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WG > SEC Filings for WG > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for WILLBROS GROUP, INC.\NEW\

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


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto. Additional sections in this Form 10-K which should be helpful to the reading of our discussion and analysis include the following: (i) a description of our services provided by segment found in Items 1 and 2 "Business and Properties - Services Provided"
(ii) a description of our business strategy found in Items 1 and 2 "Business and Properties - Our Strategy"; and (iii) a description of risk factors affecting us and our business, found in Item 1A "Risk Factors."

In as much as the discussion below and the other sections to which we have referred you pertain to management's comments on financial resources, capital spending, our business strategy and the outlook for our business, such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management's judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in our 2013 Form 10-K, particularly in Item 1A "Risk Factors" and in "Forward-Looking Statements."

OVERVIEW

Willbros is a specialty energy infrastructure contractor servicing the oil, gas, refining, 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.

2013 Year in Review

Contract revenue increased 4.7 percent to $2.0 billion in 2013 from $1.9 billion in 2012 primarily related to our Canada segment where revenue more than doubled from the previous year. Operating income increased $19.3 million to $34.1 million in 2013 from $14.8 million in 2012 as a result of positive performance in three of our four segments which produced results in line with our internal expectations. Significant losses in our regional delivery services within our Oil & Gas segment partially offset the solid financial results within our Canada, Utility T&D and Professional Servicessegments.

Contract revenue generated in our Oil & Gas segment decreased 12.4 percent mainly through lower activity in our cross-country pipeline construction services during the first half of the year as we exercised patience and discipline with respect to the acquisition of new work. Construction work on a major cross-country pipeline construction project began late in the third quarter and during the fourth quarter we were awarded two significant cross-country pipeline projects which included a large-diameter natural gas pipeline in South Texas and a liquids pipeline in the Northeast. The decrease in contract revenue within the segment was partially offset by a 3.5 percent increase in sales growth in our downstream construction and maintenance service offerings which was the result of greater turnaround activity, as well as higher utilization of shops and fabrication resources.

Positive operating performance in our pipeline and facilities services was more than offset by project issues in our regional delivery services within our Oil & Gas segment, which began in the fourth quarter of 2012. As such, we concentrated our management efforts on improving these operations which has resulted in sequential improvement each quarter in 2013. We believe that the changes in our Oil & Gas segment leadership, specifically our regional delivery services, coupled with improvements made in our estimating process and project management, will continue to positively impact our performance into 2014.

Contract revenue generated by our Utility T&D segment decreased 7.7 percent compared to 2012 which is primarily attributed to a slight reduction in electric transmission construction work as our Texas Competitive Renewable Energy Zone ("CREZ") projects are replaced with new projects with new customers, namely Xcel Energy. Operating income increased $18.3 million in 2013 as the segment benefited from the completion of the CREZ projects, as well as storm restoration work in Texas and Oklahoma.

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 increased $228.4 million to $445.2 million in 2013 evidencing that the segment is on track to achieve its $500.0 million annual contract revenue run-rate by 2016 that was previously projected. Operating income of $35.4 million was also a significant improvement over the approximate break-even results in 2012. Our Canada segment continues to deliver solid performance quarter-over-quarter, and produced operating margins of 7.9 percent for the year.


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Index to Financial Statements

Contract revenue generated by our Professional Services segment increased $12.2 million in 2013 primarily driven by our line locating and other integrity services, which grew by nearly 50.0 percent. Operating income increased $4.3 million in 2013 due to strong performance in our engineering, right-of-way, survey, integrity and government service offerings. The segment also benefited from expanding its geographic presence to offer all of our services to additional markets.

To sum up 2013, the positive operating results we achieved in three of our four segments evidences the progress we have made to improve or eliminate underperforming lines of services. Although the regional delivery services in our Oil & Gas segment diminished our overall results, we achieved quarter-over-quarter improvement.

Positive highlights for 2013 include:

On January 7, 2013, we completed the sale of all of our shares of capital in Willbros Middle East Limited, which owned our operations in Oman, to Interserve Holdings Limited, a subsidiary of Interserve Plc.

Effective August 7, 2013, we completed the refinancing of our credit facility indebtedness by entering into a five-year $150.0 million asset based senior revolving credit facility maturing on August 7, 2018 (the "ABL Credit Facility"), and a six-year $250.0 million term loan facility maturing on August 7, 2019 (the "2013 Term Loan Facility" and, together with the ABL Credit Facility, the "2013 Credit Facilities").

Effective November 1, 2013, we completed the sale of certain assets comprising our electric and gas distribution business in the Northeast ("Hawkeye") to Elecnor Hawkeye, LLC, a subsidiary of Elecnor, Inc.

We remain focused on analyzing the performance of all of our lines of service relative to our peers and strategic objectives. We will continue to take management actions to improve the operating performance of all our lines of service.

Looking Forward

Last year, we continued to deliver sequential operating improvement and three of our four segments generated positive operating performance. The rapid growth we experienced in our regional delivery services within our Oil & Gas segment outpaced our management capacity resulting in significant deterioration to our overall financial results. The regional market demands local presence, more front line management and back office support. At the beginning of the year, we changed leadership within the Oil & Gas segment and added management talent to provide more oversight and training. Additionally, we improved the back office systems and tools required for these transaction-intensive locations. We have established clear performance standards and an assurance process to verify that these standards are being met. These actions are proving successful with quarter-over-quarter improvement, and we believe these issues have been adequately addressed.

We believe our opportunities in the markets we serve are strong. We have much better visibility going into 2014 than we have had in two years. In the Oil & Gas segment, our large-diameter pipeline spread capacity is largely booked into early fall of this year. Within our regional delivery services, we are focusing our resources on growing midstream pipeline and facilities and pipeline integrity opportunities where we can differentiate our services. In our Utility T&D segment, we have the opportunity to perform additional electric transmission construction work beyond our alliance agreement with Oncor and to capture additional distribution service contracts in the market contiguous to our strong presence in Texas. In ourCanada segment, we are on track to meet or exceed our growth and performance objectives and we will continue to expand our service offerings in a thoughtful and meaningful way. We see upside potential for operating margins in our Professional Services segment as we benefit from the investments we made to expand our geographic presence and services in 2013, which included integrity, line locating and land and survey.

Over the past few years we have been managing a culture change, a change in our belief system that will take us to best in class. The culture of accountability that we are cultivating is driving improved performance throughout the entire organization.


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Index to Financial Statements

Our culture of accountability is focused on achieving these five Key Results which will be the measure of our success:

1. Safety - continuing to drive world-class safety where we protect our employees and all stakeholders associated with our work. We are targeting a total recordable incident rate of less than 1.0.

2. Our People - we are creating the environment where people choose to work for us versus any other option.

3. Our Customers - we are creating a level of customer satisfaction where they choose us versus our competition.

4. Our goal is to reduce our average Days Sales Outstanding by 10 days; and finally

5. We are targeting operating income to be in the top tier of our peer group.

We believe that by focusing on these Key Results, we will enhance stockholder value.

Other Financial Measures

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. As such, 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.

Backlog broadly consists of anticipated revenue from the uncompleted portions of existing contracts and contracts whose award is reasonably assured, 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.

Our backlog presentation reflects not only the 12 month lump-sum and MSA work; 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.

At December 31, 2013, 12 month backlog increased $75.0 million year-over-year driven largely by two significant cross-country pipeline projects awarded to our Oil & Gas segment, which included a large-diameter natural gas pipeline in South Texas and a liquids pipeline in the Northeast. This increase was slightly offset by a reduction in services on MSA contracts within the Utility T&D segment during 2013. The overall decrease in total backlog year-over-year is also primarily attributed to the reduction in MSA work.

The following tables (in thousands) show our backlog from continuing operations by operating segment and geographic location as of December 31, 2013 and 2012 and our 12 month year-end backlog for each of the last five years:

                                                                                  As of December 31,
                                                           2013                                                        2012
                                   12 Month       Percent          Total        Percent        12 Month       Percent          Total        Percent
Oil & Gas                         $   413,699         38.1 %    $   414,749         20.6 %    $   290,500         28.8 %    $   293,495         14.0 %
Utility T&D                           298,202         27.5 %        978,535         48.5 %        393,318         38.9 %      1,257,403         59.9 %
Professional Services                 194,283         17.9 %        256,981         12.7 %        146,120         14.4 %        197,752          9.4 %
Canada                                179,175         16.5 %        365,946         18.2 %        180,427         17.9 %        349,520         16.7 %

Total Backlog                     $ 1,085,359        100.0 %    $ 2,016,211        100.0 %    $ 1,010,365        100.0 %    $ 2,098,170        100.0 %


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  Index to Financial Statements
                                                        As of December 31,
                                                2013                          2012
                                         Total        Percent          Total        Percent
 Total Backlog by Geographic Region
 United States                        $ 1,645,769         81.6 %    $ 1,743,906         83.1 %
 Canada                                   365,946         18.2 %        349,520         16.7 %
 Other International                        4,496          0.2 %          4,744          0.2 %

 Backlog                              $ 2,016,211        100.0 %    $ 2,098,170        100.0 %

As of December 31, 2013 2012 2011 2010 2009 12 Month Backlog $ 1,085,359 $ 1,010,365 $ 768,869 $ 671,289 $ 368,000

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 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 all companies do not use identical calculations, our presentation of Adjusted EBITDA from continuing operations may be different from similarly titled measures of other companies.


Table of Contents
Index to Financial Statements

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

                                                                 Year Ended December 31,
                                         2013             2012             2011            2010             2009
Income (loss) from continuing
operations attributable to Willbros
Group, Inc.                           $   (23,436 )    $   (23,291 )    $ (210,383 )    $   (24,687 )    $    8,992
Interest expense, net                      30,729           29,393          45,035           27,639           8,411
Provision (benefit) for income
taxes                                      14,534            4,727         (33,558 )        (28,951 )         6,003
Depreciation and amortization              42,194           46,345          52,748           42,800          33,431
Goodwill impairment                            -             8,067         178,575           60,000              -
Changes in fair value of contingent
earnout liability                              -                -          (10,000 )        (45,340 )            -
Loss on early extinguishment of
debt                                       11,573            3,405           6,304               -               -
DOJ monitor cost                               -             1,588           3,567            4,002           2,582
Stock based compensation                    7,142            7,607           9,706            8,379           9,537
Restructuring and reorganization
costs                                         241              151             105            3,771          12,694
Acquisition related costs                      -                -               -            10,055           2,499
Gain on disposal of property and
equipment                                  (3,152 )         (3,223 )        (5,379 )         (2,491 )        (2,285 )

Adjusted EBITDA from continuing
operations                            $    79,825      $    74,769      $   36,720      $    55,177      $   81,864

RESULTS OF OPERATIONS

                                                                 Years Ended December 31
                                                                     (in thousands)
                                                                        2013-2012                        2012-2011
                                         2013             2012            Change           2011            Change
Contract revenue
Oil & Gas                             $   791,076      $   902,688      $ (111,612 )    $   560,202      $  342,486
Utility T&D                               446,216          483,603         (37,387 )        388,438          95,165
Professional Services                     342,746          330,594          12,152          278,101          52,493
Canada                                    445,213          216,793         228,420          153,411          63,382
Eliminations                               (6,468 )         (4,878 )        (1,590 )         (3,783 )        (1,095 )

Total                                   2,018,783        1,928,800          89,983        1,376,369         552,431
General and administrative                167,700          151,967          15,733          127,488          24,479
Operating income (loss)
Oil & Gas                                 (40,193 )         (1,479 )       (38,714 )        (57,162 )        55,683
Utility T&D                                23,233            4,897          18,336         (147,722 )       152,619
Professional Services                      15,715           11,426           4,289              361          11,065
Canada                                     35,376              (40 )        35,416            2,460          (2,500 )
Corporate                                      -                -               -            10,000         (10,000 )

Total                                      34,131           14,804          19,327         (192,063 )       206,867
Other expense                             (43,033 )        (33,368 )        (9,665 )        (51,878 )        18,510

Income (loss) from continuing
operations before income taxes             (8,902 )        (18,564 )         9,662         (243,941 )       225,377
Provision (benefit) for income
taxes                                      14,534            4,727           9,807          (33,558 )        38,285

Loss from continuing operations           (23,436 )        (23,291 )          (145 )       (210,383 )       187,092
Income (loss) from discontinued
operations net of provision
(benefit) for income taxes                  7,569           (5,944 )        13,513          (82,438 )        76,494

Net income (loss)                     $   (15,867 )    $   (29,235 )    $   13,368      $  (292,821 )    $  263,586


Table of Contents
Index to Financial Statements

2013 versus 2012

Consolidated Results

Contract Revenue

Contract revenue increased $90.0 million in 2013 primarily related to significant sales growth in a number of service offerings within our Canada segment, which has continued its focus on the oil sands mine sites and in situ extraction developments. This increase was partially offset by lower utilization in our cross-country pipeline construction services within our Oil & Gas segment compared to 2012 where we exercised more patience and discipline in acquiring work and a reduction in activity in our electric transmission construction services within our Utility T&D segment primarily due to the completion of the remaining Texas CREZ transmission construction projects during the year.

General and Administrative Expense

General and administrative expenses increased $15.7 million in 2013 primarily due to increased overhead costs within our Canada segment to support its substantial growth in comparison to 2012. We also incurred additional costs in our Professional Services segment related to investments made to expand our geographic presence and services including engineering, integrity, line locating and land and survey. In 2013, general and administrative expense as a percentage of contract revenue was 8.3 percent which was an increase of 0.4 percent in comparison to 2012.

Operating Income

Operating income increased $19.3 million in 2013 primarily related to improved performance in a number of lines of service within our Canada segment, as well as profitability generated from the completion of two Texas CREZ projects and storm restoration work in Texas and Oklahoma all within our Utility T&D segment. These increases were partially offset by significant losses in our regional delivery services within our Oil & Gas segment which were the result of ineffective project management and execution.

Other Expense

Other expense increased $9.7 million in 2013 primarily due to an increase of $8.2 million in debt extinguishment costs year-over-year associated with the refinancing of our credit facility indebtedness and a net increase in interest expense of $1.3 million due to an increase in interest rates under our 2013 Term Loan Facility.

Provision for Income Taxes

Provision for income taxes increased $9.8 million driven primarily by our Canada segment being in a profit position for 2013, compared to a break-even position for 2012.

Income (Loss) from Discontinued Operations, Net of Taxes

Income from discontinued operations increased $13.5 million primarily due to a $23.6 million gain on the sale of Willbros Middle East Limited, which held our operations in Oman and $17.0 million of settlement proceeds from Central Maine Power. This increase was partially offset by continued losses in Hawkeye, which were mainly attributed to the Maine Power Reliability Program project.

Segment Results

Oil & Gas Segment

Contract revenue decreased $111.6 million compared to 2012 primarily related to lower utilization in our cross-country pipeline construction services where we exercised more patience and discipline in acquiring work. This increase was partially offset by sales growth within our downstream construction and maintenance services through greater turnaround activity and higher utilization of shops and fabrication resources.

Operating loss increased $38.7 million primarily related to significant losses in our regional delivery services which were the result of ineffective project management and execution. At the beginning of the year, we changed leadership within the Oil & Gas segment and added management talent to provide more oversight and training. Additionally, we improved the back office systems and tools required for these regional delivery services. These actions are proving successful with quarter-over-quarter improvement and we believe these issues have been adequately addressed.


Table of Contents
Index to Financial Statements

Professional Services Segment

Contract revenue increased $12.2 million in 2013 primarily driven by increased demand in line locating and other integrity services and in engineering services supporting the gas, liquids and petrochemical industries.

Operating income increased $4.3 million in 2013 primarily related to improved profitability in engineering, right-of-way, survey, integrity and government service offerings.

Utility T&D Segment

Contract revenue decreased $37.4 million in 2013 primarily due to a reduction in activity in our electric transmission construction services mainly related to the completion of the remaining Texas CREZ transmission construction projects during the year.

Operating income increased $18.3 million due to increased profitability generated from the completion of the Texas CREZ projects and storm restoration work in Texas and Oklahoma.

Canada Segment

Contract revenue increased $228.4 million in 2013 primarily related to substantial growth in our specialty construction and integrity services that started in late 2012 as well as the continued progression of several capital replacement projects in Northern Alberta and several additional maintenance projects.

. . .

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