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WG > SEC Filings for WG > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for WILLBROS GROUP, INC.\NEW\ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WILLBROS GROUP, INC.\NEW\


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2013 and 2012, included in Item 1 of Part I of this Form 10-Q, and the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

OVERVIEW

Willbros is a specialty energy infrastructure contractor serving the oil, gas, refinery, petrochemical and power industries. Our offerings include engineering, procurement and construction (either individually or as an integrated "EPC" service offering), turnarounds, maintenance facilities development and operations services.

First Quarter of 2013

In the first quarter of 2013, we reported contract revenue of $487.4 million which was an increase of over 30 percent from the first quarter of 2012 primarily due to growth within our Oil & Gas and Canada segments. Our operating loss of $1.6 million during the first quarter of 2013 was an improvement of $8.1 million from our reported operating loss of $9.7 million in the first quarter last year. First quarter of 2013 results were impacted by severe weather conditions in the lower 48 states in comparison to the unusually warm winter previously experienced in the first quarter of 2012. Management actions to address underperforming lines of service is progressing well and delivering results. Financial results over the past two quarters within our Canada segment demonstrate our commitment and ability to improve performance throughout the Company. We expect to replicate this success by hiring additional management talent, strengthening our project management capabilities and expanding our training programs. Our primary objective for 2013 remains improvement of operating results, cash flow and margins.

We have added a fourth segment, Professional Services, which reports directly to our Chief Operating Officer. The successful expansion of our Professional Services operations has created the critical mass to warrant management oversight as a separate segment. The segment provides engineering, procurement, project management, integrity and field services to the oil and gas and electric utility industries. The Professional Services segment has significant growth potential with opportunities for upstream, midstream and downstream engineering services. It is also well positioned to be a full service provider in the emerging integrity market.

Contract revenue generated by our Professional Services segment marginally declined during the first quarter of 2013 due to lower volumes of EPC projects in backlog. Operating income for the quarter was an improvement relative to the first quarter of 2012 due to strong performance in our engineering services. Our utility line locating, stray voltage and gas leak detection services benefited from storm work in the Northeast. Investments in geographic expansion of this and other integrity services partially offset operating results in the first quarter.

Contract revenue generated by our Oil and Gas segment continued to increase primarily driven by growth in our regional delivery services, which has reached an annualized contract revenue run rate in excess of $350.0 million. Regional delivery services remains a focal point in 2013 as management is committed to improve the oversight, systems and operating performance in these markets. Operating losses incurred in our regional delivery markets more than offset the positive performance of our pipelines and facilities services.

Our Utility T&D segment continues to improve its operating results by benefitting from increased profitability in our electric transmission and distribution and construction and maintenance services in Texas. Losses incurred in the Midwest due to inclement weather negatively impacted the first quarter of 2013 results.

Our Canada segment continues to benefit from its new business model which focuses on the oil sands mine sites and in situ extraction developments. Contract revenue and operating income improved significantly through our project and specialty services, the completion of certain infrastructure replacement construction projects and through the strengthening of our project management capabilities.

Looking Forward

We are positioned to address significant growth markets in North America and expect increased opportunities for our Professional Services, Oil & Gas, Utility T&D and Canada segments. We continue to focus our management actions on risk identification and mitigation, and on lines of service which are underperforming, with the objective of generating improved operating results, cash flow and margins. Despite inclement weather negatively impacting our first quarter results, we clearly have lines of service that did not perform to our expectations. We are taking actions to remediate or exit these lines of service.


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Our Professional Services segment continues to see benefit from low natural gas prices, which have sparked renewed interest and investment in the petrochemical industry and from the new domestic crude supplies, which require more transportation and terminal infrastructure. Both gas and liquids are driving increased opportunities for our engineering businesses. Infrastructure safety and reliability issues nationwide, including the proposed pipeline integrity regulations, present significant opportunities for our engineering, program management, field services and physical remediation capabilities.

Our Oil & Gas segment continues to have growth opportunities driven by the high level of investment in the liquids-rich shale plays and the market for cross-country pipelines has improved as abundant natural gas liquids are transported to refining and petrochemical facilities distant from new producing areas. The ramp up in domestic liquids production has created demand for large gathering systems development, new lateral lines and mainline crude transportation systems as well as production and processing facilities, including pump stations, metering, tanks and terminals. Downstream project opportunities now include new small capital projects in both refining and petrochemical facilities. Midcontinent liquids production and consequent refining activity have improved the outlook for turnaround projects in our historical customer base in the heartland of the United States.

Our Utility T&D segment continues to improve its operating performance in Texas and the Mid-Atlantic markets. Competitive Renewable Energy Zone work in Texas will continue to anchor activity in this segment through 2013. We have now booked work outside our alliance agreement, and we anticipate this new backlog will deliver higher operating margins commensurate with the national market. We intend to expand our presence and to provide our services to the markets between the Mid-Atlantic and Texas.

Our Canada segment has transitioned to a business model focused on the oil sands mine sites and in situ extraction developments. We believe the oil sands market offers us long-term recurring services opportunities to provide maintenance, fabrication, and capital project engineering and construction. We have added additional quality backlog and will continue to expand our smaller business units with the same discipline we have applied to our primary business units, which provide construction, maintenance and specialty services.

We intend to remain focused on actions underway throughout 2013, namely, reducing debt; promoting a cultural acceptance of Safety as an undeniable value; and sharp focus on the end markets we serve in North America: the Canadian oil sands; the development of liquids-rich hydrocarbon sources; the expansion of the electric transmission grid; and the emerging integrity market. We will continue to advance our strategy of increasing revenue from recurring services to mitigate the seasonality of our business. We will continue to analyze the performance of our business units relative to our peers and take actions to improve operating margins or exit the businesses which do not meet our objectives. We expect these actions to drive incremental improvement in all our businesses and markets in 2013.

Other Financial Measures

Adjusted EBITDA from Continuing Operations

We define Adjusted EBITDA from continuing operations as income (loss) from continuing operations before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for items broadly consisting of selected items which management does not consider representative of our ongoing operations and certain non-cash items of the Company. These adjustments are included in various performance metrics under our credit facilities and other financing arrangements. These adjustments are itemized in the following table. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA from continuing operations, you should be aware that in the future we may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. Our presentation of Adjusted EBITDA from continuing operations should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Management uses Adjusted EBITDA from continuing operations as a supplemental performance measure for:

Comparing normalized operating results with corresponding historical periods and with the operational performance of other companies in our industry; and

Presentations made to analysts, investment banks and other members of the financial community who use this information in order to make investment decisions about us.

Adjusted EBITDA from continuing operations is not a financial measurement recognized under U.S. generally accepted accounting principles, or U.S. GAAP. When analyzing our operating performance, investors should use Adjusted EBITDA from continuing operations in addition to, and not as an alternative for, net income, operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Because not all companies use identical calculations, our presentation of Adjusted EBITDA from continuing operations may be different from similarly titled measures of other companies.


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A reconciliation of Adjusted EBITDA from continuing operations to U.S. GAAP financial information follows (in thousands):

                                                                Three Months Ended
                                                           March 31,         March 31,
                                                              2013              2012
Loss from continuing operations attributable to
Willbros Group, Inc.                                       $  (11,629 )      $  (21,150 )
Interest expense, net                                           7,690             7,877
Provision for income taxes                                      2,612               973
Depreciation and amortization                                  11,070            11,877
Loss on early extinguishment of debt                               -              2,256
Stock based compensation                                          821             2,084
Restructuring and reorganization costs                             96               102
(Gain) loss on disposal of property and equipment              (1,100 )             195
DOJ monitor cost                                                   -              1,586

Adjusted EBITDA from continuing operations                 $    9,560        $    5,800

Backlog

In our industry, backlog is considered an indicator of potential future performance as it represents a portion of the future revenue stream. Our strategy is focused on capturing quality backlog with margins commensurate with the risks associated with a given project, and for the past several years we have put processes and procedures in place to identify contractual and execution risks in new work opportunities and believe we have instilled in the organization the discipline to price, accept and book only work which meets stringent criteria for commercial success and profitability.

We believe the backlog figures are firm, subject only to the cancellation and modification provisions contained in various contracts. Additionally, due to the short duration of many jobs, revenue associated with jobs won and performed within a reporting period will not be reflected in quarterly backlog reports. We generate revenue from numerous sources, including contracts of long or short duration entered into during a year as well as from various contractual processes, including change orders, extra work and variations in the scope of work. These revenue sources are not added to backlog until realization is assured.

Backlog broadly consists of anticipated revenue from the uncompleted portions of existing contracts and contracts whose award is reasonably assured. Our backlog presentation reflects not only the 12-month lump sum and work under a Master Service Agreement ("MSA"); but also, the full-term value of work under contract, including MSA work, as we believe that this information is helpful in providing additional long-term visibility. We determine the amount of backlog for work under ongoing MSA maintenance and construction contracts by using recurring historical trends inherent in the MSAs, factoring in seasonal demand and projecting customer needs based upon ongoing communications with the customer. We also include in backlog our share of work to be performed under contracts signed by joint ventures in which we have an ownership interest.

The following tables (in thousands) show our backlog from continuing operations by operating segment and geographic location as of March 31, 2013 and December 31, 2012:

                                                       March 31, 2013                                           December 31, 2012
                                    12 Month      Percent          Total        Percent        12 Month       Percent          Total        Percent
Oil & Gas                           $ 202,637         23.0 %    $   212,358         10.6 %    $   290,500         28.8 %    $   293,495         14.0 %
Utility T&D                           337,992         38.4 %      1,169,806         58.3 %        393,318         38.9 %      1,257,403         59.9 %
Professional Services                 156,387         17.8 %        228,134         11.4 %        146,120         14.4 %        197,752          9.4 %
Canada                                183,005         20.8 %        395,804         19.7 %        180,427         17.9 %        349,520         16.7 %

Total Backlog                       $ 880,021        100.0 %    $ 2,006,102        100.0 %    $ 1,010,365        100.0 %    $ 2,098,170        100.0 %


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                                           March 31, 2013              December 31, 2012
                                         Total        Percent          Total        Percent
 Total Backlog by Geographic Region
 United States                        $ 1,606,046         80.1 %    $ 1,743,906         83.1 %
 Canada                                   395,804         19.7 %        349,520         16.7 %
 Other International                        4,252          0.2 %          4,744          0.2 %

 Backlog                              $ 2,006,102        100.0 %    $ 2,098,170        100.0 %

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In our Annual Report on Form 10-K for the year ended December 31, 2012, we identified and disclosed our significant accounting policies. Subsequent to December 31, 2012, there has been no change to our significant accounting policies.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

                                 (in thousands)



                                                    2013             2012            Change
Contract revenue
Oil & Gas                                         $ 184,984        $ 148,705        $  36,279
Utility T&D                                         113,204          108,310            4,894
Professional Services                                78,465           83,573           (5,108 )
Canada                                              111,995           33,969           78,026
Eliminations                                         (1,289 )           (851 )           (438 )

Total                                               487,359          373,706          113,653
General and administrative                           37,638           37,569               69
Operating income (loss)
Oil & Gas                                           (14,571 )         (2,686 )        (11,885 )
Utility T&D                                           1,893           (3,563 )          5,456
Professional Services                                   613             (420 )          1,033
Canada                                               10,507           (3,051 )         13,558

Total                                                (1,558 )         (9,720 )          8,162
Other expense                                        (7,459 )        (10,457 )          2,998

Loss from continuing operations before income
taxes                                                (9,017 )        (20,177 )         11,160
Provision for income taxes                            2,612              973            1,639

Loss from continuing operations                     (11,629 )        (21,150 )          9,521
Income from discontinued operations net of
provision (benefit) for income taxes                 15,821              770           15,051

Net income (loss)                                 $   4,192        $ (20,380 )      $  24,572

Consolidated Results

Contract Revenue

Contract revenue increased $113.7 million which is primarily attributable to significant growth in projects and specialty services in Canada and continued business growth and expansion of our regional delivery services within the liquids-rich shale plays across the United States.

General and Administrative Expenses

General and administrative expense as a percentage of contract revenue was 7.7 percent in the first quarter of 2013 as compared to 10.1 percent in the first quarter of 2012 due to improved cost savings achieved in the first quarter of 2013.


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Operating Loss

Operating loss decreased $8.1 million driven primarily by improved performance within our Canada segment, specifically through increased profitability in the specialty pipeline construction and integrity services as well as through improved performance on several completed infrastructure replacement construction projects. This improved performance was partially offset by a reduction of operating income within our Oil & Gassegment primarily attributed to decreased performance in our regional delivery services.

Other Expense

Other expense decreased $3.0 million primarily due to the lack of debt extinguishment costs during the first quarter of 2013. Debt extinguishment costs during the first quarter of 2012 were the result of accelerated debt payments.

Provision for Income Taxes

Provision for income taxes increased $1.6 million primarily attributed to increased taxable income in our Canada segment quarter-over-quarter.

Income from Discontinued Operations, Net of Taxes

Income from discontinued operations, net of taxes increased $15.1 million driven primarily by a gain on the sale of Willbros Middle East Limited, which held our operations in Oman. The increase was partially offset by the liquidation of our Canada cross-country pipeline business in the second quarter of 2012, as well as continued losses in our electric and gas distribution business in the Northeast.

Segment Results

Oil & Gas Segment

Contract revenue increased $36.3 million driven predominantly by business growth and continued expansion of our regional delivery services into the liquids-rich shale plays across the United States.

Operating income decreased $11.9 million primarily attributed to decreased performance in our regional delivery services, partially offset by improved profitability in our cross-country pipeline and facilities construction services.

Utility T&D Segment

Contract revenue increased $4.9 million driven primarily through additional wireless work performed in the Southwest combined with continued steady sales under our alliance agreement with Oncor. The increase quarter-over-quarter was partially offset by a decline in cable restoration services due to poor weather in the Midwest and Northeast.

Operating income increased $5.5 million primarily related to improved profitability in our electric transmission and distribution businesses in Texas. The increase was partially offset by decreased income in our cable restoration services attributed mainly to inclement weather during the first quarter of 2013.

Professional Services Segment

Contract revenue decreased $5.1 million driven predominantly by a decrease in EPC services quarter-over-quarter. The decrease was partially offset by higher revenue volumes on increased demand for our core engineering, integrity and government offerings during the first quarter of 2013.

Operating income increased $1.0 million primarily through strong performance in our engineering services. Our utility line locating, stray voltage and gas leak detection service also benefited from storm work in the Northeast. The increase in operating income was partially offset by investments in geographic expansion of other integrity services.

Canada Segment

Contract revenue increased $78.0 million driven primarily by expansion of a significant specialty pipeline construction project, the advancement of our pipeline integrity services and the progression of our capital replacement and tank construction projects during the first quarter of 2013.

Operating income increased $13.6 million primarily through increased profitability in projects and specialty services as well as through improved performance on several completed infrastructure replacement construction projects in Northern Alberta.


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LIQUIDITY AND CAPITAL RESOURCES

Our financing objective is to maintain financial flexibility to meet the material, equipment and personnel needs to support our project and MSA commitments. Our primary source of capital is our cash on hand, cash flow from operations and borrowings under our Revolving Credit Facility.

Additional Sources and Uses of Capital

Pursuant to our Amendment and Restatement Agreement dated as of November 8, 2012, the 2010 Credit Agreement was amended and restated in its entirety (the "Amended and Restated Credit Agreement"). Under the Amended and Restated Credit Agreement, certain existing lenders under the Revolving Credit Facility holding an aggregate amount of commitments equal to $115.0 million, agreed that the maturity applicable to such commitments would be extended by one year, to June 30, 2014.

The Revolving Credit Facility under the Amended and Restated Credit Agreement is available for letters of credit and for revolving loans and can be used for working capital and general corporate purposes. 100 percent of the Revolving Credit Facility can be used to obtain letters of credit; however, the Amended and Restated Credit Agreement includes a sublimit for any new revolver borrowings. This sublimit ranges from $48.0 million to $50.0 million as determined by reference to a formula, which permits new revolver borrowings only if we first make voluntary prepayments and/or mandatory repayments or prepayments of revolver borrowings from the net proceeds of asset sales, equity issuances or other sources. However, if on or after March 31, 2013, we have received net proceeds from asset sales or equity issuances equal to or exceeding $90.0 million, the sublimit for revolver borrowings will be $50.0 million with an increase to $75.0 million after the close of any fiscal quarter in which our Maximum Total Leverage Ratio is 2.25 to 1.00 or less.

As of March 31, 2013, we had $45.4 million in outstanding revolver borrowings and $57.7 million in letters of credit outstanding, with $71.9 million remaining against our $175.0 million capacity, of which $48.0 million was available for cash borrowing, pursuant to the formula discussed above.

We believe that additional sales of non-strategic assets and cash flow from operations will allow us to operate under the reduced commitment amount of $115.0 million for the Revolving Credit Facility through December 31, 2013. We continue to take steps to generate positive operating cash flow and will continue to pursue opportunities to reduce our financial leverage and strengthen our overall balance sheet. These steps may include additional sales of non-strategic and under-performing assets (including equipment, real property and businesses) as well as accessing capital markets to reduce or refinance our indebtedness.

For additional information regarding the Amended and Restated Credit Agreement, see the discussion in Note 6 - Long-Term Debt.

The table below sets forth the primary covenants in the Amended and Restated Credit Agreement and the status with respect to these covenants as of March 31, 2013:

                                                     Covenants                Actual Ratios at
                                                  Requirements (1)             March 31, 2013
Maximum Total Leverage Ratio(1) (debt
divided by Consolidated EBITDA) should be
less than:                                                3.25 to 1                        2.89
Minimum Interest Coverage Ratio(2)
(Consolidated EBITDA divided by
Consolidated Interest Expense as defined
in the Amended and Restated Credit
Agreement) should be equal to or greater
than:                                                     2.75 to 1                        4.28

(1) The Maximum Total Leverage Ratio requirement decreases to 3.00 as of June 30, 2013 and 2.75 as of September 30, 2013.

(2) The Minimum Interest Coverage Ratio increases to 3.00 as of December 31, 2013.

The Maximum Total Leverage Ratio requirement decreased to 3.25 to 1 as of March 31, 2013 from 4.00 to 1 at December 31, 2012. Depending on our financial performance, we may be required to request amendments, or waivers for the primary covenants, dispose of assets, or obtain refinancing in future periods. There can be no assurance that we will be able to obtain amendments or waivers, complete asset sales, or negotiate agreeable refinancing terms should it become needed.


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