 not aware of any manifestation
by a potential claimant of its awareness of a possible claim or assessment with
respect to any such facility.
We believe that we are currently in compliance, in all material respects, with
all environmental laws and regulations. We do not anticipate that we will incur
material capital expenditures for environmental controls or for investigation or
remediation of environmental conditions during 2004 or 2005.
CONTINGENT EARNOUT OBLIGATIONS--In connection with our acquisition of Howe-Baker
in 2000, we assumed two earnout arrangements which are contingent upon the
performance of the underlying acquired entities. One of the arrangements which
has and will continue to require us to make cash payments to the previous owners
expires in July 2004 (of which $3,522 is included in accrued liabilities at
December 31, 2003), while the other arrangement was scheduled to expire on or
before December 31, 2008 ("2008 Earnout"), subject to certain of our call rights
and the put rights of the previous owners. On April 30, 2003, we settled the
obligations of the 2008 Earnout as described in Note 12.
OTHER--We are a defendant in a number of lawsuits arising in the normal course
of business, including among others, lawsuits wherein plaintiffs allege exposure
to asbestos due to work we may have performed at various locations. We have
never been a manufacturer, distributor or supplier of asbestos products, and we
have in place appropriate insurance coverage for the type of work that we have
performed. During 2003, we were named as a defendant in additional
asbestos-related lawsuits. To date, we have been able to dismiss or settle all
such claims without a material impact on our operating results or financial
position and do not currently believe that the asserted claims will have a
material adverse effect on our future results of operations or financial
position. As a matter of standard policy, we continually review our litigation
accrual and as further information is known on pending cases, increases or
decreases, as appropriate, may be recorded in accordance with SFAS No. 5,
"Accounting for Contingencies."
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
our direct obligation. Where a surety incurs such a loss, an indemnity agreement
between the parties and us 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 are
returned. At December 31, 2003, we had provided $637,511 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, 2003, we had
outstanding surety bonds and letters of credit of $17,808 relating to our
insurance program.
29
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 paid 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 termination of employment, or (ii) a change of
control. These shares are considered outstanding for basic and diluted EPS
computations. The total value of the shares initially placed in the Trust was
$12,735.
From time to time, we grant restricted shares to key employees under our
Long-Term Incentive Plans. 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. During 2001, 272,314
restricted stock units were distributed from the Trust in connection with the
departure of a former executive.
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.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -- The components of accumulated
other comprehensive income (loss) are as follows:
CURRENCY UNREALIZED MINIMUM UNREALIZED FAIR ACCUMULATED OTHER
TRANSLATION LOSS ON DEBT PENSION LIABILITY VALUE OF CASH COMPREHENSIVE
ADJUSTMENT SECURITIES (1) ADJUSTMENT FLOW HEDGES (2) INCOME (LOSS)
----------- ------------- ----------------- --------------- -----------------
Balance at January 1, 2001 $ (9,872) $ - $ - $ - $ (9,872)
----------- -------------- ----------------- --------------- -----------------
Change in 2001 [net of tax of
$1,402, $254, $65, and $0] (2,603) (473) (120) - (3,196)
----------- -------------- ----------------- --------------- -----------------
Balance at December 31, 2001 (12,475) (473) (120) - (13,068)
Change in 2002 [net of tax of
$1,620, ($56), $487 and $0] (3,008) 105 (904) - (3,807)
----------- -------------- ----------------- --------------- -----------------
Balance at December 31, 2002 (15,483) (368) (1,024) - (16,875)
Change in 2003 [net of tax of
($2,996), ($56), ($140) and ($709)] 5,564 105 259 1,317 7,245
----------- -------------- ----------------- --------------- -----------------
Balance at December 31, 2003 $ (9,919) $ (263) $ (765) $ 1,317 $ (9,630)
=========== ============== ================= =============== =================
(1) The unrealized loss on debt securities resulted from a mark-to-market loss
on a cash flow hedge for our $75,000 private placement debt issuance in 2001.
(2) The unrealized fair value of cash flow hedges will be reclassified into
earnings upon settlement of the underlying purchase obligations, which are
anticipated to be settled within the next 12 months. See Note 10 for additional
discussion relative to our financial instruments.
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, 2003, 662,661 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. Total compensation expense of
$3,962, $756 and $1,125 was recognized for the Incentive Plans in 2003, 2002 and
2001, respectively. Of the 8,363,510 shares authorized for grant under the
Incentive Plans, 1,699,231 shares remain available for grant at December 31,
2003.
30
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, 2003, 2002 and 2001:
WEIGHTED AVERAGE
Stock Options Exercise Price Per Share EXERCISE PRICE PER SHARE
------------- --------------------------- ------------------------
Outstanding at January 1, 2001 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
Granted 399,053 $ 14.56 - $ 23.13 $ 15.40
Forfeited (54,344) $ 8.34 - $ 23.13 $ 8.76
Exercised (1,402,478) $ 4.60 - $ 16.93 $ 8.15
---------- --------------------------- ------------------------
Outstanding at December 31, 2003 3,581,569 $ 5.50 - $ 23.13 $ 10.82
========== =========================== ========================
The weighted average fair value of options granted during 2003, 2002 and 2001
was $6.99, $6.20 and $6.58, respectively. The number of outstanding fixed stock
options exercisable at December 31, 2002 and 2001 was 2,247,546 and 939,820,
respectively. These options had a weighted average exercise price of $8.23 and
$7.84 at December 31, 2002 and 2001, respectively.
The following summarizes information about stock options outstanding at December
31, 2003:
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
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$5.50 - $8.34 1,714,950 6.6 $ 8.11 1,639,302 $ 8.12
$9.00 - $14.85 1,627,647 7.3 $ 12.77 618,889 $ 11.07
$15.00 - $23.13 238,972 8.5 $ 16.91 67,989 $ 16.06
- --------------- --------- --- ---------------- --------- ----------------
3,581,569 7.1 $ 10.82 2,326,180 $ 9.14
========= === ================ ========= ================
Restricted Shares -- Restricted shares generally vest over four years. The
following table shows the changes in restricted shares:
2003 2002 2001
----------- ----------- -----------
Shares subject to restriction at beginning of year 326,018 476,814 600,336
Restricted share grants 44,499 43,840 110,366
Restricted share distributions (129,775) (193,796) (232,128)
Restricted share forfeitures - (840) (1,760)
----------- ----------- -----------
Shares subject to restriction at end of year 240,742 326,018 476,814
=========== =========== ===========
Performance Shares -- Performance shares generally vest over three years,
subject to achievement of specific Company performance goals. During 2003,
193,513 performance shares were granted with a weighted-average grant-date fair
value of $14.80. No performance shares were granted during 2002 or 2001.
31
16. INCOME TAXES
2003 2002 2001
---------- ---------- -----------
SOURCES OF INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
---------- ---------- -----------
U.S. $ 45,612 $ 32,896 $ 3,277
Non-U.S. 52,450 39,298 44,628
---------- ---------- -----------
Total $ 98,062 $ 72,194 $ 47,905
========== ========== ===========
INCOME TAX EXPENSE
---------- ---------- -----------
Current income taxes
U.S. (Federal and State) $ (7,927) $ (736) $ -
Non-U.S. (10,579) (6,512) (7,438)
---------- ---------- -----------
(18,506) (7,248) (7,438)
---------- ---------- -----------
Deferred income taxes
U.S. (Federal and State) (1) (7,814) (11,614) (2,392)
Non-U.S. (3,393) (1,371) (3,650)
---------- ---------- -----------
(11,207) (12,985) (6,042)
---------- ---------- -----------
Total income tax expense $ (29,713) $ (20,233) $ (13,480)
========== ========== ===========
(1) During 2003 and 2002, we utilized $3,338 and $6,612 of Deferred Tax Asset,
respectively, related to U.S. NOLs.
RECONCILIATION OF INCOME TAXES AT THE NETHERLANDS' STATUTORY RATE AND INCOME TAX (EXPENSE) BENEFIT
Tax expense at statutory rate $ (33,831) $ (24,907) $ (16,767)
State income taxes (765) (479) (478)
Other country statutory tax rate differential 3,906 6,908 4,541
Extraterritorial income exclusion 2,477 - -
Other, net (1,500) (1,755) (776)
---------- ---------- -----------
Income tax expense $ (29,713) $ (20,233) $ (13,480)
========== ========== ===========
Effective tax rate 30.3% 28.0% 28.1%
Our statutory rate was The Netherlands' rate of 34.5% in 2003 and 2002, and 35%
in 2001.
The principal temporary differences included in deferred income taxes reported
on the December 31, 2003 and 2002 balance sheets were:
2003 2002
---------- ----------
CURRENT DEFERRED TAXES
---------- ----------
Tax benefit of U.S. operating losses and credits $ 5,804 $ 4,336
Contract revenue and costs 9,459 7,487
Employee compensation and benefit plan reserves 3,522 1,541
Voluntary resignation offer 695 918
Other 4,029 3,574
---------- ----------
CURRENT DEFERRED TAX ASSET $ 23,509 $ 17,856
---------- ----------
NON-CURRENT DEFERRED TAXES
---------- ----------
Tax benefit of U.S. operating losses and credits $ 2,242 $ 3,481
Tax benefit of non-U.S. operating losses and credits 13,383 12,928
Employee compensation and benefit plan reserves 3,268 6,485
Non-U.S. activity 7,492 10,106
Insurance reserves 6,210 7,167
---------- ----------
Non-current deferred tax asset 32,595 40,167
Less: valuation allowance (13,363) (10,497)
---------- ----------
19,232 29,670
Depreciation and amortization (18,100) (10,586)
Other (11,311) (11,558)
---------- ----------
Non-current deferred tax liability (29,411) (22,144)
---------- ----------
NET NON-CURRENT DEFERRED TAX (LIABILITY) ASSET $ (10,179) $ 7,526
---------- ----------
NET DEFERRED TAX ASSETS $ 13,330 $ 25,382
========== ==========
32
As of December 31, 2003, neither income taxes nor withholding taxes have been
provided on the undistributed earnings of our U.S. companies and their
subsidiaries since it is our intention not to remit these earnings. We intend to
permanently reinvest the unremitted earnings of our U.S. companies and their
subsidiaries in those businesses and, therefore, have not provided for deferred
taxes on such unremitted foreign earnings. We did not record any Netherlands
deferred income taxes on undistributed earnings of our other subsidiaries and
affiliates at December 31, 2003. 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.
As of December 31, 2003, we had U.S. net operating loss carryforwards ("NOLs")
of approximately $17,563, of which $13,413 is subject to limitation under
Internal Revenue Code Section 382. The U.S. NOLs will expire from 2019 to 2021.
As of December 31, 2003, our Central and South America ("CSA") segment had NOLs
of approximately $3,549. We believe that it is more likely than not that the CSA
NOLs will not be utilized. Therefore, a full valuation allowance has been placed
against the CSA NOLs. Likewise, our Europe, Africa, Middle East ("EAME") and
Asia Pacific ("AP") segments had NOLs of approximately $35,918. We believe that
it is more likely than not that $35,738 of the EAME and AP NOLs will not be
utilized. Therefore, a valuation allowance has been placed against the EAME and
AP NOLs in the amount of $35,738. As of December 31, 2003, we had a foreign tax
credit in the amount of $1,899. A valuation allowance has been placed against
the foreign tax credit in the amount of $1,497.
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 exit costs/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:
2003 2002 2001
------------ ------------ ------------
REVENUES
North America $ 970,851 $ 801,624 $ 726,629
Europe, Africa, Middle East 329,947 132,853 124,226
Asia Pacific 218,201 95,935 39,917
Central and South America 93,278 118,066 191,052
------------ ------------ ------------
Total revenues $ 1,612,277 $ 1,148,478 $ 1,081,824
============ ============ ============
The following table indicates revenues for individual countries in excess of 10%
of consolidated revenues during any of the three years ended December 31, 2003,
based on where we performed the work:
2003 2002 2001
---------- ---------- ----------
United States $ 901,871 $ 750,935 $ 665,217
Australia $ 175,180 $ 66,962 $ 6,848
33
The following tables present income from operations, assets and capital
expenditures by geographic segment:
2003 2002 2001
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS, EXCLUDING EXIT COSTS/SPECIAL CHARGES
North America $ 67,762 $ 52,100 $ 42,161
Europe, Africa, Middle East 17,384 3,603 1,402
Asia Pacific 6,000 2,270 (203)
Central and South America 12,195 23,712 20,769
---------- ---------- ----------
Total income from operations, excluding exit costs/special charges $ 103,341 $ 81,685 $ 64,129
========== ========== ==========
2003 2002 2001
---------- ---------- ----------
EXIT COSTS/SPECIAL CHARGES (NOTE 4) $ - $ 3,972 $ 9,686
========== ========== ==========
2003 2002 2001
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS
North America $ 67,762 $ 49,413 $ 36,272
Europe, Africa, Middle East 17,384 3,032 (274)
Asia Pacific 6,000 1,950 (538)
Central and South America 12,195 23,318 18,983
---------- ---------- ----------
Total income from operations $ 103,341 $ 77,713 $ 54,443
========== ========== ==========
2003 2002 2001
---------- ---------- ----------
ASSETS
North America $ 724,082 $ 581,046 $ 501,538
Europe, Africa, Middle East 140,601 85,474 59,228
Asia Pacific 38,192 31,246 25,786
Central and South America 26,611 42,670 61,713
---------- ---------- ----------
Total assets $ 929,486 $ 740,436 $ 648,265
========== ========== ==========
Our revenues earned and assets attributable to operations in The Netherlands
were not significant in any of the three years ended December 31, 2003. Our
long-lived assets are considered to be net property and equipment. Approximately
84% of these assets were located in the United States for the year ended
December 31, 2003, while the other 16% were strategically located throughout the
world.
2003 2002 2001
--------- --------- ---------
CAPITAL EXPENDITURES
North America $ 23,991 $ 20,123 $ 7,448
Europe, Africa, Middle East 6,926 2,718 779
Asia Pacific 212 1,037 56
Central and South America 157 49 634
--------- --------- ---------
Total capital expenditures $ 31,286 $ 23,927 $ 8,917
========= ========= ========
Although we manage our operations by the four geographic segments, revenues by
project type are shown below:
2003 2002 2001
----------- ----------- -----------
Revenues
Process and Technology $ 582,712 $ 331,200 $ 209,434
Standard Tanks 368,946 430,954 459,022
Low Temperature/Cryogenic Tanks and Systems 285,334 109,312 135,392
Repairs and Turnarounds 167,994 113,633 154,584
Specialty and Other Structures 116,059 101,603 71,995
Pressure Vessels 91,232 61,776 51,397
----------- ----------- -----------
Total revenues $ 1,612,277 $ 1,148,478 $ 1,081,824
=========== =========== ===========
34
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, 2003:
QUARTER ENDED 2003 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------
Revenues $ 322,309 $ 389,309 $ 429,123 $ 471,536
Gross profit $ 39,661 $ 49,355 $ 51,513 $ 56,033
Net income $ 12,764 $ 16,464 $ 18,028 $ 18,698
Net income per share - basic $ 0.29 $ 0.37 $ 0.39 $ 0.40
Net income per share - diluted $ 0.28 $ 0.35 $ 0.37 $ 0.39
Common dividends per share $ 0.04 $ 0.04 $ 0.04 $ 0.04
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
SHAREHOLDER INFORMATION -- Our Common Stock is traded on the New York Stock
Exchange. As of February 26, 2004, we had approximately 9,970 shareholders. The
following table presents the range of Common Stock prices on the New York Stock
Exchange for the years ended December 31, 2003 and 2002:
RANGE OF COMMON STOCK PRICES
QUARTER ENDED 2003 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------
High $ 17.65 $ 25.00 $ 28.50 $ 30.00
Low $ 14.25 $ 16.16 $ 22.09 $ 24.00
Close $ 16.24 $ 22.68 $ 27.16 $ 28.90
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
35