UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) AUGUST 24, 2004
WILLBROS GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
REPUBLIC OF PANAMA
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(State or Other Jurisdiction of Incorporation)
1-11953 98-0160660
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(Commission File Number) (IRS Employer Identification No.)
PLAZA 2000 BUILDING
50TH STREET, 8TH FLOOR
P.O. BOX 0816
PANAMA, REPUBLIC OF PANAMA
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(Address of Principal Executive Offices) (Zip Code)
(507) 213-0947
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 8.01 OTHER EVENTS.
The quarter ended June 30, 2004 is the first full quarter to include the
operating results of the Opal Gas Plant, which commenced commercial operations
in late March 2004. We believe that the operation of this plant significantly
changes the way that our operations should be understood and analyzed, and
accordingly have restructured our lines of business into two operating segments:
Engineering and Construction, and Facilities Development and Operations. We
believe this organization more accurately reflects the way our management now
assesses the performance of our businesses and makes decisions about allocating
resources. Formerly, we reported in one operating segment offering three
integrated services: construction, engineering and specialty services. Specialty
services, with the exception of the fueling facilities and the Venezuela water
injection activities that are now included in the Facilities Development and
Operations segment, have been consolidated within the Engineering and
Construction segment. We believe this is appropriate because both kinds of work
are performed under contracts, and work under a single contract may involve both
kinds of services, using the same personnel and equipment.
Within the Engineering and Construction segment we provide construction
services, such as pipe coating, dredging and the building and replacement of:
- major pipelines;
- gathering systems;
- flow stations;
- pump stations;
- gas compressor stations;
- gas processing facilities;
- oil and gas production facilities;
- marine structures;
- piers;
- pressure vessels;
- dock facilities; and
- bridges.
Our Engineering and Construction segment also provides engineering
services, which include:
- feasibility studies;
- conceptual and detailed design services;
- field services, material procurement; and
- overall project management.
The Facilities Development and Operations segment includes asset
development efforts and the operation of assets developed under "Build, Own and
Operate" contracts, including:
- the gas processing plant in the Opal, Wyoming area;
- four fueling facilities constructed and operated for the Defense
Energy Supply Corporation, an agency of the U.S. government; and
- the Lake Maracaibo water injection program in Venezuela, operated
and maintained by a consortium in which we hold a 10% equity
interest, for PDVSA Gas.
If our lines of business had been restructured in this manner as of
December 31, 2003, Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8, "Financial Statements
and Supplementary Data" submitted in our Form 10-K for the year ended December
31, 2003 would have appeared as set forth below. Also, Exhibit 99 includes an
additional note on segment reporting that would have been included, had we
elected at that time to report on two segments, as part of our Notes to
Condensed Consolidated Financial Statements in our Form 10-Q for the quarter
ended March 31, 2004. Except with respect to the limited matters discussed
above, this report speaks as of March 12, 2004, the date we filed our Annual
Report on Form 10-K for the year ended December 31, 2003, and we have not
updated the disclosure in this report to speak as of a later date. All
information contained in this report is subject to updating and supplementing as
provided in our periodic reports filed with or furnished to the Securities and
Exchange Commission. This report should be read in conjunction with our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June
30, 2004 and each current report filed or furnished in 2004.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements for the years ended December 31, 2003, 2002
and 2001, included in Item 8 of this Form 10-K.
OVERVIEW
We derive our revenue from providing engineering and construction services
and developing and operating facilities for the oil, gas and power industries
and government entities worldwide. In 2003 our revenue was primarily generated
from operations in Canada, Chad, Cameroon, Iraq, Nigeria, Oman, United States,
and Venezuela. We obtain contracts for our work primarily by competitive bidding
or through negotiations with long-standing or prospective clients. Contracts
have durations from a few weeks to several months or in some cases more than a
year.
We believe the fundamentals supporting the demand for engineering and
construction services for the oil, gas and power industries indicate the market
for our services will be strong in the mid to long-term. We expect the markets
outside of North America to lead the improvements in demand for our services. We
expect the demand in North America for our services to improve in late 2004. An
industry survey appears to substantiate our outlook as they are suggesting that
planned worldwide pipeline construction will be higher in 2004 than in 2003. The
survey indicates an increase in the planned miles of pipeline construction from
approximately 38,000 miles in 2003 and beyond to approximately 59,000 miles in
2004 and beyond. Our bidding activity also substantiates our outlook for the
near-term as we have seen an increase in prospects that we believe fit with our
capabilities and qualifications from approximately $2 billion at the end of 2002
to approximately $5 billion at December 2003.
For the year ended December 31, 2003, we had a loss of $3.2 million or
$0.16 per share on revenue of $418.7 million. This compares to revenue of $583.7
million in 2002, a Willbros record, when we reported net income of $29.7 million
or $1.59 per diluted share. The operating results for the fourth quarter and
year ended December 31, 2003 were positively impacted by the resolution of a
portion of our contract variations. This resolution positively impacted revenue,
contract income, net income, and EBITDA by $6.9 million. The timing and amount
of potential future resolution of the remaining claims for contract variations
of over $30 million is uncertain.
Our 2003 revenue was down from 2002, primarily driven by weak market
conditions in North America, which resulted in an 80% decline in the engineering
group revenue. The weakness in the North American market is attributable to the
following:
- Contraction in the amount of credit available to our traditional
customers,
- Stagnant economic growth,
- Transfer of pipeline assets by major pipeline transportation
companies to new "non-traditional" owners, which resulted in delays
in expansion plans of these existing pipeline systems,
- Delays in capital expenditures as a result of concern related to
hostilities in the Middle East, and
- Overbuilding of natural gas fired generation capacity.
Outside North America we experienced intermittent political and social
unrest in Iraq, Nigeria and Venezuela which reduced our revenue and negatively
impacted our contract margins for 2003. Revenue in 2003 was also lower due to
the completion, in the first half of the year, of three major projects which
were not replaced with projects of similar magnitude.
Contract margin for the year decreased to 12.7% of revenue from 16.4% in
2002. This decline in contract margin is the result of the following:
- An overall decline in the contract margins in the United States due
to the competitiveness of the market for our services,
- Persistent and heavy rain on a major project in the Southeastern
United States,
- Negative impact of the contract costs without offsetting revenue
associated with unresolved contract variations,
- Less revenue to cover our fixed and semi-variable indirect contract
costs, and
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- Delays in the performance of our work due to intermittent political
and social unrest in Iraq, Nigeria and Venezuela during the year.
General and Administrative ("G&A") expenses as a percentage of revenue
increased due primarily to the lower 2003 revenue and a $2.2 million increase in
G&A expenses in 2003 over 2002. The increase in G&A expenses is due in large
part to the inclusion of the Mt. West Group of companies for the entire year in
2003 versus just the fourth quarter in 2002. This accounted for $3.3 million of
additional G&A expenses in 2003. We also incurred increased G&A expenses in 2003
above 2002 levels due to a marked increase in bid activity, primarily in our
international markets, increased insurance costs, and legal and consulting
support costs on contract variation resolution.
The effective income tax rate for the year exceeded the United States
statutory income tax rate primarily as a result of:
- Income earned under contracts which provide tax concessions that
eliminate the payment of income taxes, and
- Utilization of previously unrecognized net operating loss ("NOL")
carryforwards to offset current income tax expenses in countries
outside of the United States.
These benefits were partially offset by the requirement in certain
countries outside of the United States to provide income taxes on a deemed
profit which resulted in an effective tax rate which was substantially higher
than the United States statutory income tax rate.
In 2003, our cash and cash equivalents decreased from $49.5 million to
$21.0 million and our long-term debt increased from $0 to $17.0 million. These
changes were primarily due to the following:
- An investment of $40.6 million in capital assets. A significant
amount of the total capital expenditures was related to our gas
processing plant in Opal, Wyoming (the "Opal Gas Plant"). The Opal
Gas Plant began operations in the first quarter of 2004 under a
ten-year gas processing contract with a subsidiary of the Williams
Companies (See the related discussion under "Significant Business
Developments"); and
- $7.8 million used in operating activities primarily attributable to
increases in Nigeria's accounts receivable and contract cost and
recognized income not yet billed.
These cash outflows were partially funded by increased borrowings of $14.0
million under our line of credit and increased capital lease obligations of $4.3
million.
In the first quarter of 2004, we completed two financing transactions
which we believe will improve our liquidity and, combined with cash flows from
operations, will be sufficient to finance our working capital and capital
expenditure requirements for future operations. On March 12, 2004, we completed
a $60.0 million 2.75% Convertible Senior Notes (the "Convertible Notes")
offering. Also, on March 12, 2004, we amended and restated the $125.0 million
senior secured credit facility. The three-year amended and restated credit
facility (the "2004 Credit Facility") provides for $150.0 million of available
credit capacity to be used for letters of credit and cash borrowing. (See
related discussion under "Liquidity and Capital Resources").
We believe this new capital structure positions us to take on a
substantial amount of additional new work as well as provide a better matching
of our capital asset investment with the long-term revenue and cash flows being
generated from our capital assets such as our Opal Gas Plant.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
REVENUE RECOGNITION; PERCENTAGE-OF-COMPLETION METHOD
A number of factors relating to our business affect the recognition of
contract revenue. Revenue from fixed-price construction and engineering
contracts is recognized on the percentage-of-completion method. Under this
method, estimated contract income and resulting revenue is generally accrued
based on costs incurred to date as a percentage of total estimated costs, taking
into consideration physical completion. Total estimated costs, and thus contract
income, are impacted by changes in productivity, scheduling, and the unit cost
of labor, subcontracts, materials and equipment. Additionally, external factors
such as weather, client needs, client delays in providing permits and approvals,
labor availability, governmental
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regulation and politics, may affect the progress of a project's completion and
thus the timing of revenue recognition. We do not recognize income on a
fixed-price contract until the contract is approximately 5% to 10% complete,
depending upon the nature of the contract. Costs which are considered to be
reimbursable are excluded from the percentage-of-completion calculation. Accrued
revenue pertaining to reimbursables is limited to the cost of the reimbursables.
If a current estimate of total contract cost indicates a loss on a contract, the
projected loss is recognized in full when determined. Revenue from change
orders, extra work and variations in the scope of work is recognized when
agreement is reached with clients as to the scope of work and when it is
probable that the cost of such work will be recovered in a change in contract
price. Profit on change orders, extra work and variations in the scope of work
is recognized when realization is assured beyond a reasonable doubt. Revenue
from claims is recognized when agreement is reached with clients as to the value
of the claims, which in some instances may not occur until after completion of
work under the contract. Revenue from unit-price contracts is recognized as
earned. We believe that our operating results should be evaluated over a
relatively long time horizon during which major contracts in progress are
completed and change orders, extra work, variations in the scope of work and
cost recoveries and other claims are negotiated and realized.
All U.S. government contracts and many of our other contracts provide for
termination of the contract for the convenience of the client. In the event a
contract would be terminated at the convenience of the client prior to
completion, we will typically be compensated for progress up to the time of
termination and any termination costs. Many contracts are subject to certain
completion schedule requirements with liquidated damages in the event schedules
are not met as the result of circumstances that are within our control. In
addition, some contracts provide for bonus payments to us for early completion
of the project and/or obtainment of specified safety goals.
INCOME TAXES
The determination of our tax provision is complex due to operations in
several tax jurisdictions outside the United States which may be subject to
certain risks which ordinarily would not be expected in the United States. Tax
regimes in certain jurisdictions are subject to significant changes which may be
applied on a retroactive basis. If this were to occur, our tax expense could be
materially different than the amounts reported. Furthermore, in determining the
valuation allowance related to deferred tax assets, we estimate taxable income
into the future and determine the magnitude of deferred tax assets which are
more likely than not to be realized. Future taxable income could be materially
different than amounts estimated, in which case the valuation allowance would
need to be adjusted.
JOINT VENTURE ACCOUNTING
From time to time, we seek one or more joint venture partners when a
project requires local content, equipment, manpower or other resources beyond
those we have available to complete work in a timely and efficient manner or
when we wish to share risk on a particularly large project. We have investments,
ranging from 10 percent to 50 percent, in joint ventures that operate in similar
lines of business as ours. Investments consist of a 10 percent interest in a
consortium for work in Venezuela and a 50 percent interest in a joint venture
for work in Africa. Interests in these unconsolidated ventures are accounted for
under the equity-method in the consolidated balance sheets and on a
proportionate consolidation basis in the consolidated statements of operations.
This presentation is consistent with construction industry practice.
Alternatively, if we were to account for these interests using the equity-method
in the consolidated statement of operations, revenue and contract cost would be
materially lower; however, net income would not change.
SIGNIFICANT BUSINESS DEVELOPMENTS
We recently reached an agreement with a customer to settle a portion of
our contract variations which positively impacted our net income for 2003 by
$6.9 million. We currently have over $30 million of outstanding contract
variation claims. The timing and amount of potential future revenue recoveries
associated with these unresolved contract variations remains uncertain. The
claims are primarily related to large projects completed in 2003. The Company is
currently in the beginning stages of arbitration on the largest unresolved
contract variation relating to the Bolivia Transierra Pipeline project.
In 2003, we completed agreements with Williams Gas Processing Company to
design, construct and own a gas processing plant near Opal, Wyoming to process
gas production from nearby fields. The Opal Gas
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Plant was recently completed and began operations in the first quarter of 2004.
The plant is designed to process volumes in excess of 350 million standard cubic
feet per day of natural gas, producing 7,000 to 11,000 barrels per day of
natural gas liquids at various operating conditions. We receive an annual
processing fee under a 10 year contract through April 2014, and share in the
proceeds from the sales of natural gas liquids extracted.
Concurrent with the commercial start-up of the Opal Gas Plant in late
March 2004, we have elected to restructure our business into two operating
segments: Engineering and Construction, and Facilities Development and
Operations. We believe this organization more accurately reflects the way our
management now assesses the performance of our businesses and makes decisions
about allocating resources. Formerly, we reported in one operating segment
offering three integrated services: construction, engineering and specialty
services.
Late in the third quarter of 2003, Willbros Middle East, Inc. was awarded
a project in Iraq for the construction and installation of 15 pipelines ranging
in size from 8-inch to 40-inch diameter under a river in northern Iraq by
horizontal directional drilling. The contract is currently valued at $50-plus
million.
On October 23, 2002, we acquired all outstanding shares of the Mt. West
Group. Mt. West Group provides design-build services, including engineering,
procurement and construction services to the energy industry, primarily in the
western United States. The purchase price of $13.7 million consisted of $4.6
million cash and acquisition costs and 950,000 shares of common stock valued at
$9.1 million. In addition, the purchase price will be adjusted by an earn-out
amount equal to 25 percent of the combined net income of Mt. West Group for the
24-month period following the date of acquisition. Any earn-out amounts due
shall be payable in cash upon completion of the earn-out period. As of December
31, 2003, the Mt. West Group has cumulative net income of $1.0 million since the
acquisition date. The transaction was accounted for as a purchase.
On May 14, 2002, we completed a public offering of our common shares at
$17.75 per share; 4,356,750 shares were sold by us. The underwriters exercised
options to purchase all shares available for over-allotments. We received $71.9
million in proceeds, after the underwriting discount and offering costs, which
were used to repay indebtedness under the prior credit agreement and for working
capital and general corporate purposes.
OTHER FINANCIAL MEASURES
EBITDA
We use EBITDA (earnings before net interest, income taxes, depreciation
and amortization) as part of our overall assessment of financial performance by
comparing EBITDA between accounting periods. We believe that EBITDA is used by
the financial community as a method of measuring our performance and of
evaluating the market value of companies considered to be in businesses similar
to ours. EBITDA for 2003 was $16.9 million as compared to $60.1 million in 2002.
The $43.2 million decrease in EBITDA is primarily the result of:
- The $165.0 million decrease in revenue, at 2002's contract margin of
16.4% accounts for $27.1 million of the decrease, and
- The 3.7% decrease in contract margin in 2003 on $418.7 million in
revenue accounts for another $15.5 million of the decrease.
A reconciliation of EBITDA to GAAP financial information can be found in
Item 6, "Selected Financial Data" of this Form 10-K.
BACKLOG
We define anticipated contract revenue as backlog when the award of a
contract is reasonably assured, generally upon the execution of a definitive
agreement or contract. Anticipated revenue from post-contract award processes,
including change orders, extra work, variations in the scope of work and the
effect of escalation or currency fluctuation formulas, is not added to backlog
until realization is reasonably assured. Backlog as of December 31, 2003 was
$224.7 million with an estimated embedded margin of 29.6% compared to $216.0
million at December 31, 2002 with an estimated embedded margin of 22.1%.
Included
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in the December 31, 2003 backlog is $22.0 million of gas processing revenue with
an estimated embedded margin of 100%. The gas processing revenue is associated
with the 10 year gas processing contract for our Opal Gas Plant entered into
during the year. If we were to reduce the 2003 backlog revenue and estimated
contract income for the Opal gas processing contract, the estimated embedded
margin of work in backlog would be 22.0%. An estimated $170.0 million of the
current backlog (74%) is scheduled to be worked off in 2004.
RESULTS OF OPERATIONS
During the second quarter of 2004, Willbros changed the way the business
is managed by establishing two separate operating segments: (1) Engineering &
Construction ("E&C"), and (2) Facilities Development and Operations
("Facilities"). Facilities is comprised of the Opal Gas Plant, fuel depot
facilities and a 10% equity interest in a Venezuelan joint venture to provide
water injection services. The bulk of our activity continues to be focused in
the E&C segment. Specialty services revenue, with the exception of the fueling
facilities and the Venezuela water injection activities, are included in the E&C
segment.
Our E&C contract revenue and contract costs are primarily related to the
timing and location of development projects in the oil, gas and power industries
worldwide. Contract revenue and cost variations by country from year-to-year are
the result of (a) entering and exiting work countries; (b) the execution of new
contract awards; (c) the completion of contracts; and (d) the overall level of
activity in our services.
Facilities revenue is heavily concentrated in the operations of our Opal
Gas Plant. Revenues and contract income of the Opal Gas Plant are dependent on
the volume of gas furnished to the plant and the relative price differential
between equivalent heating value contained in natural gas and natural gas
liquids. The Opal Gas Plant commenced commercial production in late March 2004.
Facilities revenue comprised only of the fuel depot facilities and the Venezuela
water injection activities, represented 1.3%, 0.6% and 1.5% of the total
consolidated revenue for 2003, 2002, and 2001, respectively.
Our ability to be successful in obtaining and executing contracts can be
affected by the relative strength or weakness of the U.S. dollar compared to the
currencies of our competitors, our clients and our work locations. During 2003
and 2002, as a result of economic and political events in Venezuela, the
Venezuelan Bolivar experienced significant devaluation relative to the U.S.
dollar. Included in foreign exchange loss in 2003 and 2002 are foreign exchange
losses of $0.5 million and $0.9 million, respectively, resulting from the
translation of our Bolivar denominated monetary assets and liabilities into U.S.
dollars. We do not believe that our revenue or results of operations in other
areas were adversely affected in this regard during the years ended December 31,
2003 or 2002. We do not expect any adverse impact from the recent February 2004
devaluation of the Venezuelan Bolivar.
FISCAL YEAR ENDED DECEMBER 31, 2003,
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2002
CONTRACT REVENUE
Engineering and Construction revenue decreased $166.6 million (29%) to
$413.3 million in 2003 from $579.9 million in 2002. The decrease resulted from
completing several projects in the first half of 2003 as compared to a full year
of activity on these projects in 2002. The 2003 completion of the Explorer
Pipeline project, the Chad-Cameroon Pipeline project and the Bolivia Transierra
Pipeline projects resulted in a year-to-year construction revenue declines of
$70.1 million, $74.5 million and $44.4 million, respectively. The combined
$189.0 million reduction in E&C revenue from these three projects was partially
offset by increased revenue related to the Venezuela Ameriven project ($22.1
million), increased work in Oman ($23.7 million), and a full year of Mt. West
Group revenue ($23.1 million).
Facilities revenue increased $1.6 million (42%) to $5.4 million in 2003
from $3.8 million in 2002. $1.0 million of the increase was from additional
equity income attributable to the Venezuelan water injection joint venture and
remainder was from additional fuel depot revenue.
CONTRACT INCOME
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Engineering and Construction contract income decreased $43.4 million (47%)
to $48.7 in 2003 from $92.1 million in 2002. E&C contract margin for 2003 was
11.8%, a 4.1% decrease from the 15.9% margin in 2002. The margin decline in 2003
was primarily related to the loss of the higher margin large projects mentioned
in the revenue discussion and the incurrence of contract variation costs at the
conclusion of these projects.
Facilities contract income increased $1.0 million (29%) to $4.4 million in
2003 from $3.4 million in 2002. The additional income was attributable to the
Venezuelan water injection joint venture.
OTHER OPERATING ITEMS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $1.0 million (4%) in 2003
primarily due to a change in the mix of assets and depreciable lines of our
property, plant and equipment.
GENERAL AND ADMINISTRATIVE
G&A expenses increased $2.2 million or 6% to $36.1 million in 2003 versus
$33.9 million in 2002. This increase resulted from a full year of G&A expenses
for the Mt. West Group acquired on October 23, 2002 and is partially offset by
reductions in Venezuela and U.S. engineering G&A expenses. Excluding the Mt.
West Group's $3.3 million year-to-year increase, G&A expenses declined $1.1
million primarily as a result of lower staff compensation. We did incur higher
G&A expenses in 2003 over 2002 in the following areas:
- Bidding and estimating;
- Insurance; and
- Legal and consulting.
OPERATING INCOME
An operating loss of $5.2 million occurred in 2003 as compared to
operating income of $38.3 million in 2002. The $43.5 million decrease in 2003
occurred from a $165.0 million decline in revenue coupled with a 3.7% margin
decline.
NON-OPERATING ITEMS
NET INTEREST INCOME (EXPENSE)
Net interest expense decreased $0.4 million to $1.2 million in 2003 from
$1.6 million in 2002. Interest expense was $0.2 million less than 2002 because
of reduced debt and capitalized interest related to the construction of our Opal
Gas Plant. Interest income increased $0.2 million in 2003 as compared to 2002.
OTHER INCOME (EXPENSE)
Other expenses decreased $1.3 million to $0.2 million in 2003 from $1.5
million in 2002. The $1.3 million decrease is the result of a $0.6 million gain
on the disposal of equipment in 2003, a $0.3 million reduction in foreign
currency translation losses in 2003 versus 2002, and the occurrence in 2002 of
$0.4 million of miscellaneous expenses which were not repeated in 2003.
PROVISION FOR INCOME TAXES
The provision for income taxes in 2003 decreased $8.9 million as compared
to 2002 mainly as a result of a $41.8 million decrease in pretax income.
Additionally, the tax provision for 2002 received a benefit of $3.3 million
because of a reduction to the deferred tax valuation allowance. This was
primarily based on our assessment of our United States operations, including
past earnings history and projected future earnings, and the scheduled
expiration of our tax net operating losses. Although 2003 did not provide the
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levels of taxable revenue that we contemplated one year ago, we believe the
deferred tax attributes will be fully utilized in future years. The effective
income tax rate for the year exceeded the United States statutory income tax
rate primarily as a result of:
- Income earned under contracts which provide tax concessions that
eliminate the payment of income taxes, and
- Utilization of previously NOL carryforwards to offset current income
tax expenses in countries outside of the United States.
These benefits were partially offset by the requirement in certain
countries outside of the United States to provide income taxes on a deemed
profit which resulted in an effective tax rate which was substantially higher
than the United States statutory income tax rate.
FISCAL YEAR ENDED DECEMBER 31, 2002,
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2001
CONTRACT REVENUE
Engineering and Construction revenue increased $195.5 million (51%) to
$579.9 million in 2002 from $384.4 in 2001. The increase resulted primarily from
$101.3 million and $56.9 million of year-to-year increases in the Chad-Cameroon
Pipeline and Explorer Pipeline projects, respectively, and $47.4 million of new
revenue in Bolivia from the Transierra Pipeline project.
Facilities revenue decreased $1.9 million (33%) to $3.8 million in 2002,
from $5.7 million in 2001. The decrease in revenue was entirely attributable to
a reduction in revenue associated with the Venezuelan water injection joint
venture.
CONTRACT INCOME
Engineering and Construction contract income increased $21.2 million (30%)
to $92.1 in 2002 from $70.9 million in 2001. The revenue related increase in
2002 contract income was partially reduced by a 2.5% decrease in 2002 E&C margin
to 15.9%, as compared to 18.4% margin in 2001.
Facilities contract income increased $1.3 million to $3.4 million in 2002
from $2.1 million in 2001. The increase resulted primarily from $1.4 million of
additional fuel depot contract income.
OTHER OPERATING ITEMS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $3.8 million (19%) due primarily
to the addition of equipment for the Chad-Cameroon Pipeline Project and the
project in Bolivia.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $3.9 million (13%) to $33.9
million. This increase is due to higher staff compensation and administrative
services necessary to support the 50% increase in revenue. As a percent of
revenue, general and administrative expenses decreased from 7.7% in 2001 to 5.8%
in 2002.
OPERATING INCOME
Operating income increased $5.6 million (17%) from $32.7 million in 2001
to $38.3 million in 2002. Excluding a gain of $9.2 million in 2001 associated
with the termination of certain benefit plans, operating income increased $14.8
million (63%). Excluding the gain in 2001, operating income increased largely as
a result of higher revenue resulting from greater activity in North America,
construction activity on the Chad-
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Cameroon Pipeline Project and marine maintenance and construction in Offshore
West Africa, partially offset by reduced income in Nigeria resulting from a 29%
decrease in revenue in that area. The increased income from this 50% increase in
revenue was offset by higher depreciation, amortization and general and
administrative costs.
NON-OPERATING ITEMS
NET INTEREST INCOME (EXPENSE)
Net interest expense decreased $1.0 million (40%) to $1.6 million. In May
2002, we completed a common stock offering in which we received $71.9 million in
net proceeds. Borrowings under our prior credit agreement were paid in full.
Interest expense in 2002 includes amortization of debt issue costs of $0.9
million compared to $0.5 million in 2001.
FOREIGN EXCHANGE LOSS
Foreign exchange loss increased $0.9 million to $1.0 million due primarily
to the effect of the devaluation of the Venezuelan Bolivar in 2002 on our
Venezuelan Bolivar denominated monetary assets and liabilities.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased $4.9 million (47%) due primarily
to the difference between $6.6 million of changes to estimated income tax
liabilities and deferred tax assets during 2002 compared to $3.2 million of
similar changes during 2001. In addition, during 2002, we recorded a $1.1
million deferred income tax benefit associated with operating losses outside the
United States. Changes to the 2002 income tax liabilities include a $1.2 million
reduction due to annual settlements of income tax liabilities outside the United
States and a $1.0 million reduction resulting from changes in current year
estimated tax liabilities outside the United States as a result of the above
settlements. In addition, we reduced income taxes in the United States by $1.1
million as a result of the refinement of the allocation of expenses among
operating entities and other items affecting estimated tax liabilities in the
United States and a $3.3 million reduction in the deferred tax assets valuation
allowance. We reduced our U.S. valuation allowance as a result of our assessment
of our United States operations including past earnings history and projected
future earnings considering the scheduled expiration of our tax net operating
losses. Changes in 2001 resulted from a $2.3 million reduction in the deferred
assets valuation allowance in the United States and a $0.9 million reduction
from annual settlements income taxes outside the United States. The provision
for income taxes is also impacted by the differing income tax rates in the
various countries in which we operate, including for example Nigeria where
income taxes are largely based on deemed profit rather than taxable income as
well as a tax holiday in Cameroon for income earned on the Chad-Cameroon
Pipeline Project.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL REQUIREMENTS
Our primary requirements for capital are to acquire, upgrade and maintain
equipment, provide working capital for current projects, finance the
mobilization of employees and equipment to new projects, establish a presence in
countries where we perceive growth opportunities and finance the possible
acquisition of new businesses and equity investments. Historically, we have met
these capital requirements primarily from operating cash flows, and more
recently from a 2002 equity offering and borrowings under our credit facility.
WORKING CAPITAL
Cash and cash equivalents decreased $28.5 million (58%) to $21.0 million
at December 31, 2003, from $49.5 million at December 31, 2002. The decrease
consists of $39.2 million used in investing activities, including the design and
construction of our Opal Gas Plant, the acquisition of equipment and spare
parts, and $7.8 million used in operating activities, primarily due to increases
in accounts receivable and contract cost and recognized income not yet billed,
principally in Nigeria. These negative cash flows are partially offset by $18.5
million cash provided by financing activities, including $14.0 million from
borrowings under
10
the line of credit and $4.3 million from capital lease obligations entered into
in 2003. Working capital and stockholders' equity remained fairly constant from
year-to-year, both decreasing less than 1%.
We believe the anticipated increase in revenue, improvement in contract
margins and a focus on reducing the working capital requirements in Nigeria,
will return the Company to positive cash flow from operations in 2004.
2.75% CONVERTIBLE SENIOR NOTES
On March 12, 2004, we completed a $60.0 million 2.75% Convertible Senior
Notes (the "Convertible Notes") offering to enhance our competitive position in
the market place and provide a better matching of the funding of capital assets
with the revenue and cash flow streams they are generating.
The Convertible Notes will be general senior unsecured obligations.
Interest will be paid semi-annually on March 15th and September 15th, beginning
on September 15, 2004. The Convertible Notes will mature on March 15, 2024
unless the notes are repurchased, redeemed or converted earlier. We may redeem
the Convertible Notes for cash on or after March 15, 2011, at 100% of the
principal amount of the notes plus accrued interest. The holders of the
Convertible Notes have the right to require us to repurchase the Convertible
Notes, including unpaid interest, on March 15, 2011, 2014, and 2019 or upon a
change of control related event. On March 15, 2011 and upon a change in control
event, we must pay the purchase price in cash. On March 15, 2014 and 2019, we
have the option of providing common stock in lieu of cash or a combination of
common stock and cash to fund repurchases. The holders of the Convertible Notes
may convert, under certain circumstances, the notes into shares of our common
stock at an initial conversion ratio of 51.3611 shares of common stock per
$1,000 principal amount of notes (representing a conversion price of
approximately $19.47 per share). Net proceeds of approximately $57.2 million
will be used for working capital, to repay $14.0 million of indebtedness under
the $125.0 million June 2002 credit agreement and for general corporate
purposes.
RESTATED AND EXTENDED CREDIT FACILITY
On March 12, 2004, the existing June 2002 credit agreement was amended and
restated (the "2004 Credit Facility"). The 2004 Credit Facility will mature on
March 12, 2007. The 2004 Credit Facility may be used for standby and commercial
letters of credit, borrowings or a combination thereof. Borrowings are limited
to the lesser of 40% of the borrowing base or $30.0 million and are payable at
termination on March 12, 2007. Interest is payable quarterly at a base rate plus
a margin ranging from 0.75% to 2.00% or a Eurodollar Rate plus a margin ranging
from 1.75% to 3.00%. A commitment fee on the unused portion of the 2004 Credit
Facility is payable quarterly ranging from 0.375% to 0.625%. The 2004 Credit
Facility is collateralized by substantially all of our assets, including stock
of the principal subsidiaries, restricts the payment of cash dividends and
requires us to maintain certain financial ratios. The borrowing base is
calculated using varying percentages of cash, accounts receivable, accrued
revenue, contract cost and recognized income not yet billed, property, plant and
equipment, and spare parts.
Debt issue costs of $2.6 million associated with the 2004 Credit Facility
and the remaining $0.6 million of unamortized debt issue costs related to the
June 2002 credit agreement will be amortized over a 24 month period.
At December 31, 2003, $14.0 million was borrowed under the June 2002
credit agreement and was repaid with the proceeds from the sale of the
Convertible Notes. We had $41.0 million in letters of credit outstanding leaving
a total of $40.3 million available for the issuance of letters of credit and
$6.0 million for borrowings or a combination thereof. Based on a covenant waiver
agreement discussed below, total cash borrowings may not exceed $20.0 million.
At December 31, 2003 and 2002, unamortized debt issue cost was $0.8 million and
$2.1 million, respectively.
COVENANT WAIVER
On October 31, 2003, we obtained a Consent and Waiver Agreement (the
"Agreement") from our syndicated bank group to waive non-compliance with certain
financial covenants in our credit June 2002 agreement and to agree to a method
for calculating the borrowing base that eliminates the multiple of EBITDA
calculation through the filing of the February 2004 borrowing base certificate.
The Agreement provided waivers for certain quarterly financial covenants through
December 31, 2003. If we had not
11
obtained the Agreement, we would have been in default of the June 2002 credit
agreement. The Agreement limits cash borrowings under the June 2002 credit
agreement to $20.0 million and the total borrowing base available for cash
borrowing and the issuance of standby letters of credit may not exceed $75.0
million.
LIQUIDITY
We believe that cash flows from operations, borrowing capacity under the
2004 Credit Facility and the net proceeds from the Convertible Notes offering
will be sufficient to finance working capital and capital expenditures for
ongoing operations at our present level of activity and will provide capacity
for expected growth. Capital expenditures for equipment and spare parts in 2004
are estimated at $30.0 million and $6.0 million, respectively. Also, we may be
required to make additional payments during 2004 related to the Mt. West Group
acquisition based on a 25% of net income earn-out provision covering the
two-year period following the acquisition date. We believe that while there are
numerous factors that could and will have an impact on our cash flow, both
positively and negatively, there are not one or two events that, should they
occur, could not be funded from our operations or borrowing capacity. For a list
of events which could cause actual results to differ from our expectations and a
discussion of risk factors that could impact cash flow, please refer to the
section entitled "Political and Economic Risks; Operational Risks" contained in
Items 1 & 2 in this Form 10-K.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----- ------ --------- --------- -------
(DOLLAR AMOUNTS IN MILLIONS)
Long-term Debt.............................. $ 14.0 $ - $ 14.0 $ - $ -
Capital Lease Obligations................... 4.5 1.3 2.2 1.0 -
Operating Lease Obligations................. 7.9 2.3 3.5 1.7 .4
Other Long-term Liabilities................. .2 .1 .1 - -
------- ------ ------ ------ ------
Total....................................... $ 26.6 $ 3.7 $ 19.8 $ 2.7 $ .4
======= ====== ====== ====== ======
As of December 31, 2003, $14.0 million was borrowed under the June 2002
credit agreement and was repaid with the proceeds from the sale of the
Convertible Notes. We had $41.0 million of letters of credit outstanding,
leaving $40.3 million available for letters of credit and $6.0 million for
borrowings.
Capital lease obligations include approximately $3.9 million to a leasing
company under a four-year capital lease in connection with the ongoing
acquisition and installation of new corporate information systems and
infrastructure. The lease amount increases quarterly based on costs incurred to
a maximum value of $7.0 million.
We have certain operating leases for equipment, office and camp
facilities. Minimum lease commitments under operating leases as of December 31,
2003, totaled $7.9 million and are payable as follows: 2004, $2.3 million; 2005,
$2.0 million; 2006, $1.5 million; 2007, $0.9 million; 2008, $0.8 million and
later years, $0.4 million.
Based upon the above, our total cash obligations are payable as follows:
2004, $3.7 million; 2005-2006, $19.8 million; 2007-2008, $2.7 million; and later
years, $0.4 million.
Additionally, we have various notes and leases payable, generally related
to equipment financing and local revolving credit facilities. All notes and
leases are at market interest rates, and are collateralized by certain vehicles,
equipment and/or real estate.
We have unsecured credit facilities with banks in certain countries
outside the United States. Borrowings under these lines, in the form of
short-term notes and overdrafts, are made at competitive local interest rates.
Generally, each line is available only for borrowings related to operations in a
specific country. Credit available under these facilities is approximately $5.8
million at December 31, 2003. There were no outstanding borrowings at December
31, 2003.
We do not anticipate any significant collection problems with our
customers, including those in countries that may be experiencing economic and/or
currency difficulties. Since our customers generally are major
12
oil companies and government entities, and the terms for billing and collecting
for work performed are generally established by contracts, we historically have
a very low incidence of collectability problems.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMERCIAL COMMITMENTS
From time to time we enter into commercial commitments, usually in the
form of commercial and standby letters of credit, insurance bonds and financial
guarantees. Contracts with our customers may require us to provide letters of
credit or insurance bonds with regard to our performance of contracted services.
In such cases, the commitments can be called upon in the event of our failure to
perform contracted services. Likewise, contracts may allow us to issue letters
of credit or insurance bonds in lieu of contract retention provisions, in which
the client withholds a percentage of the contract value until project completion
or expiration of a warranty period.
In connection with our 10% interest in a joint venture in Venezuela, we
issued a corporate guarantee equal to 10% of the joint venture's outstanding
borrowings with two banks. The guarantee reduces as borrowings are repaid, and
expires in March 2004. The commitment as of December 31, 2003 totals $3.6
million, the maximum amount of future payments we could be required to make. A
summary of our off-balance sheet commercial commitments as of December 31, 2003
is as follows:
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
---------------------
TOTAL LESS THAN
COMMITMENT 2 YEARS
---------- -------
(DOLLAR AMOUNTS IN MILLIONS)
Letters of Credit:
Chad-Cameroon Pipeline Project -- performance $ 21.3 $ 21.3
Bolivia Project -- performance 8.9 8.9
Other -- performance and retention 10.8 10.8
----------- -----------
Total letters of credit 41.0 41.0
----------- -----------
Insurance Bonds -- primarily performance related:
Expiring 3.2 3.2
Non-expiring - -
----------- -----------
Total insurance bonds 3.2 3.2
----------- -----------
Corporate guarantee 3.6 3.6
----------- -----------
Total commercial commitments $ 47.8 $ 47.8
=========== ===========
These commercial commitments totaling $47.8 million represent the maximum
amount of future payments we could be required to make. We had no liability
recorded as of December 31, 2003, related to these commitments.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," ("FIN 46"). The interpretation states that certain variable interest
entities may be required to be consolidated into the results of operations and
financial position of the entity that is the primary beneficiary. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, the revised effective date, to variable entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period. We do not expect the adoption of FIN 46 to have a
material impact on our financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123". This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In
13
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and are included in the notes to our
consolidated financial statements included in Item 8 of this Form 10-K.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. We will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost is recognized at the date of our
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring costs as well as
the amounts recognized.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4,
44, and 64, Amendment of SFAS No. 13 and Technical Corrections". SFAS No. 145
provides guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. We adopted
SFAS No. 145 in January 2003 and such adoption did not materially affect our
consolidated financial statements.
EFFECTS OF INFLATION AND CHANGING PRICES
Our operations are affected by increases in prices, whether caused by
inflation, government mandates or other economic factors, in the countries in
which we operate. We attempt to recover anticipated increases in the cost of
labor, fuel and materials through price escalation provisions in certain of our
major contracts or by considering the estimated effect of such increases when
bidding or pricing new work.
14
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements of Willbros Group, Inc. and Subsidiaries
Independent Auditors' Report..................................................................... 16
Consolidated Balance Sheets as of December 31, 2003 and 2002..................................... 17
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001............................................................. 18
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
years ended December 31, 2003, 2002 and 2001................................................. 19
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001............................................................. 20
Notes to Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001............................................................. 21
15
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Willbros Group, Inc.:
We have audited the accompanying consolidated balance sheets of Willbros
Group, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Willbros
Group, Inc. as of December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, as of
July 1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and certain provisions from SFAS No.
142, "Goodwill and Other Intangible Assets", and effective January 1, 2002,
adopted the remaining provisions of SFAS No. 142.
/s/ KPMG LLP
Houston, Texas
February 20, 2004, except for Note 7 which is as of March 12, 2004 and Note 14
which is as of August 16, 2004
16
WILLBROS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
----------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 20,969 $ 49,457
Accounts receivable, net 101,654 94,552
Contract cost and recognized income not yet billed 40,109 27,880
Prepaid expenses 11,531 6,424
--------- ---------
Total current assets 174,263 178,313
Spare parts, net 6,363 6,657
Property, plant and equipment, net 95,528 77,261
Investment in joint ventures 14,086 16,745
Goodwill 9,360 8,689
Other assets 11,822 10,528
--------- ---------
Total assets $ 311,422 $ 298,193
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,315 $ 1,171
Accounts payable and accrued liabilities 75,614 66,582
Accrued income taxes - 8,567
Contract billings in excess of cost and recognized income 7,205 11,093
--------- ---------
Total current liabilities 84,134 87,413
Long-term debt 17,007 -
--------- ---------
Total liabilities 101,141 87,413
Stockholders' equity:
Class A preferred stock, par value $.01 per share,
1,000,000 shares authorized, none issued - -
Common stock, par value $.05 per share, 35,000,000 shares
authorized and 20,748,498 shares issued at December 31,
2003 (20,615,875 at December 31, 2002) 1,037 1,031
Capital in excess of par value 152,630 151,784
Retained earnings 57,741 60,954
Treasury stock at cost, 46,196 shares at December 31, 2003
and 2002 (345) (345)
Notes receivable for stock purchases (1,240) (1,315)
Accumulated other comprehensive income (loss) 458 (1,329)
--------- ---------
Total stockholders' equity 210,281 210,780
--------- ---------
Total liabilities and stockholders' equity $ 311,422 $ 298,193
========= =========
See accompanying notes to consolidated financial statements.
17
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Contract revenue $ 418,737 $ 583,703 $ 390,134
Operating expenses (income):
Contract 365,625 488,256 317,186
Termination of benefit plans - - (9,204)
Depreciation and amortization 22,285 23,304 19,522
General and administrative 36,060 33,846 29,975
------------ ------------ ------------
423,970 545,406 357,479
------------ ------------ ------------
Operating income (loss) (5,233) 38,297 32,655
Other income (expense):
Interest income 524 400 377
Interest expense (1,746) (1,951) (2,965)
Foreign exchange loss (677) (1,025) (117)
Other - net 506 (524) (486)
------------ ------------ ------------
(1,393) (3,100) (3,191)
------------ ------------ ------------
Income (loss) before income taxes (6,626) 35,197 29,464
Provision (benefit) for income taxes (3,413) 5,448 10,384
------------ ------------ ------------
Net income (loss) $ (3,213) $ 29,749 $ 19,080
============ ============ ============
Income (loss) per common share:
Basic $ (.16) $ 1.63 $ 1.32
============ ============ ============
Diluted $ (.16) $ 1.59 $ 1.27
============ ============ ============
Weighted average number of common shares outstanding:
Basic 20,662,305 18,271,492 14,442,035
============ ============ ============
Diluted 20,662,305 18,721,759 15,074,166
============ ============ ============
See accompanying notes to consolidated financial statements.
18
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share amounts)
Accumulated
Notes Other
Common Stock Capital in Receivable Compre- Total
------------ Excess For hensive Stock-
Par of Par Retained Treasury Stock Income holders'
Shares Value Value Earnings Stock Purchases (Loss) Equity
------ ----- ----- -------- ----- --------- ------ ------
Balance, January 1, 2001 15,206,495 $ 760 $ 68,373 $ 12,125 $(8,474) $ (43) $ (995) $ 71,746
Comprehensive income (loss):
Net income - - - 19,080 - - - 19,080
Foreign currency translation
adjustments - - - - - - 57 57
---------
Total comprehensive
income 19,137
Payment of notes receivable - - - - - 35 - 35
Issuance of treasury stock - - 779 - 1,071 - - 1,850
Issuance of common stock
under employee benefit plan 25,446 1 305 - - - - 306
Exercise of stock options 496,250 25 3,458 - - - - 3,483
----------- ------- --------- --------- ------- --------- ------- ---------
Balance, December 31, 2001 15,728,191 786 72,915 31,205 (7,403) (8) (938) 96,557
Comprehensive income (loss):
Net income - - - 29,749 - - - 29,749
Foreign currency translation
adjustments - - - - - - (391) (391)
---------
Total comprehensive
income 29, 358
Issuance of notes receivable
for stock purchase - - - - - (1,307) - (1,307)
Issuance of treasury stock for
acquisition of Mt. West Group - - 2,062 - 7,058 - - 9,120
Issuance of common stock
under employee benefit plan 33,121 1 421 - - - - 422
Sale of common stock, net
of offering cost 4,356,750 218 71,684 - - - - 71,902
Exercise of stock options 497,813 26 4,702 - - - - 4,728
----------- ------- --------- --------- ------- --------- ------- ---------
Balance, December 31, 2002 20,615,875 1,031 151,784 60,954 (345) (1,315) (1,329) 210,780
Comprehensive income (loss):
Net loss - - - (3,213) - - - (3,213)
Foreign currency translation
adjustments - - - - - - 1,787 1,787
---------
Total comprehensive
loss (1,426)
Payment of notes receivable - - - - - 75 - 75
Issuance of common stock
under employee benefit plan 27,623 1 244 - - - - 245
Exercise of stock options 105,000 5 602 - - - - 607
----------- ------- --------- --------- ------- --------- ------- ---------
Balance, December 31, 2003 20,748,498 $ 1,037 $ 152,630 $ 57,741 $ (345) $ (1,240) $ 458 $ 210,281
=========== ======= ========= ========= ======= ========= ======= =========
See accompanying notes to consolidated financial statements.
19
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (3,213) $ 29,749 $ 19,080
Reconciliation of net income (loss) to cash provided
by (used in) operating activities:
Termination of certain benefit plans - - (9,204)
Change in equity in joint ventures, net 2,659 (9,059) (3,252)
Depreciation and amortization 22,285 23,304 19,522
Amortization of debt issue costs 1,573 881 504
Loss (gain) on sales and retirements
of property, plant and equipment (343) 281 402
Non-cash compensation expense - 553 -
Deferred income tax benefit (2,169) (3,903) (1,466)
Changes in operating assets and liabilities:
Accounts receivable (7,141) 11,035 (25,333)
Contract cost and recognized
income not yet billed (12,229) (9,093) 5,759
Prepaid expenses and other assets (5,687) (4,230) 385
Accounts payable and accrued liabilities 9,171 1,323 772
Accrued income taxes (8,795) (1,858) 2,351
Contract billings in excess of cost
and recognized income (3,888) (10,128) 15,236
-------- -------- --------
Cash provided by (used in) operating activities (7,777) 28,855 24,756
Cash flows from investing activities:
Acquisitions, net of cash acquired - (2,001) (7,410)
Proceeds from sales of property and equipment 1,395 604 162
Purchase of property, plant and equipment (34,212) (22,898) (22,223)
Purchase of spare parts (6,354) (7,329) (6,595)
-------- -------- --------
Cash used in investing activities (39,171) (31,624) (36,066)
Cash flows from financing activities:
Proceeds from long-term debt 14,000 38,000 75,000
Proceeds from notes payable to banks 8,162 8,323 1,674
Proceeds from common stock 852 75,192 3,789
Collection of notes receivable for stock purchases 75 - 35
Repayment of long-term debt - (77,000) (62,000)
Repayment of notes payable to banks (5,059) (8,396) (2,104)
Sale of treasury stock - - 1,979
Costs of debt issuance - (3,019) -
-------- -------- --------
Cash provided by financing activities 18,030 33,100 18,373
Effect of exchange rate changes on cash and
cash equivalents 430 (163) 287
-------- -------- --------
Cash provided by (used in) all activities (28,488) 30,168 7,350
Cash and cash equivalents, beginning of year 49,457 19,289 11,939
-------- -------- --------
Cash and cash equivalents, end of year $ 20,969 $ 49,457 $ 19,289
======== ======== ========
See accompanying notes to consolidated financial statements.
20
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company - Willbros Group, Inc. ("WGI"), a Republic of Panama corporation,
and all of its majority-owned subsidiaries (the "Company") provide engineering
and construction services and facilities development and operations for the oil,
gas and power industries and government entities worldwide. The Company's
principal markets are Africa, Asia, Australia, the Middle East, South America,
Canada and the United States.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of WGI and all of its majority-owned subsidiaries.
Intercompany accounts and transactions are eliminated in consolidation. The
ownership interest of minority participants in subsidiaries that are not wholly
owned (principally in Nigeria and Oman) is included in accounts payable and
accrued liabilities and is not material. The minority participants' share of the
net income of those subsidiaries is included in contract expenses. Interests in
unconsolidated joint ventures are accounted for on the equity method in the
consolidated balance sheets and on a proportionate consolidation basis in the
consolidated statements of operations.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenue and expenses. Actual results could differ
significantly from those estimates.
Reclassifications - Minority owners of certain non U.S. subsidiaries
(operating principally in Nigeria and Oman) earn a percentage of net contract
receipts rather than sharing in the net income or losses of the subsidiaries'
operations. Due to the nature of these minority interests and the basis on which
the entitlement is earned, amounts attributable to the minority interests are
included in contract costs. Prior to March 31, 2002, the minority interest
amounts were presented as a separate line item in other expenses. Accordingly,
reclassifications have been made to the 2001 balances to conform to the 2003
presentation. Amounts due to the minority participants continue to be included
in accounts payable and accrued liabilities.
Accounts Receivable - Accounts receivable include retainage, all due
within one year, of $8,812 in 2003 and $5,470 in 2002 and are stated net of
allowances for bad debts of $915 in 2003 and $725 in 2002. The provision
(credit) for bad debts was $199 in 2003, $(58) in 2002 and $(290) in 2001.
Spare Parts - Spare parts (excluding expendables), stated net of
accumulated depreciation of $13,915 in 2003 and $13,826 in 2002, are depreciated
over three years on the straight-line method.
Property, Plant and Equipment - Depreciation is provided on the
straight-line method using estimated lives as follows:
Construction equipment 4-6 years
Marine equipment 10 years
Transportation equipment 3-4 years
Buildings, furniture and equipment 3-20 years
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in income for the period. Normal repair and maintenance costs
are charged to expense as incurred. Major overhaul costs are accrued in advance
of actual overhaul activities and are allocated to contracts based on estimates
of equipment condition. Significant renewals and betterments are capitalized.
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used
21
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
is measured by a comparison of the carrying amount of the asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
Goodwill - Goodwill represents the excess of purchase price over fair
value of net assets acquired. Goodwill acquired prior to July 1, 2001 was being
amortized on a straight-line basis over twenty years, until adoption of the
non-amortization of goodwill provision of Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" in 2002. SFAS
No. 142 addresses the method of identifying and measuring goodwill and other
intangible assets acquired in a business combination, eliminates further
amortization of goodwill, and requires periodic evaluations of impairment of
goodwill balances. The Company performs its goodwill impairment tests annually
during the fourth quarter of its fiscal year and more frequently if an event or
circumstance indicates that an impairment has occurred. These tests involved
determining the fair market value of each of the reporting units with which the
goodwill was associated and comparing the estimated fair market value of each of
the reporting units with its carrying amount. The Company completed its annual
evaluation for impairment of goodwill as of December 31, 2003, and determined
that no impairment of goodwill existed as of that date.
The Company adopted SFAS No. 141, "Business Combinations" and certain
provisions of SFAS No. 142 as of July 1, 2001, and the remaining provisions
regarding the non-amortization of goodwill acquired prior to July 1, 2001,
effective January 1, 2002. The effect of the elimination of amortization of
goodwill on the Company's net income as if SFAS No. 142 had been in effect in
prior periods would have been to increase net income by $54 in 2001.
Revenue - Construction and engineering fixed-price contracts and cost plus
fixed-fee contracts are accounted for using the percentage-of-completion method.
Under this method, estimated contract revenue is generally accrued based on the
percentage the costs to date bear to total estimated costs, taking into
consideration physical completion. Estimated contract losses are recognized in
full when determined. Revenue from unit-price contracts and from time and
material contracts is recognized as earned. Revenue from change orders, extra
work and variations in the scope of work is recognized when agreement is reached
with clients as to the scope of work and when it is probable that the cost of
such work will be recovered in a change in contract price. Profit on change
orders, extra work and variations in scope of work is recognized when
realization is assured beyond a reasonable doubt. Revenue from claims is
recognized when agreement is reached with clients as to the value of the claims,
which in some instances may not occur until after completion of work under the
contract. Costs incurred for bidding and obtaining contracts are expensed as
incurred.
Income Taxes - The Company accounts for income taxes by the asset and
liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences of operating loss and tax credit carryforwards
and temporary differences between the financial statement carrying values of
assets and liabilities and their respective tax bases. The provision for income
taxes is impacted by income taxes in certain countries, primarily Nigeria, being
based on deemed profit rather than taxable income as well as tax holidays on
certain projects.
22
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plans and Benefits - - During 2001, the Company terminated its
defined benefit retirement plans and postretirement medical benefits plan that
provided retirement benefits to substantially all regular employees. Pension
costs were funded in accordance with annual actuarial valuations. The Company
recorded the cost of postretirement medical benefits, which was funded on the
pay-as-you-go basis, over the employees' working lives. The Company has a
voluntary defined contribution retirement plan for U.S. based employee that is
qualified, and is contributory on the part of the employees, and a voluntary
savings plan for certain international employees that is non-qualified, and is
contributory on the part of the employee.
Common Stock Options - The Company measures stock-based compensation using
the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, and provides pro-forma disclosure as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock - Based
Compensation." As such, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the exercise price.
If compensation cost for the Company's stock options plans had been
determined using the fair value method in SFAS No. 123 and SFAS No. 148, the
Company's net income and income per share would have been as shown in the pro
forma amounts below:
Year Ended December 31,
------------------------------------
2003 2002 2001
----------- ----------- ----------
Net income (loss) as reported $ (3,213) $ 29,749 $ 19,080
Add stock-based employee compensation
included in net income, after tax - 553 -
Less stock-based employee compensation
determined under fair value method, after tax (1,786) (2,397) (812)
----------- ----------- ----------
Pro forma net income (loss) $ (4,999) $ 27,905 $ 18,268
=========== =========== ==========
Income (loss) per share:
Basic, as reported $ (.16) $ 1.63 $ 1.32
=========== =========== ==========
Basic, pro forma $ (.24) $ 1.53 $ 1.26
=========== =========== ==========
Diluted, as reported $ (.16) $ 1.59 $ 1.27
=========== =========== ==========
Diluted, pro forma $ (.24) $ 1.49 $ 1.21
=========== =========== ==========
The fair value of granted options was estimated on the date of grant using
the Black-Sholes option pricing model with the following assumptions:
Year Ended December 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ----------
Expected option life in years 1-3 4 3-4
Risk-free interest rate 1.13% 1.81% 3.91%
Dividend yield - - -
Volatility 52.99% 57.04% 61.03%
Foreign Currency Translation - All significant monetary asset and liability
accounts stated in currencies other than United States dollars are translated
into United States dollars at current exchange rates for countries in which the
local currency is the functional currency. Translation adjustments are
accumulated in other comprehensive income (loss). Non-monetary assets and
liabilities in highly inflationary economies are translated into United States
dollars at historical exchange rates. Revenue and expense accounts are converted
at prevailing rates throughout the year. Foreign currency transaction
adjustments and translation
23
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adjustments in highly inflationary economies are recorded in income.
Concentration of Credit Risk - The Company has a concentration of
customers in the oil, gas and power industries which exposes the Company to a
concentration of credit risks within an industry. The Company seeks to obtain
advance and progress payments for contract work performed on major contracts.
Receivables are generally not collateralized. The Company believes that its
allowance for bad debts is adequate.
Fair Value of Financial Instruments - The carrying value of financial
instruments does not materially differ from fair value.
Cash Flows - In the determination of cash flows, all highly liquid
investments with maturities of less than three months are considered to be cash
equivalents. The Company paid interest of $300 in 2003, $1,132 in 2002, and
$2,858 in 2001 and income taxes of $11,265 in 2003, $11,315 in 2002 and $8,650
in 2001.
Capitalized Interest - The Company capitalizes interest as part of the
cost of significant assets constructed or developed for the Company's own use.
During 2003, $386 of interest was capitalized, primarily attributable to the
design and construction of the Opal Gas Plant. No interest was capitalized in
2002 and 2001.
Income (Loss) per Share - Basic income (loss) per share is calculated by
dividing net income, less any preferred dividend requirements, by the
weighted-average number of common shares outstanding during the year. Diluted
income (loss) per share is calculated by including the weighted-average number
of all potentially dilutive common shares with the weighted-average number of
common shares outstanding.
Derivative Financial Instruments - The Company may use derivative
financial instruments such as forward contracts, options or other financial
instruments as hedges to mitigate non-U.S. currency exchange risk when the
Company is unable to match non-U.S. currency revenue with expenses in the same
currency. The Company had no derivative financial instruments as of December 31,
2003 or 2002.
2. ACQUISITIONS
On October 23, 2002, the Company acquired all outstanding shares of Mt.
West Fabrication Plants and Stations, Inc., Process Electric and Control, Inc.,
Process Engineering Design, Inc. and Pacific Industrial Electric, Inc.
(collectively, "Mt. West Group"). Mt. West Group provides design-build services,
including engineering, procurement and construction services to the energy
industry, primarily in the western United States, thereby expanding the
Company's services in the United States. The purchase price of $13,711 was based
on a multiple of cash flow and consisted of $4,591 cash and acquisition costs
and 950,000 shares of common stock valued at $ 9,120 (based on the average
market price of the Company's common shares over the two-day periods before and
after the date a definitive purchase agreement was signed). In addition, the
purchase price will be adjusted by an earn-out amount equal to 25 percent of the
combined adjusted net income, as defined in the definitive purchase agreement,
of Mt. West Group for the 24-month period following the date of acquisition. Any
earn-out amounts due shall be payable in cash upon completion of the earn-out
period. The transaction was accounted for as a purchase.
On October 12, 2001, the Company successfully completed its tender offer
for all outstanding shares of MSI Energy Services Inc. ("MSI"), a general
contractor in Alberta, Canada. The acquisition established the Company's
presence in Canada. The aggregate purchase price, including transaction costs,
was $8,295. Concurrently, the Company sold to certain MSI shareholders 144,175
common shares of treasury stock with an assigned value of $1,850, the market
price at the date the transaction was announced. The net cash of $6,445 paid to
purchase MSI was funded through borrowings under the Company's principal credit
agreement. The transaction was accounted for as a purchase.
24
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. ACQUISITIONS (CONTINUED)
None of the goodwill created as a result of these acquisitions is expected
to be deductible for tax purposes.
The fair value of the net assets acquired from these acquisitions was as
follows:
Mt. West Group MSI
-------------- -----------
Current assets $ 15,799 $ 3,549
Property, plant and equipment 3,544 3,318
Current liabilities (9,173) (1,080)
Deferred income taxes (808) (482)
Term debt - (416)
----------- -----------
9,362 4,889
Goodwill, included in other assets 4,349 3,406
----------- -----------
$ 13,711 $ 8,295
=========== ===========
The unaudited pro forma results of operations including Mt. West Group and
MSI as if the acquisitions occurred January 1, 2001, would have been:
Year Ended December 31,
-----------------------------
2002 2001
----------- -----------
Revenue $ 665,197 $ 459,199
Net income (loss) 31,902 21,966
Income (loss) per common share:
Basic $ 1.68 $ 1.42
=========== ===========
Diluted $ 1.64 $ 1.36
=========== ===========
3. CONTRACTS IN PROGRESS
Most contracts allow for progress billings to be made during the performance of
the work. These billings may be made on a basis different from that used for
recognizing revenue, such as the achievement of contract milestones. Contracts
in progress for which cost and recognized income exceed billings or billings
exceed cost and recognized income consist of:
December 31,
-----------------------------
2003 2002
----------- -----------
Costs incurred on contracts in progress $ 433,537 $ 433,469
Recognized income 74,579 77,871
----------- -----------
508,116 511,340
Progress billings and advance payments 475,212 494,553
----------- -----------
$ 32,904 $ 16,787
=========== ===========
Contract cost and recognized income not yet billed $ 40,109 $ 27,880
Contract billings in excess of cost and recognized income (7,205) (11,093)
----------- -----------
$ 32,904 $ 16,787
=========== ===========
The Company expects all amounts to be billed within one year.
25
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which are used to secure debt or are subject
to lien, at cost, consist of:
December 31,
------------------
2003 2002
-------- --------
Construction equipment $ 59,226 $ 54,428
Marine equipment 57,603 54,664
Transportation equipment 23,912 24,372
Land, buildings, furniture and equipment 58,692 36,900
-------- --------
199,433 170,364
Less accumulated depreciation and amortization 103,905 93,103
-------- --------
$ 95,528 $ 77,261
======== ========
Included in land, buildings, furniture and equipment is $3,871 for the
cost of a new information system, presently in the installation stage, which has
been capitalized in connection with a capital lease. The lease, which could have
a maximum lease value of $7,000, began on December 31, 2003, requires monthly
payments for four years, increases quarterly based on expenditures made, has an
implicit interest rate of 5.14%, and contains a bargain purchase provision at
the end of the lease term.
5. JOINT VENTURES
The Company has had investments during the past three years, ranging from
10 percent to 50 percent, in joint ventures that operate in similar lines of
business as the Company. Investments consist of a 10 percent interest in a
consortium for work in Venezuela, a 35 percent interest in a joint venture for
work in Australia and a 50 percent interest in a joint venture for work in
Africa. Interests in these unconsolidated ventures are accounted for under the
equity-method in the consolidated balance sheets and on a proportionate
consolidation basis in the consolidated statements of operations.
The Company's proportionate share of revenue and contract cost included in
the consolidated statements of operations from these ventures consists of:
Year Ended December 31,
----------------------------
2003 2002 2001
-------- -------- --------
Contract revenue $ 60,344 $127,643 $ 42,483
Contract cost 43,417 105,285 31,637
The Company's investments in and advances to these ventures consist of:
December 31,
------------------
2003 2002
--------- -------
Due from joint ventures, included in accounts receivable $ - $ 4,662
Investment in joint ventures 14,086 16,745
26
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
5. JOINT VENTURES (CONTINUED)
Summarized balance sheet information for the significant joint venture in
Africa (accounted for under the equity-method in the consolidated balance
sheets) is as follows:
December 31,
-----------------------------
2003 2002
---------- -----------
Current assets $ 22,395 $ 29,661
Non-current assets 1,068 17,380
---------- -----------
Total $ 23,463 $ 47,041
========== ===========
Liabilities, current $ 8,926 $ 25,484
Equity 14,537 21,557
---------- -----------
Total $ 23,463 $ 47,041
========== ===========
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
December 31,
-----------------------------
2003 2002
---------- -----------
Trade payables $ 63,313 $ 47,666
Payrolls and payroll liabilities 10,876 16,639
Equipment reconditioning and overhaul reserves 1,425 2,277
---------- -----------
$ 75,614 $ 66,582
========== ===========
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
December 31,
-----------------------------
2003 2002
---------- -----------
$125,000 revolving credit agreement with a syndicated bank group $ 14,000 $ -
Other obligations 4,322 1,171
---------- -----------
Total long-term debt 18,322 1,171
Less current portion 1,315 1,171
---------- -----------
Long-term debt, less current portion $ 17,007 $ -
========== ===========
On June 14, 2002, the Company completed a $125,000 credit agreement with a
syndicated bank group. The facility may be used for standby and commercial
letters of credit, borrowings or a combination thereof. Borrowings are limited
to the lesser of 40% of the borrowing base or $50,000 and are payable at
termination on June 14, 2005. Interest is payable quarterly at a base rate plus
a margin ranging from 0.75% to 2.00% or a Eurodollar Rate plus a margin ranging
from 1.75% to 3.00%. A commitment fee on the unused portion of the credit
agreement is payable quarterly ranging from 0.50% to 0.75%. The credit agreement
is collateralized by substantially all of the Company's assets, including stock
of the principal subsidiaries, restricts the payment of cash dividends and
requires the Company to maintain certain financial ratios. The borrowing base is
calculated using the lesser of (1) varying percentages of cash, accounts
receivable, accrued revenue, contract cost and recognized income not yet billed,
property, plant and equipment, and spare parts or (2) a multiple of EBITDA. Debt
issue costs of $3,257 net of accumulated
27
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
amortization of $2,455, associated with the new credit agreement are included in
other assets at December 31, 2003 and are being amortized over 24 months ending
June 2004.
As of December 31, 2003, there were borrowings of $14,000 under the June
2002 credit agreement. The Company had $41,047 of letters of credit outstanding,
leaving $40,287 available for the issuance of letters of credit and $6,000 for
borrowings or a combination thereof.
In the quarters ended September 30, 2003 and December 31, 2003, due to the
Company's operating results and EBITDA levels, a Consent and Waiver Agreement
(the "Agreement") was obtained from the syndicated bank group to waive
non-compliance with certain financial covenants to the credit agreement and to
agree to a method for calculating the borrowing base that eliminates the
multiple of EBITDA calculation through the filing of the February 2004 borrowing
base certificate. The Agreement provides waivers for certain quarterly financial
covenants through December 31, 2003. As a result of the Agreement, cash
borrowings under the credit agreement are limited to $20,000 and the total
borrowing base available for cash borrowing and the issuance of standby letters
of credit may not exceed $75,000. Borrowings under the credit facility are
classified as long-term due to their stated maturity date and the future
expected compliance with the covenants of the credit facility. Effective March
31, 2004, the calculation of all covenants and the borrowing base revert to the
original calculations contained in the June 14, 2002 credit agreement.
Additionally, at that date the maximum borrowings under the facility return to
$125,000 and cash borrowings are limited to 40% of the borrowing base or
$50,000. In the future, an acceleration of debt under the credit facility could
occur if the credit agreement's covenants are not met and the Company is not
successful in obtaining waivers of compliance at that time.
On March 12, 2004, the Company completed a $60,000 2.75% Convertible
Senior Notes (the "Convertible Notes") offering. The Convertible Notes will be
general senior unsecured obligations. Interest will be paid semi-annually on
March 15th and September 15th, beginning on September 15, 2004. The Convertible
Notes will mature on March 15, 2024 unless the notes are repurchased, redeemed
or converted earlier. The Company may redeem the Convertible Notes for cash on
or after March 15, 2011, at 100% of the principal amount of the notes plus
accrued interest. The holders of the Convertible Notes have the right to require
the Company to repurchase the Convertible Notes, including unpaid interest, on
March 15, 2011, 2014, and 2019 or upon a change of control related event. On
March 15, 2011 and upon a change in control event, the Company must pay the
purchase price in cash. On March 15, 2014 and 2019, the Company has the option
of providing common stock in lieu of cash or a combination of common stock and
cash to fund repurchases. The holders of the Convertible Notes may convert,
under certain circumstances, the notes into shares of common stock at an initial
conversion ratio of 51.3611 shares of our common stock per $1,000.00 principal
amount of notes (representing a conversion price of approximately $19.47 per
share).
On March 12, 2004, the existing June 2002 credit agreement was amended and
restated (the "2004 Credit Facility"). The 2004 Credit Facility will mature on
March 12, 2007. The 2004 Credit Facility may be used for standby and commercial
letters of credit, borrowings or a combination thereof. Borrowings are limited
to the lesser of 40% of the borrowing base or $30,000 and are payable at
termination on March 12, 2007. Interest is payable quarterly at a base rate plus
a margin ranging from 0.75% to 2.00% or a Eurodollar Rate plus a margin ranging
from 1.75% to 3.00%. A commitment fee on the unused portion of the 2004 Credit
Facility is payable quarterly ranging from 0.375% to 0.625%. The 2004 Credit
Facility is collateralized by substantially all of the Company's assets,
including stock of the principal subsidiaries, restricts the payment of cash
dividends and requires the Company to maintain certain financial ratios. The
borrowing base is calculated using varying percentages of cash, accounts
receivable, accrued revenue, contract cost and recognized income not yet billed,
property, plant and equipment, and spare parts.
28
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Other obligations include approximately $3,871 to a leasing company under
a four-year capital lease in connection with the ongoing acquisition and
installation of new corporate information systems and infrastructure.
Additionally, the Company has various notes payable, generally related to
equipment financing, and local revolving credit facilities. All are at market
interest rates, and are collateralized by certain vehicles, equipment and/or
real estate.
The Company has unsecured credit facilities with banks in certain
countries outside the United States. Borrowings in the form of short-term notes
and overdrafts are made at competitive local interest rates. Generally, each
line is available only for borrowings related to operations in a specific
country. Credit available under these facilities is approximately $5,841 at
December 31, 2003. There were no outstanding borrowings made under these
facilities at December 31, 2003 or 2002.
8. RETIREMENT BENEFITS
The Company had two defined benefit plans (pension plans), one covering
substantially all regular employees which were funded by employee and Company
contributions and the other covering certain executive officers which was funded
by Company contributions. The Company's funding policy was to contribute at
least the minimum required by the Employee Retirement Income Security Act of
1974 in accordance with annual actuarial valuations. Benefits under the plans
were determined by employee earnings and credited service. The Company had a
post-retirement medical benefits plan that covered substantially all regular
employees and was funded by Company and retiree contributions based on estimated
cost. The defined benefit plans and the post-retirement medical benefit plan
were terminated during 2001.
Plan assets of the pension plans consisted primarily of listed stocks and
bonds. Pension plan assets totaling $494 in 2002 and $35,985 in 2001 were
distributed to plan participants. By December 31, 2002, all assets had been
distributed to plan participants. The post-retirement medical benefit plan had
no assets. Upon termination of these plans in 2001, all benefits ceased and the
liabilities relating to the accrued cost of future benefits were reversed
resulting in non-cash, non-taxable gains of $9,204, which are reflected as a
reduction of operating expenses in the 2001 consolidated statements of
operations.
Benefit expense for the year ended December 31, 2001 for these plans
included the following components:
Post-retirement
Pension Medical
Benefits Benefits
-------- ---------------
Service cost $ 714 $ 56
Interest cost 2,260 215
Expected return on plan assets (2,418) -
Recognized net actuarial loss (gain) (323) (27)
Amortization of transition asset (29) -
Amortization of prior service cost 45 (12)
Curtailment 73 -
Amendments (220) -
------- -------
102 232
Settlement gain (3,170) (6,034)
------- -------
$(3,068) $(5,802)
======= =======
29
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
8. RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the changes in benefit obligations and plan
assets and the reconciliation of the funded status of the plans to the accrued
benefit cost:
Year Ended December 31,
-----------------------------------------
Post-
retirement
Medical
Pension Benefits Benefits
--------------------------- -----------
2002 2001 2001
--------- ----------- -----------
Change in benefit obligations:
Benefit obligations, beginning of year $ 494 $ 32,289 $ 5,540
Service cost 377 714 56
Interest cost - 2,260 215
Plan participants' contribution - 295 60
Amendments - 326 -
Actuarial loss (gain) - 595 -
Curtailment - - (5,381)
Benefits paid (871) (35,985) (490)
--------- ----------- -----------
Benefits obligations, end of year - 494 -
--------- ----------- -----------
Change in plan assets:
Plan assets at fair value,
beginning of year 494 35,444 -
Actual return on plan assets - (858) -
Employer contribution 377 1,598 430
Plan participants' contribution - 295 60
Benefits paid (871) (35,985) (490)
--------- ----------- -----------
Plan assets at fair value,
end of year - 494 -
--------- ----------- -----------
Accrued benefit cost $ - $ - $ -
========= =========== ===========
The Company has a defined contribution plan that is funded by
participating employee contributions and the Company. The Company matches
employee contributions, up to a maximum of 4 percent of salary in the form of
cash or WGI common stock, as elected by the employee. Company contributions for
this plan were $1,094 (including $245 of WGI common stock) in 2003, $1,038
(including $422 of WGI common stock) in 2002 and $905 (including $306 of WGI
common stock) in 2001.
30
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. INCOME TAXES
The provision (benefit) for income taxes represents income taxes arising
as a result of operations and credits for revision of previous estimates of
income taxes payable in a number of countries. The Company is not subject to
income tax in Panama on income earned outside of Panama. All income has been
earned outside of Panama. The relationship between income (loss) before income
taxes and the provision for income taxes is affected by the method of
determining income taxes in the countries in which the Company operates. The
effective consolidated tax rate differs from the U.S. federal statutory tax rate
as taxable income and operating losses from different countries cannot be offset
and tax rates and methods of determining taxes payable are different in each
country.
Income (loss) before income taxes and the provision (benefit) for income
taxes in the consolidated statements of operations consist of:
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Income (loss) before income taxes:
Other countries $ 17,064 $ 20,000 $ 8,935
United States (23,690) 15,197 20,529
-------- -------- --------
$ (6,626) $ 35,197 $ 29,464
======== ======== ========
Provision (benefit) for income taxes:
Current provision (benefit):
Other countries $ 6,241 $ 4,446 $ 5,563
United States:
Federal (6,427) 3,551 4,991
State (1,058) 1,354 1,296
-------- -------- --------
(1,244) 9,351 11,850
-------- -------- --------
Deferred tax expense (benefit):
United States (679) (2,653) (1,497)
Other countries (1,490) (1,250) 31
-------- -------- --------
(2,169) (3,903) (1,466)
-------- -------- --------
Total provision (benefit) for income taxes $ (3,413) $ 5,448 $ 10,384
======== ======== ========
The Company's provision (benefit) for income taxes differed from the
United States statutory federal income tax rate of 34% due to the following:
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Tax at U.S. statutory rate $ (2,253) $ 11,967 $ 10,018
Non-U.S. income taxed at other
than U.S. rates (5,802) (6,800) (3,038)
Non-U.S. income tax 4,751 3,196 5,563
State tax, net of federal benefit (698) 894 855
Non-U.S. income taxed in U.S. - 113 784
Other, net 589 (613) 973
Termination of benefit plans - - (2,433)
Adjustment to deferred tax asset valuation allowance - (3,309) (2,338)
-------- -------- --------
$ (3,413) $ 5,448 $ 10,384
======== ======== ========
31
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. INCOME TAXES (CONTINUED)
The principal components of the Company's net deferred tax assets are:
December 31,
-------------------
2003 2002
-------- --------
Deferred income tax assets:
Self insured medical accrual $ 196 $ 182
Accrued vacation 291 342
Non-U.S. tax net operating loss carryforwards 16,995 14,909
U.S. tax net operating loss carryforwards 4,859 4,898
Other 288 490
-------- --------
22,629 20,821
Valuation allowance (14,595) (13,799)
-------- --------
Deferred income tax assets, net of valuation allowance 8,034 7,022
Deferred income tax liabilities:
Property and equipment (1,086) (2,290)
-------- --------
Net deferred income tax assets, included in other assets $ 6,948 $ 4,732
======== ========
The net deferred income tax assets (liabilities) are as follows:
December 31,
--------------
2003 2002
------ ------
United States $4,698 $4,019
Other countries 2,250 713
------ ------
Net deferred income tax assets $6,948 $4,732
====== ======
The United States federal income tax benefit recognized in 2003 is a
result of the Company's ability to carry a significant portion of the 2003
United States loss back to the years 2002 and 2001 to offset the United States
income of certain subsidiaries in those years.
The Company has $14,290 in United States net operating loss carryforwards
at December 31, 2003. The United States net operating loss carryforwards will
expire, unless utilized, beginning with $391 in 2005, $2,617 in 2007 and $11,282
in subsequent years through December 31, 2013. The carryforwards available on an
annual basis are limited. The Company has assessed its United States operations
including past earnings history and projected future earnings, and the
limitations and expiration dates of the U.S. net operating loss carryforwards
and other tax assets, and has determined that it is more likely than not that
the $4,698 of U.S. net deferred tax assets at December 31, 2003, will be
realized.
At December 31, 2003, the Company has non-expiring operating loss
carryforwards in the United Kingdom of $34,602 ((pound)19,331), and a net
operating loss carryforward expiring over three years in Venezuela of $1,713
(Bolivars 2,740,034). The deferred tax assets applicable to these operating loss
carryforwards at December 31, 2003 and 2002 are fully reserved by a valuation
allowance of $14,423. At December 31, 2003, the Company has non-expiring
operating loss carryforwards in Bolivia of $10,289 (Bolivianos 82,406). The
Company has assessed its Bolivia operations and has determined it is more likely
than not that $2,401 of the deferred tax asset related to these net operating
loss carryforwards at December 31, 2003, will be realized,
32
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. INCOME TAXES (CONTINUED)
and the remainder has been reserved by a valuation allowance of $172. Overall,
the valuation allowance increased in 2003 because of additional losses in
Bolivia, partially offset by income in Venezuela.
In connection with the acquisitions of Mt. West Group in 2002 and MSI in
2001, the Company recorded $808 and $482, respectively, of deferred tax
liabilities relating primarily to differences between the financial statement
carrying values of the assets acquired and their tax bases.
10. STOCKHOLDER RIGHTS PLAN
On April 1, 1999, the Company adopted a Stockholder Rights Plan and
declared a distribution of one Preferred Share Purchase Right ("Right") on each
outstanding share of the Company's common stock. The distribution was made on
April 15, 1999 to stockholders of record on that date. The Rights expire on
April 14, 2009.
The Rights are exercisable only if a person or group acquires 15 percent
or more of the Company's common stock or announces a tender offer the
consummation of which would result in ownership by a person or group of 15
percent or more of the common stock. Each Right entitles stockholders to buy one
one-thousandth of a share of a series of junior participating preferred stock at
an exercise price of $30.00 per share.
If the Company is acquired in a merger or other business combination
transaction after a person or group has acquired 15 percent or more of the
Company's outstanding common stock, each Right entitles its holder to purchase,
at the Right's then-current exercise price, a number of acquiring company's
common shares having a market value of twice such price. In addition, if a
person or group acquires 15 percent or more of the Company's outstanding common
stock, each Right entitles its holder (other than such person or members of such
group) to purchase, at the Right's then-current exercise price, a number of the
Company's common shares having a market value of twice such price.
Prior to the acquisition by a person or group of beneficial ownership of
15 percent or more of the Company's common stock, the Rights are redeemable for
one-half cent per Right at the option of the Company's Board of Directors.
11. STOCK OWNERSHIP PLANS
During May 1996, the Company established the Willbros Group, Inc. 1996
Stock Plan (the "1996 Plan") with 1,125,000 shares of common stock authorized
for issuance to provide for awards to key employees of the Company, and the
Willbros Group, Inc. Director Stock Plan (the "Director Plan") with 125,000
shares of common stock authorized for issuance to provide for the grant of stock
options to non-employee directors. The number of shares authorized for issuance
under the 1996 Plan, and the Director Plan, was increased to 3,125,000, and
225,000, respectively, by shareholder approval.
Options granted under the 1996 Plan vest over a three to four year period.
Options granted under the Director Plan vest six months after the date of grant.
At December 31, 2003, the 1996 Plan had 610,588 shares and the Director Plan had
104,000 shares available for grant. Certain provisions allow for accelerated
vesting based on increases of share prices.
33
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11. STOCK OWNERSHIP PLANS (CONTINUED)
The Company's stock option activity and related information consist of:
Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding, beginning
of year 1,560,899 $10.48 1,851,800 $ 9.64 1,859,550 $ 7.62
Granted 45,000 10.22 218,912 12.56 559,500 13.54
Exercised 105,000 5.79 497,813 8.38 496,250 7.02
Forfeited 53,500 14.07 12,000 6.24 71,000 6.12
--------- ------ --------- ------ --------- ------
Outstanding, end of year 1,447,399 $10.68 1,560,899 $10.48 1,851,800 $ 9.64
========= ====== ========= ====== ========= ======
Exercisable at end of year 1,096,774 $10.91 875,399 $ 9.94 975,500 $ 9.00
========= ====== ========= ====== ========= ======
The weighted-average fair value of options granted during the year was
$2.52 in 2003 ($4.05 in 2002 and $6.47 in 2001). Exercise prices for options
outstanding, weighted-average remaining life and weighted-average exercise price
by ranges of exercise prices at December 31, 2003 are:
Weighted Weighted
Range of Options Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
--------------- ----------- -------------- --------------
$ 5.06 - $ 6.94 448,591 5.9 Years $ 5.92
7.26 - 11.88 363,750 6.2 Years 9.02
12.70 - 19.44 635,058 6.8 Years 14.99
--------- --------- -------
$ 5.06 - $ 19.44 1,447,399 6.4 Years $ 10.68
========= ========= =======
The number of vested options and weighted-average exercise price by ranges
of exercise prices at December 31, 2003 are:
Weighted
Range of Vested Average
Exercise Prices Option Exercise Price
--------------- ------ --------------
$ 5.06 - $ 6.94 316,591 $ 6.05
7.26 - 11.88 266,750 8.96
12.70 - 19.44 513,433 14.93
--------- -------
$ 5.06 - $ 19.44 1,096,774 $ 10.91
========= =======
In March 2002, certain officers of the Company borrowed a total of $1,307
under the Employee Stock Purchase Program, which permitted selected executives
and officers (exclusive of the Chief Executive Officer) to borrow from the
Company up to 100% of the funds required to exercise vested stock options. The
loans are full recourse, non-interest bearing for a period of up to 5 years and
are collateralized by the related stock. The difference of $553 between the
discounted value of the loans and the fair market value of the
34
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11. STOCK OWNERSHIP PLANS (CONTINUED)
stock on the date of exercise was recorded as compensation expense. The loans
receivable are presented as a reduction of stockholders' equity. The maximum
loan amount any one officer may have outstanding under the Employee Stock
Purchase Program is $250.
12. COMMON STOCK OFFERING
On May 14, 2002, the Company completed a public offering of its common
shares at $17.75 per share; 4,356,750 shares were sold by the Company. The
underwriters exercised options to purchase all shares available for
over-allotments. The Company received $71,902 in proceeds, after the
underwriting discount and offering costs, which were used to repay indebtedness
under the prior credit agreement and for working capital and general corporate
purposes.
13. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share are computed as follows:
Year Ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) applicable to common shares $ (3,213) $ 29,749 $ 19,080
============ ============ ============
Weighted average number of common shares
outstanding for basic earnings per share 20,662,305 18,271,492 14,442,035
Weighted average number of dilutive potential
common shares outstanding - 450,267 632,131
------------ ------------ ------------
Weighted average number of common shares
outstanding for diluted earnings per share 20,662,305 18,721,759 15,074,166
============ ============ ============
Earnings (loss) per common share:
Basic $ (.16) $ 1.63 $ 1.32
============ ============ ============
Diluted $ (.16) $ 1.59 $ 1.27
============ ============ ============
The weighted average number of potential common shares excluded from the
computation of diluted earnings (loss) per share because of their anti-dilutive
effect was 1,444,066 at December 31, 2003 (405,092 at December 31, 2002 and
449,750 at December 31, 2001).
14. SEGMENT INFORMATION
The Company operates in two operating segments: Engineering and
Construction, and Facilities Development and Operations. This organization
reflects the way management assesses the performance of the businesses and makes
decisions about allocating resources. The Engineering and Construction segment
provides construction of pipelines, stations and other facilities, engineering,
procurement, project management, and other oilfield services including
maintenance, transportation, dredging, and coating. The Facilities Development
and Operations segment consists of the development, ownership and operation of
35
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
14. SEGMENT INFORMATION (CONTINUED)
assets developed under "Build, Own and Operate" contracts. Information about
these operating segments is as follows:
Year Ended December 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Contract revenue (1):
Engineering and construction $ 413,353 $ 579,946 $ 384,436
Facilities development and operations 5,384 3,757 5,698
--------- --------- ---------
$ 418,737 $ 583,703 $ 390,134
========= ========= =========
Operating income (loss):
Contract income (2):
Engineering and construction $ 48,752 $ 92,086 $ 70,882
Facilities development and operations 4,360 3,361 2,066
--------- --------- ---------
53,112 95,447 72,948
Operating costs and expenses:
Termination of benefit plans - - (9,204)
Depreciation and amortization 22,285 23,304 19,522
General and administrative 36,060 33,846 29,975
--------- --------- ---------
58,345 57,150 40,293
--------- --------- ---------
Operating income (loss) $ (5,233) $ 38,297 $ 32,655
Other income (expense)
Interest income 524 400 377
Interest expense (1,746) (1,951) (2,965)
Foreign exchange loss (677) (1,025) (117)
Other - net 506 (524) (486)
--------- --------- ---------
(1,393) (3,100) (3,191)
--------- --------- ---------
Income (loss) before taxes $ (6,626) $ 35,197 $ 29,464
========= ========= =========
Capital expenditures:
Engineering and construction $ 19,115 $ 23,132 $ 25,240
Facilities development and operations 16,609 1,123 2,588
General corporate 4,842 5,972 990
--------- --------- ---------
$ 40,566 $ 30,227 $ 28,818
========= ========= =========
Total assets:
Engineering and construction $ 248,975 $ 225,816 $ 189,785
Facilities development and operations 23,338 7,977 9,354
General corporate (3) 39,109 64,400 24,996
--------- --------- ---------
$ 311,422 $ 298,193 $ 224,135
========= ========= =========
(1) All revenue is from third party customers.
(2) Contract income equals contract revenue less contract cost.
(3) General corporate includes assets not assigned to an operating segment,
and is composed primarily of cash and cash equivalents, home office
property and equipment, and deferred tax assets.
36
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
14. SEGMENT INFORMATION (CONTINUED)
Customers (all in the Engineering and Construction operating segment)
representing more than 10 percent of total contract revenue are as follows:
Year Ended December 31,
--------------------------
2003 2002 2001
---- ---- ----
Customer A 16% 29% 18%
Customer B 15 - 14
Customer C - 16 -
Customer D - - 17
Customer E - - 10
Customer F - - 10
--- --- ---
31% 45% 69%
=== === ===
Information about the Company's operations in its significant work
countries is shown below:
Year Ended December 31,
----------------------------
2003 2002 2001
-------- -------- --------
Contract revenue:
United States (4) $129,401 $231,552 $205,292
Offshore West Africa 66,918 59,285 44,027
Cameroon 61,605 136,149 34,808
Nigeria 53,185 47,826 67,365
Oman 40,885 17,244 14,303
Venezuela 29,312 12,835 16,968
Canada 24,177 13,685 3,334
Iraq 10,057 - -
Bolivia 2,998 47,383 -
Dominican Republic 199 17,744 -
Australia - - 4,037
-------- -------- --------
$418,737 $583,703 $390,134
======== ======== ========
Long-lived assets:
United States $ 41,359 $ 24,298 $ 17,346
Nigeria 23,574 21,291 21,305
Offshore West Africa 12,307 11,070 11,399
Oman 6,857 5,139 4,464
Venezuela 5,575 7,304 6,640
Canada 4,289 3,852 3,258
Cameroon 3,089 7,262 9,709
Bolivia 2,806 3,503 -
Other 2,035 199 193
-------- -------- --------
$101,891 $ 83,918 $ 74,314
======== ======== ========
(4) Net of intercountry revenue of $9,009 in 2003, $25,849 in 2002, and
$59,284 in 2001.
37
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES
The Company provides construction, engineering and specialty services to
the oil, gas and power industries. The Company's principal markets are currently
Africa, the Middle East, South America and North America. Operations outside the
United States may be subject to certain risks which ordinarily would not be
expected to exist in the United States, including foreign currency restrictions,
extreme exchange rate fluctuations, expropriation of assets, civil uprisings and
riots, war, unanticipated taxes including income taxes, excise duties, import
taxes, export taxes, sales taxes or other governmental assessments, availability
of suitable personnel and equipment, termination of existing contracts and
leases, government instability and legal systems of decrees, laws, regulations,
interpretations and court decisions which are not always fully developed and
which may be retroactively applied. Management is not presently aware of any
events of the type described in the countries in which it operates that have not
been provided for in the accompanying consolidated financial statements.
Based upon the advice of local advisors in the various work countries
concerning the interpretation of the laws, practices and customs of the
countries in which it operates, management believes the Company has followed the
current practices in those countries; however, because of the nature of these
potential risks, there can be no assurance that the Company may not be adversely
affected by them in the future. The Company insures substantially all of its
equipment in countries outside the United States against certain political risks
and terrorism through political risk insurance coverage that contains a 20%
co-insurance provision.
The Company has the usual liability of contractors for the completion of
contracts and the warranty of its work. Where work is performed through a joint
venture, the Company also has possible liability for the contract completion and
warranty responsibilities of its joint venture partners. Management is not aware
of any material exposure related thereto which has not been provided for in the
accompanying consolidated financial statements.
Certain post-contract completion audits and reviews are being conducted by
clients and/or government entities. While there can be no assurance that claims
will not be received as a result of such audits and reviews, management does not
believe a legitimate basis for any material claims exists. At the present time
it is not possible for management to estimate the likelihood of such claims
being asserted or, if asserted, the amount or nature thereof.
In connection with the Company's 10% interest in a joint venture in
Venezuela, the Company issued a corporate guarantee equal to 10% of the joint
venture's outstanding borrowings with two banks. The guarantee reduces as
borrowings are repaid, and expires in March 2004. The commitment as of December
31, 2003 totals approximately $3,582, the maximum amount of future payments the
Company could be required to make.
From time to time the Company enters into commercial commitments, usually
in the form of commercial and standby letters of credit, insurance bonds and
financial guarantees. Contracts with the Company's customers may require the
Company to provide letters of credit or insurance bonds with regard to the
Company's performance of contracted services. In such cases, the commitments can
be called upon in the event of failure to perform contracted services. Likewise,
contracts may allow the Company to issue letters of credit or insurance bonds in
lieu of contract retention provisions, in which the client withholds a
percentage of the contract value until project completion or expiration of a
warranty period. Retention commitments can be called upon in the event of
warranty or project completion issues, as prescribed in the contracts. At
December 31, 2003, the Company had approximately $44,200 of letters of credit
and insurance bonds
38
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONTINUED)
outstanding, representing the maximum amount of future payments the Company
could be required to make. The Company had no liability recorded as of December
31, 2003, related to these commitments.
In 1997 the Company entered into lease agreements with a special-purpose
leasing partnership for land and an office building for the engineering group in
Tulsa, Oklahoma. In July 2002, the Company acquired the assets for $5,500,
thereby eliminating the lease agreements and related commercial commitments.
The Company is a party to a number of legal proceedings. Management
believes that the nature and number of these proceedings are typical for a firm
of similar size engaged in a similar type of business and that none of these
proceedings is material to the Company's financial position.
The Company has certain operating leases for office and camp facilities.
Rental expense, excluding daily rentals and reimbursable rentals under cost plus
contracts, was $2,127 in 2003, $1,782 in 2002, and $2,596 in 2001. Minimum lease
commitments under operating leases as of December 31, 2003, totaled $7,909 and
are payable as follows: 2004, $2,282; 2005, $1,985; 2006, $1,491; 2007, $905;
2008, $783 and later years, $463.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the years ended December
31, 2003 and 2002 is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter(a) Year
--------- --------- --------- --------- ---------
December 31, 2003:
Contract revenue $ 98,936 $ 122,864 $ 91,498 $ 105,439 $ 418,737
Operating income (loss) (4,851) 2,510 (9,541) 6,649 (5,233)
Income (loss) before
income taxes (5,604) 2,189 (9,732) 6,521 (6,626)
Net income (loss) (4,573) 4,125 (8,746) 5,981 (3,213)
Earnings per share:
Basic (.22) .20 (.42) .29 (.16)
Diluted (.22) .20 (.42) .28 (.16)
December 31, 2002:
Contract revenue $ 147,497 $ 148,149 $ 151,699 $ 136,358 $ 583,703
Operating income 10,548 12,181 8,521 7,047 38,297
Income before
income taxes 9,422 10,803 7,834 7,138 35,197
Net income 4,613 7,609 7,935 9,592 29,749
Earnings per share:
Basic .31 .42 .40 .47 1.63
Diluted .30 .41 .40 .46 1.59
39
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(a) Included in revenue, operating income and net income in the Fourth
Quarter 2003 is $6,892 for settlement of a contract variation. The
settlement added $.33 to earnings per share. Included in Fourth
Quarter 2002 is a $3,309 deferred income tax benefit resulting from
a reduction in the deferred tax valuation allowance.
The Company derives its revenue from contracts with durations from a few
weeks to several months or in some cases, more than a year. Unit-price contracts
provide relatively even quarterly results. However, major projects are usually
fixed-price contracts that may result in uneven quarterly financial results due
to the method by which revenue is recognized.
40
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits:
The following is a list of all exhibits filed as part of this Form 8-K.
23 Consent of KPMG LLP.
99 Additional note on segment reporting for the Form 10-Q for the
quarter ended March 31, 2004.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WILLBROS GROUP, INC.
Date: August 25, 2004 By: /s/ Warren L. Williams
----------------------
Warren L. Williams
Senior Vice President, Chief Financial
Officer and Treasurer
42
EXHIBIT INDEX
The following is a list of all exhibits included in this Form 8-K.
Exhibit
Number Description
------- -----------
23 Consent of KPMG LLP.
99 Additional note on segment reporting for the Form 10-Q for the
quarter ended March 31, 2004.
43