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CBI > SEC Filings for CBI > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for CHICAGO BRIDGE & IRON CO N V

Form 10-K for CHICAGO BRIDGE & IRON CO N V


27-Feb-2014

Annual Report


Item 7. 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 that may impact our future performance. This discussion should be read in conjunction with our Financial Statements and the related notes thereto.
OVERVIEW
General-We provide a wide range of services including conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management and environmental services to customers in the energy infrastructure market throughout the world, and are a provider of diversified government services. In conjunction with the Shaw Acquisition on February 13, 2013, beginning in the first quarter of 2013, our reporting segments are comprised of our four operating groups: Engineering, Construction and Maintenance; Fabrication Services; Technology; and Government Solutions. For comparative purposes only, the impact of the acquired Shaw operations are presented separately within the operating group discussions below.
We continue to be broadly diversified across the global energy infrastructure market. Our geographic diversity is illustrated by approximately 55% of our 2013 revenue coming from projects outside the U.S. and approximately 30% of our December 31, 2013 backlog being comprised of projects outside the U.S. The geographic mix of our revenue will evolve consistent with changes in our backlog mix, as well as shifts in future global energy demand. Our diversity in energy infrastructure end-markets ranges from upstream activities such as offshore oil and gas and onshore oil sands projects, to downstream activities such as gas processing, LNG, refining, and petrochemicals, to fossil and nuclear-based power plants. Planned investments across the natural gas value chain, including LNG and petrochemicals, remain strong, and we anticipate additional benefits from continued investments in U.S. shale gas. Global investments in power, offshore and petrochemical facilities are expected to continue at robust levels, as are investments in various types of facilities which require storage structures and pre-fabricated pipe.
Our long-term contracts are awarded on a competitive bid and negotiated basis using a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Under cost-reimbursable contracts, we generally perform our services in exchange for a price that consists of reimbursement of all customer-approved costs and a profit component, which is typically a fixed rate per hour, an overall fixed fee or a percentage of total reimbursable costs. Under fixed-price contracts, we perform our services and execute our projects at an established price. The timing of our revenue recognition may be impacted by the contracting structure of our contracts. Cost-reimbursable contracts, and hybrid contracts with a more significant cost-reimbursable component, generally provide our customers with greater influence over the timing of when we perform our work, and accordingly, such contracts often result in less predictability with respect to the timing of our revenue. Fixed-price contracts, and hybrid contracts with a more significant fixed-price component, tend to provide us with greater control over project schedule and the timing of when work is performed and costs are incurred, and accordingly, when revenue is recognized. Our shorter-term contracts and services are generally provided on a cost-reimbursable, fixed-price or unit price basis. Our December 31, 2013 backlog distribution by contracting type is described below within our operating group discussion. We anticipate that approximately 35% to 40% of our consolidated backlog will be recognized during 2014.


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Backlog for each of our operating groups generally consists of several hundred contracts, which are being executed globally. These contracts vary in size from less than one hundred thousand dollars in contract value to several billion dollars, with varying durations that can exceed five years. The differing types, sizes, and durations of our contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in our quarterly operating group results as a percentage of operating group revenue. In addition, the relative contribution of each of our operating groups, and selling and administrative expense fluctuations, will impact our quarterly consolidated results as a percentage of consolidated revenue. Selling and administrative expense fluctuations are primarily impacted by our stock-based compensation costs, which are recognized predominantly in the first quarter of each year due to the timing of stock awards and the immediate expensing of awards for participants that are eligible to retire. Although quarterly variability is not unusual in our business, we are currently not aware of any fundamental change in our backlog or business that would give rise to future operating results that would be significantly different from our recent historical norms. Engineering, Construction and Maintenance-Our Engineering, Construction and Maintenance operating group provides engineering, procurement, and construction for major energy infrastructure facilities, as well as comprehensive and integrated maintenance services. This segment includes our Oil and Gas business unit (formerly our Project Engineering and Construction segment) and Shaw's former Power and Plant Services segments. Effective January 1, 2013, the backlog and operating results of our large LNG mechanical erection project in the Asia Pacific region that we previously reported within our former Steel Plate Structures segment (currently within our Fabrication Services operating group) are reported within our Engineering, Construction and Maintenance operating group to align with our current operating structure. Prior year information has been reclassified to conform to the current year classification.
Our Engineering, Construction and Maintenance operating group comprised $21.4 billion (77%) of our consolidated December 31, 2013 backlog. Backlog for the acquired Shaw Power and Plant Services business units (collectively "Power") totaled $12.1 billion at December 31, 2013. The Engineering, Construction and Maintenance operating group backlog composition at December 31, 2013 was approximately 50% power, 30% LNG, 5% refining, 5% gas processing, and 10% oil sands, petrochemical and other end markets. Our power backlog was primarily concentrated in the U.S., however, we anticipate that our significant future opportunities will be derived from China and other regions. Our LNG backlog was primarily concentrated in the Asia Pacific and North American regions and we anticipate significant opportunities will continue to be derived from these regions in addition to Africa. The majority of our refining-related backlog was derived from South America and we anticipate that our future opportunities will be derived from the Middle East, South America, Russia, and the Asia Pacific region. Our gas processing projects were primarily concentrated in the U.S. and the Asia Pacific region, where we anticipate continued strength. Our oil sands backlog was derived from Canada and we anticipate opportunities will continue from this region. Our December 31, 2013 backlog distribution for this operating group by contracting type was approximately 65% fixed-price and hybrid and 35% cost-reimbursable.
Fabrication Services-Our Fabrication Services operating group provides fabrication of piping systems, process and nuclear modules, and fabrication and erection of steel plate storage tanks and pressure vessels for the oil and gas, water and wastewater, mining, mineral processing and power generation industries. This segment includes our former Steel Plate Structures segment and Shaw's former Fabrication and Manufacturing segment. As discussed above, effective January 1, 2013, the backlog and operating results of our large LNG mechanical erection project in the Asia Pacific region that we previously reported within our former Steel Plate Structures segment are now reported within our Engineering, Construction and Maintenance operating group. Prior year information has been reclassified to conform to the current year classification. Our Fabrication Services operating group comprised approximately $3.2 billion (12%) of our consolidated December 31, 2013 backlog. Backlog for the acquired Shaw Fabrication and Manufacturing business unit totaled $946.2 million at December 31, 2013. The Fabrication Services backlog composition by end market at December 31, 2013 was approximately 35% LNG (including low temp and cryogenic), 30% petrochemical, 25% power, 5% gas processing and 5% other end markets. Our December 31, 2013 backlog distribution for this operating group by contracting type was approximately 95% fixed-price, hybrid, or unit based, with the remainder being cost-reimbursable.
Technology-Our Technology operating group provides licensed process technologies, catalysts, specialized equipment and engineered products for use in petrochemical facilities, oil refineries and gas processing plants and offers process planning and project development services, and a comprehensive program of aftermarket support. This segment primarily consists of our former Lummus Technology segment and comprised $876.4 million (3%) of our consolidated December 31, 2013 backlog. Our December 31, 2013 backlog for this operating group was primarily comprised of fixed-price contracts. Technology's backlog excludes contracts related to our 50% owned CLG joint venture, which we do not consolidate. CLG income is recognized as equity earnings and is generated from technology licenses, engineering services and catalysts, primarily for the refining industry.


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Government Solutions-Our Government Solutions operating group leads large, high-profile programs and projects, including design-build infrastructure projects, for federal, state and local governments, and provides full-scale environmental services for government and private sector customers, including remediation and restoration of contaminated sites, emergency response, and disaster recovery. This segment primarily consists of Shaw's former Environmental and Infrastructure segment.
Our Government Solutions operating group comprised approximately $2.3 billion (8%) of our consolidated December 31, 2013 backlog. The composition of the backlog by end market at December 31, 2013 was approximately 45% EPC, 30% remediation and restoration, 15% program and project management and 10% environmental consulting and engineering, and was primarily concentrated in the U.S. Our December 31, 2013 backlog for this operating group was primarily comprised of cost-reimbursable contracts. Due to the nature of contracts for this operating group, where legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year, approximately $1.2 billion of our backlog at December 31, 2013 was for contractual commitments that are subject to future funding decisions.
RESULTS OF OPERATIONS
Our new awards, revenue and income from operations by reporting segment were as follows:

                                                  Years Ended December 31,
                                                       (In thousands)
                                          % of                       % of                       % of
                            2013         Total         2012         Total         2011         Total
New Awards
Engineering,
Construction and
Maintenance            $  7,929,048       65%      $ 5,115,271       70%      $ 4,531,870       67%
Fabrication Services      2,681,886       22%        1,463,978       20%        1,738,001       25%
Technology                  633,690        5%          726,721       10%          537,844        8%
Government Solutions      1,008,346        8%                -        -%                -        -%
Total new awards       $ 12,252,970                $ 7,305,970                $ 6,807,715

                                          % of                       % of                       % of
                            2013         Total         2012         Total         2011         Total
Revenue
Engineering,
Construction and
Maintenance            $  6,724,567       61%      $ 3,305,377       60%      $ 2,312,151       51%
Fabrication Services      2,575,597       23%        1,692,533       31%        1,789,817       39%
Technology                  599,195        5%          487,296        9%          448,574       10%
Government Solutions      1,195,168       11%                -        -%                -        -%
Total revenue          $ 11,094,527                $ 5,485,206                $ 4,550,542

                                          % of                       % of                       % of
                            2013        Revenue        2012        Revenue        2011        Revenue
Income From
Operations
Engineering,
Construction and
Maintenance            $    328,919       4.9%     $   168,467       5.1%     $    93,826       4.1%
Fabrication Services        259,750      10.1%         170,780      10.1%         165,033       9.2%
Technology                  156,835      26.2%         127,396      26.1%          96,338      21.5%
Government Solutions         34,741       2.9%               -        -%                -        -%
Total operating
groups                      780,245       7.0%         466,643       8.5%         355,197       7.8%
Acquisition and
integration related
costs                       (95,737 )                  (11,000 )                        -
Total income from
operations             $    684,508       6.2%     $   455,643       8.3%     $   355,197       7.8%


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2013 Versus 2012
New Awards/Backlog-New awards represent the value of new contract commitments received during a given period and are included in backlog until work is performed and revenue is recognized, or until cancellation. Our new awards may vary significantly each reporting period based upon the timing of our major new contract commitments. New awards were $12.3 billion for 2013, compared with $7.3 billion for 2012. The increase compared to the prior year was primarily due to the current year including awards from the recently acquired Shaw operations (approximately $3.0 billion), primarily within our Engineering, Construction and Maintenance and Government Solutions operating groups, as well as an LNG liquefaction terminal award (approximately $2.5 billion) and ethane cracker award (approximately $1.0 billion) in the U.S., also within our Engineering, Construction and Maintenance operating group. See Operating Group Results for further discussion.
Backlog at December 31, 2013 was approximately $27.8 billion compared to $10.9 billion at December 31, 2012, with the increase primarily reflecting the impact of the backlog acquired in connection with the Shaw Acquisition (approximately $16.8 billion at the Acquisition Closing Date) and new awards exceeding revenue by $1.2 billion. For 2013, our non-U.S. dollar denominated backlog decreased by approximately $800.0 million due to the strengthening of the U.S. Dollar, primarily against the Australian Dollar, Colombian Peso and Canadian Dollar. While currency fluctuations can cause significant variations in our reported backlog, these fluctuations have not resulted in significant variations in our operating results.
Revenue-Revenue for 2013 was $11.1 billion, representing a $5.6 billion increase (102%) compared with 2012. Approximately $4.0 billion of the increase was attributable to the impact of the Shaw Acquisition, primarily within our Engineering, Construction and Maintenance and Government Solutions operating groups. The remaining increases were primarily due to increased construction activities on our large cost reimbursable LNG mechanical erection and gas processing projects in the Asia Pacific region and refinery project in Colombia (approximately $800.0 million combined), within our Engineering, Construction and Maintenance operating group. For 2013, revenue from our aforementioned LNG mechanical erection project, combined with our LNG tank project for the same customer within our Fabrication Services operating group, totaled $1.2 billion (approximately 11% of our total revenue). For 2012, revenue for our Colombian refinery project within our Engineering, Construction and Maintenance operating group was approximately $915.0 million (approximately 17% of our total revenue). See Operating Group Results below for further discussion.
Gross Profit-Gross profit was $1.2 billion (10.8% of revenue) for 2013, compared with $698.7 million (12.7% of revenue) for 2012. The increase in absolute dollars was attributable to higher revenue for each of our operating groups, including revenue attributable to the Shaw Acquisition. The decrease in gross profit as a percentage of revenue was primarily due to the impact of the acquired Shaw operations and our Engineering, Construction and Maintenance operating group representing a larger portion of our consolidated revenue, partly offset by the benefit of higher revenue volume and related leverage of our operating costs.
Selling and Administrative Expense-Selling and administrative expense was $379.5 million (3.4% of revenue) for 2013, compared with $227.9 million (4.2% of revenue) for 2012. The absolute dollar increase for 2013 was attributable to the impact of the Shaw Acquisition and associated higher incentive plan costs. The decrease as a percentage of revenue was primarily due to reductions in our global selling and administrative costs as a result of our integration activities and leverage of our global resources.
Intangibles Amortization-Intangibles amortization was $61.1 million for 2013, compared with $22.6 million for 2012. The increase over 2012 was primarily due to $42.0 million of amortization recognized subsequent to the Acquisition Closing Date associated with the Shaw Acquisition.
Equity Earnings-Equity earnings were $23.5 million for 2013, compared with $17.9 million for 2012. The increase was attributable to higher earnings from our unconsolidated CLG joint venture.
Acquisition and Integration Related Costs-Acquisition and integration related costs were $95.7 million for 2013, compared with $11.0 million for 2012. Acquisition-related costs primarily included transaction costs, professional fees, and change-in-control and severance-related costs associated with the Shaw Acquisition. Integration-related costs primarily related to facility consolidations and the associated accelerated lease costs for vacated facilities and personnel relocation costs.
Income from Operations-Income from operations was $684.5 million (6.2% of revenue) for 2013, compared with $455.6 million (8.3% of revenue) for 2012. The increase in absolute value and decrease as a percentage of revenue was due to the reasons noted above. See Operating Group Results below for further discussion.
Interest Expense and Interest Income-Interest expense was $87.6 million million for 2013, compared with $19.6 million for 2012. Our 2013 results were impacted by interest and fees related to financing commitments associated with the Shaw Acquisition (approximately $78.2 million). Approximately $10.5 million of our 2013 interest expense was related to one-time commitments satisfied during the first quarter and interest and fees incurred prior to the Acquisition Closing Date. Interest income was $6.9 million for 2013, compared with $8.0 million for 2012.


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Income Tax Expense-Income tax expense was $91.3 million (15.1% of pre-tax income) for 2013, compared with $127.0 million (28.6% of pre-tax income) for 2012. Our 2013 rate primarily benefited from the reversal of valuation allowance of $62.8 million associated with our U.K. net operating loss deferred tax assets (an approximate 10.0% tax rate benefit), as more fully described within Note 16 to our Consolidated Financial Statements. Our 2013 rate also benefited from an increase in available tax credits (approximately 5.0%) and a greater portion of our earnings being represented by non-controlling interests (approximately 2.0%), partly offset by a greater portion of our income being earned in the U.S. and in higher tax rate jurisdictions outside of the U.S. (approximately 3.0%). Our rate may experience fluctuations due primarily to changes in the geographic distribution of our pre-tax income. For 2014, we anticipate increased activity in higher tax rate jurisdictions, primarily the U.S., Australia and Canada. Net Income Attributable to Noncontrolling Interests-Noncontrolling interests are primarily associated with our large LNG mechanical erection and gas processing projects in the Asia Pacific region and certain operations in the U.S. and Middle East. Net income attributable to noncontrolling interests was $58.5 million for 2013, compared with $15.4 million for 2012. The change compared to 2012 was commensurate with the level of applicable operating results for the aforementioned projects and operations, including the impact of those associated with the Shaw Acquisition (approximately $16.6 million). We expect to experience an increase in net income attributable to noncontrolling interests in future periods primarily associated with additional progress on our large LNG mechanical erection project.
Operating Group Results
Engineering, Construction and Maintenance For comparative purposes only, the acquired Shaw Power results within our Engineering, Construction and Maintenance operating group have been shown separately below given there are no associated results in the 2012 period.

                                         Years Ended December 31,
                                              (In thousands)
                                              % of                      % of
                                 2013        Total         2012        Total
New Awards
Oil and Gas                  $ 6,487,790        82 %   $ 5,115,271       100 %
Power                          1,441,258        18 %             -         - %
Total New Awards             $ 7,929,048               $ 5,115,271

Revenue
Oil and Gas                  $ 4,491,632        67 %   $ 3,305,377       100 %
Power                          2,232,935        33 %             -         - %
Total Revenue                $ 6,724,567               $ 3,305,377

                                              % of                      % of
                                            Revenue                   Revenue
Income From Operations
Oil and Gas                  $   250,716       5.6 %   $   168,467       5.1 %
Power                             78,203       3.5 %             -         - %
Total Income From Operations $   328,919       4.9 %   $   168,467       5.1 %

New Awards-New awards were $7.9 billion for 2013, compared with $5.1 billion for 2012. In addition to the impact of the acquired Power operations ($1.4 billion), which included extended commitments on existing nuclear maintenance contracts (approximately $770.0 million) and a chemical plant expansion project in the U.S. (approximately $100.0 million), significant new awards for 2013 included a LNG liquefaction terminal award in the U.S. (approximately $2.5 billion), an ethane cracker in the U.S. (approximately $1.0 billion), scope increases on our refinery project in Colombia and our LNG mechanical erection project in the Asia Pacific region (approximately $2.2 billion combined), and engineering services for an offshore platform in the Norwegian Sea (approximately $180.0 million). Significant new awards for 2012 included EPC services and module fabrication for an oil sands expansion project in Canada (approximately $1.2 billion combined), scope increases on our LNG mechanical erection project (approximately $1.0 billion), refinery project in Colombia (approximately $750.0 million) and gas processing project in the Asia Pacific region (approximately $190.0 million), a gas conditioning plant in the Asia Pacific region (approximately $550.0 million), a petrochemical project in the U.S. (approximately $300.0 million), engineering services for an offshore platform in the U.K. (approximately $250.0 million), a gas processing award in Europe (approximately $175.0


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million), an offshore engineering project and butadiene extraction plant project in Europe (approximately $140.0 million combined) and front-end engineering and design services for an ethylene plant in Russia (approximately $40.0 million). Revenue-Revenue was $6.7 billion for 2013, representing an increase of $3.4 billion (103%) compared with 2012. Our 2013 results benefited from the impact of the acquired Power operations ($2.2 billion), increased construction activities on our large cost reimbursable LNG mechanical erection and gas processing projects in the Asia Pacific region and refinery project in Colombia (approximately $800.0 million combined) and increased progress on various projects in Europe and our oil sands projects in Canada. Revenue attributable to the aforementioned cost reimbursable projects totaled approximately $2.5 billion of the operating group's 2013 revenue, compared with $1.7 billion for 2012. Approximately $870.0 million of the operating group's 2013 revenue was attributable to our nuclear projects in Georgia and South Carolina, for which revenue is anticipated to increase as construction activities progress. Income From Operations - Income from operations for 2013 was $328.9 million (4.9% of revenue), compared with $168.5 million (5.1% of revenue) for 2012. Our 2013 results included $78.2 million of income from operations related to the acquired Power operations (3.5% of associated revenue), net of $20.1 million of associated intangible amortization expense. Our remaining results were $250.7 million (5.6% of revenue) for 2013, compared with $168.5 million (5.1% of revenue) for 2012. Our increase over the prior year (excluding the acquired Power operations) was partly attributable to our large cost reimbursable projects, which contributed incremental income from operations (approximately $45.0 million) on higher revenue volume, net of the dilutive effect of scope growth at lower margin levels. Our 2013 results also benefited from increased revenue volume on our remaining projects, and associated overall leverage of our operating costs, savings on a project in South America that is now complete (approximately $19.0 million) and various projects in Europe (approximately $35.0 million), partially offset by cost increases on two projects in the U.S. and Canada (approximately $59.0 million) and higher pre-contract costs (approximately $8.0 million). Our 2012 results were primarily impacted by cost increases on a project in Canada (approximately $37.0 million), partly offset by project savings on two projects in Europe (approximately $12.0 million). Fabrication Services
For comparative purposes only, the acquired Shaw Fabrication and Manufacturing results within our Fabrication Services operating group have been shown separately below given there are no associated results in the 2012 period.

                                          Years Ended December 31,
                                               (In thousands)
                                               % of                      % of
                                  2013        Total         2012        Total
New Awards
Steel Plate Structures        $ 2,152,174        80 %   $ 1,463,978       100 %
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