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CBI > SEC Filings for CBI > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for CHICAGO BRIDGE & IRON CO N V

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


24-Apr-2014

Quarterly Report


Item 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 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 were comprised of our four operating groups: Engineering, Construction and Maintenance; Fabrication Services; Technology; and Environmental Solutions (formerly Government Solutions). The three months ended March 31, 2013 includes the impact of the acquired Shaw operations from the Acquisition Closing Date, while the three months ended March 31, 2014 includes a full quarter of associated results (hereafter referred to as the "full quarter impact of the acquired Shaw operations"). Additionally, revenue and income from operations of $69,641 and $3,321, respectively, for the three months ended March 31, 2013 for a large EPC project in the U.S. that was previously reported within our Environmental Solutions operating group has been reclassified to our Engineering, Construction and Maintenance operating group to conform to its classification in 2014, reflecting the present management oversight for the project.
We continue to be broadly diversified across the global energy infrastructure market. Our geographic diversity is illustrated by approximately 50% of our 2014 revenue coming from projects outside the U.S. and approximately 25% of our March 31, 2014 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 March 31, 2014 backlog distribution by contracting type is described below within our operating group discussion.
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.


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Our Engineering, Construction and Maintenance operating group comprised approximately $25.1 billion (82%) of our consolidated March 31, 2014 backlog. The Engineering, Construction and Maintenance operating group backlog composition at March 31, 2014 was approximately 45% power, 35% 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 March 31, 2014 backlog distribution for this operating group by contracting type was approximately 80% fixed-price and hybrid and 20% 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.
Our Fabrication Services operating group comprised approximately $3.0 billion (10%) of our consolidated March 31, 2014 backlog. The Fabrication Services backlog composition by end market at March 31, 2014 was approximately 30% LNG (including low temp and cryogenic), 30% petrochemical, 25% power, 5% gas processing and 10% other end markets. Our March 31, 2014 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.
Our Technology operating group comprised approximately $839.9 million (3%) of our consolidated March 31, 2014 backlog and 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. Environmental Solutions-Our Environmental Solutions operating group provides full-scale environmental services for government and private sector customers, including remediation and restoration of contaminated sites, emergency response, and disaster recovery and leads large, high-profile programs and projects, including design-build infrastructure projects, for federal, state and local governments.
Our Environmental Solutions operating group comprised approximately $1.7 billion (5%) of our consolidated March 31, 2014 backlog. The composition of the backlog by end market at March 31, 2014 was approximately 40% remediation and restoration, 25% EPC, 20% program and project management and 15% environmental consulting and engineering, and was primarily concentrated in the U.S. Our March 31, 2014 backlog for this operating group was approximately 60% fixed-price and 40% cost-reimbursable.


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RESULTS OF OPERATIONS
Our new awards, revenue and income from operations by reporting segment were as
follows:
                                                       Three Months Ended March 31,
                                                              (In thousands)
                                                              % of                       % of
                                                2014         Total         2013         Total
New Awards
Engineering, Construction and Maintenance   $ 4,924,319       85%      $ 1,000,450       52%
Fabrication Services                            493,974        8%          707,706       36%
Technology                                      100,201        2%          152,748        8%
Environmental Solutions                         278,995        5%           85,045        4%
Total new awards                            $ 5,797,489                $ 1,945,949

                                                              % of                       % of
                                                2014         Total         2013         Total
Revenue
Engineering, Construction and Maintenance   $ 1,968,711       67%      $ 1,499,776       66%
Fabrication Services                            630,408       22%          495,048       22%
Technology                                      144,076        5%          151,482        7%
Environmental Solutions                         184,937        6%          105,123        5%
Total revenue                               $ 2,928,132                $ 2,251,429

                                                              % of                       % of
                                                2014        Revenue        2013        Revenue
Income From Operations
Engineering, Construction and Maintenance   $    88,778       4.5%     $    66,533       4.4%
Fabrication Services                             40,413       6.4%          45,024       9.1%
Technology                                       41,171      28.6%          35,542      23.5%
Environmental Solutions                             188       0.1%             671       0.6%
Total operating groups                          170,550       5.8%         147,770       6.6%
Acquisition and integration related costs        (8,067 )                  (61,256 )
Total income from operations                $   162,483       5.5%     $    86,514       3.8%

Consolidated Results
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 $5.8 billion for the first quarter 2014, compared with $1.9 billion for the corresponding 2013 period. The increase compared to the prior year quarter was primarily due to the current period including our proportionate share of a $6.2 billion LNG export facility award in the U.S. (approximately $3.1 billion), a structural, mechanical and piping construction award for an LNG project in the Asia Pacific region (approximately $625.0 million), and engineering and procurement for a clean fuels project in the Middle East (approximately $370.0 million), all within our Engineering, Construction and Maintenance operating group and a pipe fabrication award for a propane dehydrogenation unit in the U.S. (approximately $100.0 million) within our Fabrication Services operating group. See Operating Group Results below for further discussion.
Backlog at March 31, 2014 was approximately $30.7 billion, compared to $27.8 billion at December 31, 2013, with the increase primarily reflecting the impact of new awards exceeding revenue by $2.9 billion. While currency fluctuations can cause significant variations in our reported backlog, these fluctuations have not resulted in significant variances in our backlog for the first quarter 2014, and generally do not have a significant impact on our operating results. Certain contracts within our Environmental Solutions and Engineering, Construction and Maintenance operating groups are dependent upon funding from the U.S. government where legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year. Approximately $800.0 million of our backlog at March 31, 2014 for these operating groups was for contractual commitments that are subject to future funding decisions.


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Revenue-Revenue was $2.9 billion for the first quarter 2014, representing a $676.7 million increase (30%) from the corresponding 2013 period. The increase was primarily due to increased construction activities on our large cost reimbursable projects in the Asia Pacific region and Colombia, within our Engineering, Construction and Maintenance operating group and the full quarter impact of the acquired Shaw operations. See Operating Group Results below for further discussion.
Gross Profit-Our gross profit was $301.4 million (10.3% of revenue) for the first quarter 2014, compared with $246.1 million (10.9% of revenue) for the corresponding 2013 period. The absolute dollar increase was primarily attributable to our higher revenue volume. The decrease as a percentage of revenue was primarily due to the full quarter impact of the acquired Shaw operations and a temporary underutilization of fabrication capacity within our Fabrication Services operating group.
Selling and Administrative Expense-Selling and administrative expense was $119.2 million (4.1% of revenue) for the first quarter 2014, compared with $94.0 million (4.2% of revenue) for the corresponding 2013 period. The absolute dollar increase was primarily attributable to increases in our incentive plan costs (approximately $7.4 million), the full quarter impact of the acquired Shaw operations and inflationary increases. Our stock-based compensation costs, which are predominantly in selling and administrative expense, are higher in the first quarter of each year, due to the immediate expensing of awards for those participants that are eligible to retire. First quarter stock-based compensation expense totaled $43.1 million and $32.5 million for 2014 and 2013, respectively, or 63% and 50% of estimated annual expense for each of the respective periods. Intangibles Amortization-Intangibles amortization was $16.2 million for the first quarter 2014, compared with $9.2 million for the corresponding 2013 period. The increase over the prior year period was primarily due to the full quarter impact of the acquired Shaw operations.
Equity Earnings-Equity earnings were $4.2 million for the first quarter 2014, compared with $4.5 million for the corresponding 2013 period.
Acquisition and Integration Related Costs-Integration-related costs were $8.1 million for the first quarter 2014 and primarily related to facility consolidations, including the associated accrued future lease costs for vacated facilities and unutilized capacity, personnel relocation and severance-related costs, and systems integration and other integration-related costs. Acquisition and integration related costs for the corresponding 2013 period were $61.3 million and primarily included transaction costs, professional fees, and change-in-control and severance-related costs.
Income from Operations-Income from operations was $162.5 million (5.5% of revenue) for the first quarter 2014, versus $86.5 million (3.8% of revenue) for the corresponding 2013 period. The increase in absolute dollars and increase as a percentage of revenue was primarily attributable to the reasons noted above. See Operating Group Results below for further discussion.
Interest Expense and Interest Income-Interest expense was $18.9 million for the first quarter 2014, compared with $22.7 million for the corresponding 2013 period. Our first quarter 2014 and 2013 periods both included a full quarter of financing costs associated with the 2013 Shaw Acquisition due to the timing of obtaining our initial funding commitments. The decrease over the prior year period was primarily attributable to the first quarter 2013 including interest related to one-time commitments satisfied during the quarter associated with the Shaw Acquisition (approximately $2.0 million) and the impact of our lower outstanding debt balance in 2014, partly offset by the impact of an increase in average revolving credit facility borrowings. Interest income was $2.1 million for the first quarter 2014, compared with $1.9 million for the corresponding 2013 period.
Income Tax Expense-Income tax expense for the first quarter 2014 was $42.9 million (29.5% of pre-tax income), compared with $22.8 million (34.7% of pre-tax income) for the corresponding 2013 period. Our 2014 tax rate benefited from increases in our estimated available tax credits (approximately 2.5%). Our 2013 tax rate was impacted by approximately 3.0% due to the non-deductible nature of certain Shaw Acquisition-related costs. Our tax rate may continue to experience fluctuations due primarily to changes in the geographic distribution of our pre-tax income.
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 $13.8 million for the first quarter 2014, compared to $9.3 million for the corresponding 2013 period. The change compared to the 2013 period was commensurate with the level of applicable operating results for the aforementioned projects and operations.
Operating Group Results
Engineering, Construction and Maintenance New Awards-New awards were $4.9 billion for the first quarter 2014, compared with $1.0 billion for the corresponding 2013 period. Significant new awards for the first quarter 2014 included our proportionate share of a $6.2 billion LNG export facility award in the U.S. (approximately $3.1 billion), a structural, mechanical and piping construction award for an LNG project in the Asia Pacific Region (approximately $625.0 million), engineering and procurement for a clean fuels project in the Middle East (approximately $370.0 million), nuclear facility modification work in the U.S. (approximately $120.0 million),


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engineering and project management services for a pipeline expansion project in the Middle East (approximately $85.0 million), a front-end engineering award for a plastics project in the Middle East (approximately $40.0 million) and scope increases on existing backlog. Significant new awards for the first quarter 2013 included an extended commitment on an existing nuclear maintenance contract (approximately $445.0 million), engineering services for an offshore LNG platform in the Norwegian Sea (approximately $180.0 million) and scope increases on our refinery project in Colombia (approximately $175.0 million). Revenue-Revenue was $2.0 billion for the first quarter 2014, representing an increase of $468.9 million (31%), compared with the corresponding 2013 period. Our 2014 results primarily benefited from net increased revenue on our large cost reimbursable LNG mechanical erection and gas processing projects in the Asia Pacific region and refinery project in Colombia (approximately $150.0 million combined) and the full quarter impact of the acquired Shaw operations (approximately $345.0 million). Approximately $700.0 million of the operating group's first quarter 2014 revenue was from our large cost reimbursable projects, compared with $550.0 million for the corresponding 2013 period. Approximately $320.0 million of the operating group's first quarter 2014 revenue was attributable to our nuclear projects in Georgia and South Carolina, compared with $122.0 million for the corresponding 2013 period.
Income from Operations-Income from operations for the first quarter 2014 was $88.8 million (4.5% of revenue), compared with $66.5 million (4.4% of revenue) for the corresponding 2013 period. Our 2014 results benefited from our higher revenue volume and leverage of operating costs, offset partially by the full quarter impact of the acquired Shaw operations at relatively lower margin levels.
Fabrication Services
New Awards-New awards were $494.0 million for the first quarter 2014, compared with $707.7 million for the corresponding 2013 period. Significant new awards for the first quarter 2014 included a pipe fabrication award for a propane dehydrogenation unit in the U.S. (approximately $100.0 million) and various other storage tank and fabrication awards for new and existing projects throughout the world. Significant new awards during the first quarter 2013 included LNG storage tanks and facilities for two projects in the Asia Pacific region (approximately $180.0 million and $80.0 million) and ethane storage tanks in the U.S. (approximately $110.0 million).
Revenue-Revenue was $630.4 million for the first quarter 2014, representing an increase of $135.4 million (27%), compared with the corresponding 2013 period. The increase over the prior year period was primarily attributable to the full quarter impact of the acquired Shaw operations (approximately $85.0 million). Income from Operations-Income from operations for the first quarter 2014 was $40.4 million (6.4% of revenue), compared with $45.0 million (9.1% of revenue) for the corresponding 2013 period. Our first quarter 2014 results benefited from our higher revenue volume, but were impacted by a temporary underutilization of our pipe fabrication capacity due to customer delays (approximately $17.0 million). The first quarter 2013 period benefited from savings on storage tank projects in the Caribbean and South America (approximately $9.0 million). Technology
New Awards-New awards were $100.2 million for the first quarter 2014, compared with $152.7 million for the corresponding 2013 period. The decrease was primarily due to higher heat transfer awards in the prior year period. Revenue-Revenue was $144.1 million for the first quarter 2014, representing a decrease of $7.4 million (5%), compared with the corresponding 2013 period. The decrease was primarily due to a higher volume of heat transfer activity in the prior year period, partly offset by increased catalyst activity in the current quarter.
Income from Operations-Income from operations for the first quarter 2014 was $41.2 million (28.6% of revenue), versus $35.5 million (23.5% of revenue) for the corresponding 2013 period. The increase in absolute dollars and increase as a percentage of revenue was primarily due to a higher margin mix of work in the 2014 quarter for each of our licensing, heat transfer and catalyst activities, as compared to the corresponding 2013 period. Environmental Solutions
New Awards-New awards were $279.0 million for the first quarter 2014, compared with $85.0 million for the corresponding 2013 period. Significant new awards for the first quarter 2014 included an environmental monitoring award in the U.S. (approximately $60.0 million) and a nuclear decommissioning and dismantlement award in the U.S. (approximately $35.0 million).
Revenue-Revenue was $184.9 million for the first quarter 2014, representing an increase of $79.8 million (76%), compared with the corresponding 2013 period. The increase over the prior year period was primarily attributable to the current period having a full quarter of operations.


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Income from Operations-Income from operations for the first quarter 2014 was $0.2 million (0.1% of revenue), versus $0.7 million (0.6% of revenue) for the corresponding 2013 period. Our 2014 quarter results benefited from our higher revenue volume, but was offset by a lower margin mix of work. Our results continue to be impacted by ongoing uncertainty with respect to Federal government funding and prioritization.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents-At March 31, 2014, our cash and cash equivalents were $420.2 million, and were maintained in local accounts throughout the world, substantially all of which was maintained outside The Netherlands, our country of domicile. With the exception of $170.5 million of cash and cash equivalents within our variable interest entities ("VIEs") associated with our partnering arrangements, which is generally only available for use in our operating activities when distributed to the partners, we are not aware of any material restrictions on our cash and cash equivalents.
With respect to tax consequences of repatriating our foreign earnings, distributions from our European Union subsidiaries to their Netherlands parent companies are not subject to taxation. Further, for our non-European Union companies and their subsidiaries and our U.S. companies, to the extent taxes apply, the amount of permanently reinvested earnings becomes taxable upon repatriation of assets from the subsidiary or liquidation of the subsidiary. We have accrued taxes on undistributed earnings that we intend to repatriate and we intend to permanently reinvest the remaining undistributed earnings in their respective businesses and, accordingly, have accrued no taxes on such amounts. Operating Activities-During the first three months of 2014, net cash used in operating activities was $145.8 million, primarily resulting from cash generated from earnings, offset by the net change in our accounts receivable, inventory, accounts payable and net contracts in progress account balances (collectively "Contract Capital") ($300.5 million combined). Our Contract Capital balances fluctuate based on the size of our projects and changing mix of cost-reimbursable versus fixed-price backlog. Our cost-reimbursable projects tend to have a greater working capital requirement, while our fixed-price projects are generally structured to be cash flow positive, creating negative net contracts in progress balances that are subject to fluctuation and which are particularly impacted by the timing of new awards and related up-front payments, . . .

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