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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------- ---------
COMMISSION FILE NUMBER 1-11953
WILLBROS GROUP, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 98-0160660
(Jurisdiction of incorporation) (I.R.S. Employer Identification Number)
PLAZA 2000 BUILDING
50TH STREET, 8TH FLOOR
P.O. BOX 0816-01098
PANAMA, REPUBLIC OF PANAMA
TELEPHONE NO.: (507) 213-0947
(Address, including zip code, and telephone number, including
area code, of principal executive offices of registrant)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
---------------------------- -----------------------
Common stock, $.05 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No | |
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of June 30, 2003, the last business day of
the Registrant's most recently completed second fiscal quarter, was
$214,809,323.
As of March 1, 2004, 20,708,848 shares of the Registrant's Common Stock
were outstanding.
Documents incorporated by reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 20, 2004 are incorporated by reference into Part III
of this Form 10-K.
1
WILLBROS GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Page
PART I
Items 1.
and 2. Business and Properties..................................... 4
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Item 4A. Executive Officers of the Registrant........................ 29
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 30
Item 6. Selected Financial Data..................................... 31
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 46
Item 8. Financial Statements and Supplementary Data................. 47
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 72
Item 9A. Controls and Procedures..................................... 72
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 73
Item 11. Executive Compensation...................................... 73
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters....... 73
Item 13. Certain Relationships and Related Transactions.............. 73
Item 14. Principal Accountant Fees and Services...................... 73
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................................... 74
Signatures ... ............................................................ 76
2
FORWARD-LOOKING STATEMENTS
THIS FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS FORM 10-K WHICH ADDRESS
ACTIVITIES, EVENTS OR DEVELOPMENTS WHICH WE EXPECT OR ANTICIPATE WILL OR MAY
OCCUR IN THE FUTURE, INCLUDING SUCH THINGS AS FUTURE CAPITAL EXPENDITURES
(INCLUDING THE AMOUNT AND NATURE THEREOF), OIL, GAS, GAS LIQUIDS AND POWER
PRICES, DEMAND FOR OUR SERVICES, THE AMOUNT AND NATURE OF FUTURE INVESTMENTS BY
GOVERNMENTS, EXPANSION AND OTHER DEVELOPMENT TRENDS OF THE OIL, GAS AND POWER
INDUSTRIES, BUSINESS STRATEGY, EXPANSION AND GROWTH OF OUR BUSINESS AND
OPERATIONS, AND OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES WE MADE IN LIGHT OF OUR
EXPERIENCE AND OUR PERCEPTION OF HISTORICAL TRENDS, CURRENT CONDITIONS AND
EXPECTED FUTURE DEVELOPMENTS AS WELL AS OTHER FACTORS WE BELIEVE ARE APPROPRIATE
IN THE CIRCUMSTANCES. HOWEVER, WHETHER ACTUAL RESULTS AND DEVELOPMENTS WILL
CONFORM TO OUR EXPECTATIONS AND PREDICTIONS IS SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR
EXPECTATIONS INCLUDING:
- CURTAILMENT OF CAPITAL EXPENDITURES IN THE OIL, GAS, AND POWER
INDUSTRIES;
- POLITICAL OR SOCIAL CIRCUMSTANCES IMPEDING THE PROGRESS OF OUR WORK;
- THE TIMELY AWARD OF ONE OR MORE PROJECTS;
- CANCELLATION OF PROJECTS;
- INCLEMENT WEATHER;
- PROJECT COST OVERRUNS, UNFORESEEN SCHEDULE DELAYS, AND LIQUIDATED
DAMAGES;
- FAILING TO REALIZE COST RECOVERIES FROM PROJECTS COMPLETED OR IN
PROGRESS WITHIN A REASONABLE PERIOD AFTER COMPLETION OF THE RELEVANT
PROJECT;
- IDENTIFYING AND ACQUIRING SUITABLE ACQUISITION TARGETS ON REASONABLE
TERMS;
- OBTAINING ADEQUATE FINANCING;
- THE DEMAND FOR ENERGY DIMINISHING;
- DOWNTURNS IN GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS IN OUR
TARGET MARKETS;
- CHANGES IN THE EFFECTIVE TAX RATE IN COUNTRIES WHERE THE WORK WILL BE
PERFORMED;
- CHANGES IN LAWS OR REGULATIONS;
- THE RISK FACTORS LISTED IN THIS FORM 10-K AND IN OUR OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME;
- ABILITY TO MANAGE INSURABLE RISK AT AN AFFORDABLE COST; AND
- OTHER FACTORS, MOST OF WHICH ARE BEYOND OUR CONTROL.
CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FORM 10-K
ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE THAT
THE ACTUAL RESULTS OR DEVELOPMENTS WE ANTICIPATE WILL BE REALIZED OR, EVEN IF
SUBSTANTIALLY REALIZED, THAT THEY WILL HAVE THE CONSEQUENCES FOR, OR EFFECTS ON,
OUR BUSINESS OR OPERATIONS THAT WE ANTICIPATE TODAY. WE ASSUME NO OBLIGATION TO
UPDATE PUBLICLY ANY SUCH FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
______________
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS FORM 10-K TO
"WILLBROS", THE "COMPANY", "WE", "US" AND "OUR" REFER TO WILLBROS GROUP, INC.,
ITS CONSOLIDATED SUBSIDIARIES AND THEIR PREDECESSORS.
3
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
WEBSITE ACCESS TO REPORTS
Our public internet site is http://www.willbros.com/. We make available
free of charge through our internet site, via a link to Edgar Online, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
In addition, we currently make available on http://www.willbros.com/ our
annual reports to stockholders. You will need to have the Adobe Acrobat Reader
software on your computer to view these documents, which are in the .PDF format.
If you do not have Adobe Acrobat, a link to Adobe Systems Incorporated's
internet site, from which you can download the software, is provided.
GENERAL
We are a leading independent international contractor serving the oil, gas
and power industries. We provide construction and engineering services to
industry and governmental entities worldwide, specializing in pipelines and
associated facilities for onshore, coastal and offshore locations. We are also
actively involved in asset development, ownership and operations as an extension
of our construction and engineering services. We place particular emphasis on
projects in countries where we believe our experience gives us a competitive
advantage, including several developing countries.
Our construction services include the building and replacement of:
- major pipelines;
- gathering systems;
- flow stations;
- pump stations;
- gas compressor stations;
- gas processing facilities;
- oil and gas production facilities;
- piers;
- pressure vessels;
- dock facilities; and
- bridges.
Through our construction resources, we also provide specialty services,
including asset development and operations. Our asset development and operations
(also referred to as facility operations) include assets developed under "Build,
Own and Operate" contracts, such as the fueling facilities operated for the
Defense Energy Supply Corporation, an agency of the U.S. government, a gas
processing plant, owned by us, in the Opal, Wyoming area, and a water injection
facility in Venezuela.
Our engineering services include:
- feasibility studies;
- conceptual and detailed design services;
- field services, material procurement; and
- overall project management.
We provide our engineering services through engineering resources located
in Tulsa, Oklahoma; Portland, Oregon; Salt Lake City (Murray), Utah; and Abu
Dhabi. Construction services are provided utilizing a large fleet of
company-owned and leased equipment that includes marine vessels, barges,
dredges, pipelaying equipment, heavy construction equipment, transportation
equipment and camp equipment. Our equipment fleet is supported by an extensive
inventory of spare parts and tools, which we strategically position and maintain
throughout the world to maximize availability and minimize cost.
4
We trace our roots to the construction business of Williams Brothers
Company, founded in 1908. Through successors to that business, we have completed
many landmark projects around the world, including the "Big Inch" and "Little
Big Inch" War Emergency Pipelines (1942-44), the Mid-America Pipeline (1960),
the TransNiger Pipeline (1962-64), the Trans-Ecuadorian Pipeline (1970-72), the
northernmost portion of the Trans-Alaskan Pipeline System (1974-76), the All
American Pipeline System (1984-86), Colombia's Alto Magdalena Pipeline System
(1989-90), a portion of the Pacific Gas Transmission System expansion (1992-93),
and through a joint venture led by a subsidiary of ours, the Chad-Cameroon
Pipeline (2000-2003).
Over the years, we have been employed by more than 400 clients to carry out
work in 55 countries. Within the past 10 years, we have worked in Africa, Asia,
Australia, the Middle East, North America and South America. We have
historically had a steady base of operations in Canada, Nigeria, Oman, the
United States and Venezuela, which has been enhanced by major projects in
Australia, Bolivia, Cameroon, Chad, Egypt, Gabon, Indonesia, Ivory Coast,
Kuwait, and Pakistan.
Private sector clients have historically accounted for the majority of our
revenue. Government entities and agencies have accounted for the remainder. Our
top ten clients were responsible for 75% of our total revenue in 2003 (75% in
2002 and 81% in 2001). Operating units of ExxonMobil and Royal Dutch/Shell Group
of Companies accounted for 16% and 15% of our total revenue in 2003,
respectively.
CORPORATE STRUCTURE
We are incorporated in the Republic of Panama and maintain our headquarters
at Plaza 2000 Building, 50th Street, 8th Floor, P.O. Box 0816-01098, Panama,
Republic of Panama; our telephone number is (507) 213-0947. Panama's General
Corporation Law is substantially modeled on the New York and Delaware corporate
laws as they existed in 1932. Panama does not tax income derived from activities
conducted outside Panama. The principal subsidiaries of Willbros Group, Inc.
are:
- Willbros International, Inc.;
- Willbros RPI, Inc. ("RPI");
- Willbros MSI Canada Inc.("MSI");
- Willbros USA, Inc.;
- Willbros Mt. West, Inc.;
- Willbros Process Electric and Control, Inc.;
- Willbros Process Engineering Design, Inc.; and
- Willbros Pacific Industrial Electric, Inc.
The latter four companies are referred to collectively as the "Mt. West
Group."
All significant operations outside North America are carried out by
material direct or indirect subsidiaries of Willbros International, Inc., which
is also a Panamanian corporation. Such material subsidiaries include:
- Willbros Middle East, Inc.;
- Willbros West Africa, Inc.;
- Willbros (Nigeria) Limited;
- Willbros (Offshore) Nigeria Limited;
- Constructora CAMSA, C.A.;
- The Oman Construction Company LLC; and
- Willbros Transandina, S.A.
All significant operations in North America are carried out either by
Willbros RPI, Inc., a Delaware corporation, the Mt. West Group, all Colorado
corporations, with the exception of Willbros Process Electric and Control, Inc.,
which is an Oregon corporation, Willbros MSI Canada Inc., an Alberta, Canada
corporation, or by other material subsidiaries of Willbros USA, Inc., which is
also a Delaware corporation. Such other material subsidiaries of Willbros USA,
Inc. include:
- Willbros Engineers, Inc.;
- Willbros Energy Services Company; and
- Willbros Operating Services, Inc.
5
The Willbros corporate structure is designed to comply with jurisdictional
and registration requirements associated with work bid and performed and to
reduce worldwide taxation of operating income. Additional subsidiaries may be
formed in specific work countries where necessary or useful for compliance with
local laws or tax objectives. Administrative services are provided by Willbros
USA, Inc., whose administrative headquarters are located at 4400 Post Oak
Parkway, Suite 1000, Houston, Texas 77027, telephone number (713) 403-8000.
CURRENT MARKET CONDITIONS
We believe the fundamentals supporting the demand for engineering and
construction services for the pipeline industry will be strong in the mid to
long-term. We expect the international market to lead improvements in demand for
our services with an improvement in demand in the North American market expected
in late 2004. The following factors have caused the short-term outlook for our
business to strengthen:
- Improving global economic conditions have increased demand growth for
oil, gas, and power resulting in an increase in the expected number of
oil, gas and power projects.
- Planned capital expenditures for 2004 in North America are increasing,
but have not yet reached levels suggested by market fundamentals. We
believe we will begin to see the effects of these increased capital
expenditures in our quarterly results in late 2004.
- In West Africa and elsewhere, major projects with substantial capital
commitments are underway and will require pipeline infrastructure for
transportation and delivery of fuel, feedstock and final product.
- Projects delayed by events of the last two years are now being
discussed in earnest, with award dates advertised for the next 6-12
months.
- New holders of assets acquired in the past two years through merger or
outright purchase are now implementing plans to expand or upgrade
those assets.
- Increased demand in North America for natural gas has led to multiple
proposals for new liquefied natural gas ("LNG") facilities,
principally: regasification terminals and connecting pipelines in
North America, and gas gathering and liquefaction facilities in
exporting countries.
As a result of these factors, in the short-term through 2004, we expect our
revenue to increase approximately 25% to 35% from the 2003 level. In the mid to
long-term, we believe several factors influencing the global energy markets will
result in increased activity across our primary lines of business. The
fundamental factors that we expect will lead to higher levels of energy-related
capital expenditures include:
- Efforts to establish new oil and gas production in more politically
secure regions of the world;
- Rising global energy demand resulting from economic growth in
developing countries;
- The need for larger oil and gas transportation infrastructures in a
number of developing countries;
- Some state-controlled oil and gas companies seeking foreign
investment;
- The increasing role of natural gas as a fuel for power generation and
other uses in producing countries;
- The international effort to stabilize Iraq and restore Iraqi oil
production;
- Decline in existing producing reservoirs which will require additional
investment to stabilize or reverse;
- Initiatives to reduce natural gas flaring; and
- Aging of energy infrastructure.
Industry surveys of pipeline construction suggest that planned worldwide
pipeline construction will be higher in 2004 than in 2003. These reports
indicate approximately $19 billion is planned to be spent worldwide in 2004 on
pipeline construction and related infrastructure, compared to approximately $15
billion planned to have been spent in 2003. Industry surveys indicate that
approximately 59,000 miles of pipeline construction are planned for 2004 and
beyond, up significantly over comparable figures (38,000 miles) for 2003 and
beyond. We expect more than $5 billion of these projects to meet our bidding
criteria in 2004, and we expect to aggressively pursue these opportunities.
6
Partially offsetting these positive factors is the potential for political
and social unrest in some countries in which we operate:
- The political situation in Venezuela remains uncertain, projects
continue to be delayed, and the threat of disruptions to the safe and
orderly conduct of work in that country remains.
- Continuing unrest and security concerns in the Middle East have
created greater than normal uncertainty in the global oil markets.
This uncertainty continues to cause caution among oil and gas
producers with respect to their planned capital expenditure programs
for 2004, despite the high levels for oil and gas prices over the past
five years.
- Policies of populist governments in some South American countries have
caused foreign investment in certain sectors, including energy, to
decrease.
We currently have a number of significant bids outstanding with respect to
potential contract awards in Nigeria, Oman, Qatar, Thailand, and the United
States. We are also preparing bids with respect to potential contract awards in
Costa Rica, Egypt, Iraq, Mexico, Nigeria, Oman, Thailand, and the United States.
Finally, we expect to prepare and submit bids with respect to various other
potential construction and engineering projects worldwide.
BUSINESS STRATEGY
We seek to maximize stockholder value through our business strategy. The
core elements of this strategy are to:
- Concentrate on projects and prospects in areas where we can be most
competitive and obtain the highest profit margins with the appropriate
level of contractual and geo-political risk;
- Pursue engineering, procurement and construction ("EPC") contracts
with vigor because they can often yield higher profit margins on the
engineering and construction components of the contract than stand
alone contracts for similar services;
- Focus on performance and project execution in order to maximize the
profit potential on each contract awarded;
- Place an increased focus on our commitments to safety and quality
because these elements of performance measurement are increasingly
important as differentiators from our competitors;
- Develop alliances with companies who will enhance our capabilities and
competitiveness in markets throughout the world;
- Pursue growth through expansion and acquisitions in complementary
business lines;
- Pursue asset development and operation opportunities to leverage our
expertise in design and construction, and to provide a more
predictable stream of revenue and cash flow;
- Maintain a strong balance sheet, balancing business risk with low
financial risk, and maintain operating and overhead costs commensurate
with anticipated levels of revenue; and
- Pursue alliances and equity investment opportunities with clients to
secure long-term contracts which provide greater stability in our
future revenue and cash flow streams.
In pursuing this strategy, we rely on the competitive advantage gained from
our experience in completing logistically complex and technically difficult
projects in remote areas with difficult terrain and harsh climatic conditions,
our longstanding customer relationships, and our experienced multinational
employee base. Recognizing our employees as key to our competitive advantage, we
continue to invest in them to ensure that they have the training and tools
needed to be successful in today's challenging environment.
Over the past three years, we have worked to maintain operating and
overhead costs commensurate with a level that is justified by expected revenue.
To accomplish this objective, we downsized operations or offices in work
countries where expected returns have not materialized and identified and sold
surplus equipment. In addition, we terminated certain employee benefit plans and
in some cases replaced them with other benefits which controlled our costs and
enhanced our competitive position in recruiting and retaining experienced
personnel. We remain committed to maintaining overhead costs justified by
anticipated revenue run rates; presently, we believe current market conditions
are improving and expect to increase some overhead costs to enable us to be
responsive to market opportunities.
7
In carrying out the core elements of our long-term strategies, we build
from the following:
Geographic Area. Our objective is to maintain and enhance our presence in
regions where we have developed a strong base of operations, such as Africa, the
Middle East, North America and South America, by capitalizing on our local
experience, established contacts with local customers and suppliers, and
familiarity with local working conditions. In pursuing this strategy, we seek to
identify a limited number of long-term niche markets in which we can outperform
the competition and establish an advantageous position. In 2001, to establish
our presence in Canada, we acquired Willbros MSI Canada Inc. (formerly MSI
Energy Services Inc.), a Canadian contractor active in the oil sands producing
area of Northern Alberta. In 2002, we acquired the Mt. West Group to increase
and complement our engineering and construction, and EPC capabilities. The Mt.
West Group acquisition also enhanced our presence in the northwestern United
States. We also seek to establish or enhance our presence in other strategically
important areas.
EPC Contracts. We will continue to pursue EPC contracts because they can
often yield higher profit margins on the engineering and construction components
of the contract compared to stand alone contracts for similar services. In
performing EPC contracts, we participate in numerous aspects of a project. We
are therefore able to efficiently determine the design, permitting, procurement
and construction sequence for a project in connection with making engineering
decisions. EPC contracts enable us to deploy our resources more efficiently and
capture those efficiencies in the form of improved margins on the engineering
and construction components of these projects. We intend to capitalize on being
one of the few pipeline construction companies worldwide with the ability to
provide the full range of EPC services in order to capture more of this
business.
Focus on Superior Project Execution. We will continue to focus on
performance and project execution in order to maximize customer satisfaction and
the profit potential on each contract awarded. Our work force benefits from and
integrates feedback from complementary activities conducted by our engineering
and construction organizations. Constructability input from our global
experience enables our engineering teams to incorporate best practice for any
geographic region, terrain or climate. New technologies and designs introduced
first in engineering studies and project management tools are leveraged to
increase productivity and maximize asset utilization in capital intensive
construction activities. By doing so, we improve our competitive position and we
also enhance our potential for repeat business and/or add-on engineering or
specialty services.
Safety and Quality Improvements. Our Health, Safety and Environment (HSE)
program enhances our ability to meet the specific requirements of our customers
through continuous improvements to all our business processes. Based on
regulatory laws and best practices which include general standards, construction
activities and maintenance operations in the oil services industry, the HSE
system is a merger of a systems-based approach, based on API 9100 guidelines,
and focuses on leadership. HSE goals and objectives are an integral part of our
business strategy, aimed to promote continuous improvement in safety performance
through management commitment and visibility. Our HSE program includes specific
training, audits, recognition and accountability, action plans, and pre-planning
as proactive measures.
Strategic Alliances. We seek to establish strategic alliances with
companies whose resources, skills and strategies are complementary to and are
likely to enhance our business opportunities, including the formation of joint
ventures and consortia to achieve a competitive advantage and share risks. Such
alliances have already been established in a number of countries, and we
currently have alliances to pursue or perform work in Australia, Bolivia,
Canada, China, Ecuador, Saudi Arabia, Thailand, the United States, and
Venezuela.
Acquisitions. We seek to identify, evaluate and acquire companies that
offer growth opportunities and that complement our resources and capabilities.
Consistent with this strategy, in January 2000, we acquired Willbros RPI, Inc.
(formerly Rogers & Phillips, Inc.), or "RPI," a closely held pipeline
construction company in Houston, Texas with an experienced management team and a
strong market position in the U.S. Gulf Coast area. In 2001, we acquired MSI, a
closely held facility maintenance and pipeline construction company based in
Alberta, Canada. In October 2002, we acquired the Mt. West Group, a group of
four closely-held engineering and construction companies operating principally
in the western half of the United States.
Asset Development and Operations. We may decide to make an equity
investment in a project in order to enhance our competitive position and/or
maximize project returns. In 1998, this strategy led to our Venezuelan
subsidiary taking a 10 percent equity interest in a joint venture which was
awarded a 16-year contract to operate, maintain and refurbish water injection
facilities in Lake Maracaibo, Venezuela. Also, since 1998, we
8
have owned and operated fueling facilities for an agency of the U.S. Government.
In 2003, we completed agreements with a North American natural gas processor to
design, construct and own a gas processing plant in Opal, Wyoming to process gas
production from nearby fields for an annual processing fee plus a share of sales
of natural gas liquids extracted.
Conservative Financial Management. We emphasize the maintenance of a strong
balance sheet in financing the development and growth of our business. We also
seek to obtain contracts that are likely to result in recurring revenue in order
to partially mitigate the cyclical nature of our construction and engineering
businesses. Additionally, whenever possible we act to minimize our exposure to
currency fluctuations through the use of U.S. dollar-denominated contracts and
by limiting payments in local currency to approximately the amount of local
currency expenses. We continue to exercise a disciplined approach to controlling
costs at both project and administrative levels. We may seek new financing,
either debt or equity, as market conditions allow and business opportunities may
dictate.
WILLBROS BACKGROUND
We are the successor to the pipeline construction business of Williams
Brothers Company, which was started in 1908 by Miller and David Williams. In
1949, the business was reconstituted and acquired by the next generation of the
Williams family. The resulting enterprise eventually became The Williams
Companies, Inc., a major U.S. energy and interstate natural gas and petroleum
products transportation company ("Williams").
In 1975, Williams elected to discontinue its pipeline construction
activities and, in December 1975, sold substantially all of the non-U.S. assets
and international entities comprising its pipeline construction division to a
newly formed Panama corporation (eventually renamed Willbros Group, Inc.) owned
by employees of the division. In 1979, Willbros Group, Inc. retired its debt
incurred in the acquisition by selling a 60% equity interest to Heerema Holding
Construction, Inc. ("Heerema"). In 1986, Heerema acquired the balance of
Willbros Group, Inc., which then operated as a wholly-owned subsidiary of
Heerema until April 1992.
In April 1992, Heerema sold Willbros Group, Inc. to a corporation formed on
December 31, 1991 in the Republic of Panama by members of the Company's
management at the time, certain other investors, and Heerema. Subsequently, the
original Willbros Group, Inc. was dissolved into the acquiring corporation which
was renamed "Willbros Group, Inc." In August 1996, we completed an initial
public offering of common stock in which Heerema sold all of its shares of
common stock; and in October 1997 we completed a secondary offering in which the
other investors sold substantially all of their shares of common stock. In May
2002, we completed a third public offering of common stock, which was used to
repay debt and to provide cash for general corporate purposes.
WILLBROS MILESTONES
The following are selected milestones which we have achieved:
1915 Began pipeline work in the United States.
1939 Began international pipeline work in Venezuela.
1942-44 Served as principal contractor on the "Big Inch" and "Little Big Inch"
War Emergency Pipelines in the United States which delivered Gulf
Coast crude oil to the Eastern Seaboard.
1947-48 Built the 370-mile (600-kilometer) Camiri to Sucre and Cochabamba
crude oil pipeline in Bolivia.
1951 Completed the 400-mile (645-kilometer) western segment of the
Trans-Arabian Pipeline System in Jordan, Syria and Lebanon.
1954-55 Built Alaska's first major pipeline system, consisting of 625 miles
(1,000 kilometers) of petroleum products pipeline, housing,
communications, two tank farms, five pump stations, and marine dock
and loading facilities.
1956-57 Led a joint venture which constructed the 335-mile (535-kilometer)
southern section of the Trans-Iranian Pipeline, a products pipeline
system extending from Abadan to Tehran.
9
1958 Constructed pipelines and related facilities for the world's largest
oil export terminal at Kharg Island, Iran.
1960 Built the first major liquefied petroleum gas pipeline system, the
2,175-mile (3,480-kilometer) Mid-America Pipeline in the United
States, including six delivery terminals, two operating terminals, 13
pump stations, communications and cavern storage.
1962 Began operations in Nigeria with the commencement of construction of
the TransNiger Pipeline, a 170-mile (275-kilometer) crude oil
pipeline.
1964-65 Built the 390-mile (625-kilometer) Santa Cruz to Sica Sica crude oil
pipeline in Bolivia. The highest altitude reached by this line is
14,760 feet (4,500 meters) above sea level, which management believes
is higher than the altitude of any other pipeline in the world.
1965 Began operations in Oman with the commencement of construction of the
175-mile (280-kilometer) Fahud to Muscat crude oil pipeline system.
1967-68 Built the 190-mile (310-kilometer) Orito to Tumaco crude oil pipeline
in Colombia, one of five Willbros crossings of the Andes Mountains, a
project notable for the use of helicopters in high-altitude
construction.
1969 Completed a gas gathering system and 105 miles (170 kilometers) of
42-inch trunkline for the Iranian Gas Trunkline Project (IGAT) in Iran
to supply gas to the USSR.
1970-72 Built the Trans-Ecuadorian Pipeline, crossing the Andes Mountains,
consisting of 315 miles (505 kilometers) of 20-inch and 26-inch
pipeline, seven pump stations, four pressure-reducing stations and six
storage tanks. Considered the most logistically difficult pipeline
project ever completed at the time.
1974-76 Led a joint venture which built the northernmost 225 miles (365
kilometers) of the Trans-Alaskan Pipeline System.
1974-76 Led a joint venture which constructed 290 miles (465 kilometers) of
pipeline and two pump stations in the difficult to access western
Amazon basin of Peru; another logistics challenge which required
lightering from shipping on the Amazon River.
1974-79 Designed and engineered the 500-mile (795-kilometer) Sarakhs-Neka gas
transmission line in northeastern Iran.
1982-83 Built the Cortez carbon dioxide pipeline system in the southwestern
United States, consisting of 505 miles (815 kilometers) of 30-inch
pipeline.
1984-86 Constructed, through a joint venture, the All American Pipeline
System, a 1,240-mile (1,995-kilometer), 30-inch heated pipeline,
including 23 pump stations, in the United States.
1984-95 Developed and furnished a rapid deployment fuel pipeline distribution
and storage system for the U.S. Army which was used extensively and
successfully in Saudi Arabia during Operation Desert Shield/Desert
Storm in 1990/1991, in Somalia during 1993 and in Iraq in 2003.
1985-86 Built a 185-mile (300-kilometer), 24-inch crude oil pipeline from
Ayacucho to Covenas in Colombia, another Andean challenge.
1987 Rebuilt 25 miles (40 kilometers) of the Trans-Ecuadorian crude oil
pipeline mobilizing to Ecuador in two weeks and completing work within
six months after major portions were destroyed by an earthquake.
1988-92 Performed project management, engineering, procurement and field
support services to expand the Great Lakes Gas Transmission System in
the northern United States. The expansion involved modifications to 13
compressor stations and the addition of 660 miles (1,060 kilometers)
of 36-inch pipeline in 50 separate loops.
10
1989-92 Provided pipeline engineering and field support services for the Kern
River Gas Transmission System, a 36-inch pipeline project extending
over 685 miles (1,100 kilometers) of desert and mountains from Wyoming
to California in the United States.
1992-93 Rebuilt oil field gathering systems in Kuwait as part of the post-war
reconstruction effort.
1996 Listed shares upon completion of an initial public offering of common
stock on the New York Stock Exchange under the symbol "WG."
1996-97 Achieved ISO Certification for seven operating companies.
1996-98 Performed an EPC contract with Asamera (Overseas) Limited to design
and construct pipelines, flowlines and related facilities for the
Corridor Block Gas Project located in southern Sumatra, Indonesia.
1997-98 Carried out a contract for the construction of 120 miles (200
kilometers) each of 36-inch and 20-inch pipelines in the Zuata Region
of the Orinoco Belt in Venezuela.
1997-98 Completed an EPC contract for El Paso Natural Gas Company and
Gasoductos de Chihuahua, a joint venture between El Paso and PEMEX, to
construct a 45-mile (75-kilometer) gas pipeline system in Texas and
Mexico.
1999-00 Carried out a contract through a joint venture to construct a 492-mile
(792-kilometer), 18-inch gas pipeline in Australia.
2000 Acquired Rogers & Phillips, Inc., a United States pipeline
construction company.
2000 Relocated the Willbros USA, Inc. administrative headquarters from
Tulsa, Oklahoma to Houston, Texas.
2001 Acquired MSI, an Alberta, Canada based contractor, working in the oil
sands area and established a presence in Canada.
2001 Ended year with record backlog of $407.6 million.
2002 Acquired the Mt. West Group to enhance presence in the western United
States, and to improve our service capabilities worldwide.
2002 Completed engineering and project management of the Gulfstream
project, a $1.6 billion natural gas pipeline system from Mobile,
Alabama crossing the Gulf of Mexico and serving markets in central and
southern Florida.
2002 Elected Michael F. Curran CEO, succeeding Larry Bump, who retired
after 22 years as Willbros CEO.
2002 Completed the Centennial Pipeline Project: FERC application support,
engineering, procurement, construction and construction management of
new-build and conversion to refined products service of a natural gas
system from Gulf Coast to Midwest United States, 797 miles (1,275
kilometers) of 24-inch and 26-inch pipelines and facilities.
2003 Completed work on the Explorer Pipeline Mainline expansion project,
adding 12 new pump stations and additional storage to this products
pipeline from the Gulf Coast to central Illinois.
2003 Completed an EPC contract for the 665-mile (1,070-kilometer), 30-inch
crude oil Chad-Cameroon Pipeline Project, through a joint venture with
another international contractor.
2003 Completed the GASYRG natural gas pipeline in Bolivia, 144 miles (230
kilometers) of 32-inch pipeline from the San Alberto gas field to
connect with export facilities to Brazil.
2003 Began work on the design and construction of the Opal gas processing
plant with nominal capacity of 350 million standard cubic feet per
day.
11
SERVICES PROVIDED
We operate in a single operating segment providing contract construction,
specialty services and engineering to the oil, gas and power industries. The
following table reflects our contract revenue by type of service for 2003, 2002
and 2001.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
Construction......................... $ 293,714 70% $ 344,834 59% $ 214,456 55%
Engineering.......................... 36,231 9 177,222 30 120,321 31
Specialty Services................... 88,792 21 61,647 11 55,357 14
---------- ---- ----------- ---- --------- ---
Total........................... $ 418,737 100% $ 583,703 100% $ 390,134 100%
=========== === =========== ==== ========= ===
CONSTRUCTION SERVICES
We are one of the most experienced contractors serving the oil, gas and
power industries. Our construction capabilities include the expertise to
construct and replace large-diameter cross-country and offshore pipelines; to
construct oil and gas production facilities, pump stations, flow stations, gas
compressor stations, gas processing facilities and other related facilities; and
to construct offshore platforms, piers, docks and bridges.
Pipeline Construction. World demand for pipelines results from the need to
move millions of barrels of crude oil and petroleum products and billions of
cubic feet of natural gas to refiners, processors and consumers each day.
Pipeline construction is capital-intensive, and we own, lease, operate and
maintain a fleet of specialized equipment necessary for operations in the
pipeline construction business. We focus on pipeline construction activity in
remote areas and harsh climates where we believe our experience gives us a
competitive advantage. We believe that we have constructed more miles of
pipeline than any other private sector company.
The construction of a cross-country pipeline involves a number of
sequential operations along the designated pipeline right-of-way. These
operations are virtually the same for all overland pipelines, but personnel and
equipment may vary widely depending upon such factors as the time required for
completion, general climatic conditions, seasonal weather patterns, the number
of road crossings, the number and size of river crossings, terrain
considerations, extent of rock formations, density of heavy timber and amount of
swamp.
12
Onshore construction often involves separate crews to perform the following
different functions:
- clear the right-of-way;
- grade the right-of-way;
- excavate a trench in which to bury the pipe;
- haul pipe to intermediate stockpiles from which stringing trucks carry
pipe and place individual lengths (joints) of pipe alongside the
ditch;
- bend pipe joints to conform to changes of direction and elevation;
- clean pipe ends and line up the succeeding joint;
- perform various welding operations;
- non-destructively inspect welds;
- clean pipe and apply anti-corrosion coatings;
- lower pipe into the ditch;
- backfill the ditch;
- bore and install highway and railroad crossings;
- drill, excavate or dredge and install pipeline river crossings;
- tie in all crossings to the pipeline;
- install mainline valve stations;
- conduct pressure testing;
- install cathodic protection system; and
- perform final clean up.
Special equipment and techniques are required to construct pipelines across
wetlands and offshore. We use swamp pipelaying methods extensively in Nigeria,
where a significant portion of our construction operations are carried out in
the Niger River delta. In addition to our primary offshore and swamp equipment
such as lay barges, dredges and swamp backhoes, we have a substantial investment
in support vessels, including tugboats, barges, supply boats and houseboats,
which are required in order to maintain our capabilities in offshore and swamp
pipeline construction.
Station Construction. Oil and gas companies require various facilities in
the course of producing, processing, storing and moving oil and gas. We are
experienced in and capable of constructing facilities such as pump stations,
flow stations, gas processing facilities, gas compressor stations and metering
stations. The acquisition of the Mt. West Group, which provides a full range of
services for the engineering, design, procurement and construction of
processing, pumping, compression, and metering facilities, has substantially
enhanced our expertise in this area. We are capable of building such facilities
onshore, offshore in shallow water or in swamp locations. The construction of
station facilities, while not nearly as capital-intensive as pipeline
construction, is generally characterized by complex logistics and scheduling,
particularly on projects in locations where seasonal weather patterns limit
construction options, and in countries where the importation process is
difficult. Our capabilities have been enhanced by our experience in dealing with
such challenges in numerous countries around the world.
Marine Construction. Our marine fleet includes lay barges, pile driving
barges, derrick barges and other vessels, which support marine construction
operations, including the "Willbros 318" combination derrick/lay barge which
performs shallow water pipelay and maintenance projects in offshore West Africa.
This 300-foot (91-meter) barge is capable of laying up to 24-inch diameter pipe
in up to 200-foot water depths. During 2001, we purchased the "WB82"
work/derrick barge to complement our West Africa marine construction operations.
The WB82 work/derrick barge is a 253-foot (78-meter) barge with accommodations
for 135 personnel. The WB82 is equipped with a 100-ton revolving crane and is
configured to support the construction, maintenance and repair of marine
facilities. In West Africa we also own and operate the Eros, a dive support
vessel. In Venezuela, we construct and install fixed drilling and production
platforms in Lake Maracaibo and near shore locations, and we are also capable of
building bridges, docks, jetties and mooring facilities.
13
SPECIALTY SERVICES
We provide a wide range of support and ancillary services related to the
construction, operation, repair and rehabilitation of pipelines. Frequently,
such services require the utilization of specialized equipment, which is costly
and requires operating expertise. Due to the initial equipment cost and
operating expertise required, many client companies hire us to perform these
services. We own and operate a variety of specialized equipment that is used to
support construction projects and to provide a wide range of oilfield services.
We provide the following primary types of specialty services:
- Dredging;
- Pipe Coating;
- Concrete Weight Coating;
- Pipe Double-Jointing;
- Piling;
- Pressure Vessels;
- Marine Heavy Lift Services;
- Transport of Dry and Liquid Cargo;
- Rig Moves;
- Maintenance and Repair Services; and
- Asset Development and Operation.
Our workforce has significant experience in the operation of the types of
facilities we design and build. We make equity investments in some projects to
enhance our competitive position for the work assignments associated with the
project. In other instances, our experience enables us to understand and manage
project completion risk and in these cases we may elect to develop and own a
complete facility which will provide attractive internal rates of return over an
extended period of time. We currently have equity positions in and operate the
following facilities:
Opal Gas Processing Plant. We designed, built and own a turbo-expander
plant which processes gas produced from the Pinedale anticline. Designated TXP4,
the plant is located near Opal, Wyoming in southwestern Wyoming and 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 and share in the proceeds from the sales of natural gas liquids
extracted. The Opal Gas Plant began commercial natural gas processing activity
in the first quarter of 2004.
SIMCO Water Injection Facilities. In 1998, through our Venezuelan
subsidiary, we took a 10 percent equity interest in a joint venture which was
awarded a 16-year contract to operate, maintain and refurbish water injection
facilities on Lake Maracaibo, Venezuela.
U.S. Defense Energy Support Center. Since 1998, we have constructed five
fueling facilities for the U.S. Defense Energy Support Center. Currently, we own
and operate two fueling facilities at Ft. Bragg, North Carolina, which were
constructed by us in 1998 and a similar facility completed in 2000 at Twentynine
Palms Marine Corps Base in California. In 2001, we were awarded contracts for
similar facilities at Ft. Stewart, Georgia and Ft. Gordon, Georgia; these
facilities were completed and operational in 2002. In 2004 we expect to bid on
six similar facilities at various U.S. government bases.
ENGINEERING SERVICES
We provide project management, engineering, and material procurement
services to the oil, gas and power industries and government agencies. We
specialize in providing engineering services to assist clients in constructing
or expanding pipeline systems, compressor stations, pump stations, fuel storage
facilities, and field gathering and production facilities. Over the years, we
have developed expertise in addressing the unique engineering challenges
involved with pipeline systems and associated facilities to be installed where
climatic conditions are extreme, areas of environmental sensitivity must be
crossed, fluids which present extreme health hazards must be transported, and
fluids which present technical challenges regarding material selection are to be
transported.
To complement our engineering services, we also provide a full range of
field services, including:
14
- surveying;
- right-of-way acquisition;
- material receiving and control;
- construction inspection;
- facilities startup assistance; and
- facilities operations.
These services are furnished to a number of oil, gas, power and government
clients on a stand-alone basis and are also provided as part of EPC contracts
undertaken by us.
The buying process of our customers includes close scrutiny of our
experience and capabilities with respect to project requirements. Some of those
requirements are:
Climatic Constraints. In the design of pipelines and associated facilities
to be installed in harsh environments, special provisions for metallurgy of
materials and foundation design must be addressed. We are experienced in
designing pipelines for arctic conditions, where permafrost and extremely low
temperatures are prevalent, desert conditions, mountainous terrain, swamps and
offshore.
Environmental Impact of River Crossings/Wetlands. We have considerable
capability in designing pipeline crossings of rivers, streams and wetlands in
such a way as to minimize environmental impact. We possess expertise to
determine the optimal crossing techniques, such as open cut,
directionally-drilled or overhead, and to develop site-specific construction
methods to minimize bank erosion, sedimentation and other environmental impacts.
Seismic Design and Stress Analysis. Our engineers are experienced in
seismic design of pipeline crossings of active faults and areas where
liquefaction or slope instability may occur due to seismic events. Our engineers
also carry out specialized stress analyses of piping systems that are subjected
to expansion and contraction due to temperature changes, as well as loads from
equipment and other sources.
Hazardous Materials. Special care must be taken in the design of pipeline
systems transporting sour gas. Sour gas not only presents challenges regarding
personnel safety since hydrogen sulfide leaks can be extremely hazardous, but
also requires that material be specified to withstand highly corrosive
conditions. Our engineers have extensive natural gas experience which includes
design of sour gas systems.
Hydraulics Analysis for Fluid Flow in Piping Systems. We employ engineers
with the specialized knowledge necessary to address properly the effects of both
steady state and transient flow conditions for a wide variety of fluids
transported by pipelines, including natural gas, crude oil, refined petroleum
products, natural gas liquids, carbon dioxide and water. This expertise is
important in optimizing the capital costs of pipeline projects where pipe
material costs typically represent a significant portion of total project
capital costs.
We have developed significant expertise with respect to each of the
following:
Natural Gas Transmission Systems. The expansion of the natural gas
transportation network in the United States in recent years has been a major
contributor to our engineering business. We believe we have established a strong
position as a leading supplier of project management and engineering services to
natural gas pipeline transmission companies in the United States. Since 1988, we
have provided engineering services for over 19 major natural gas pipeline
projects in the United States, totaling more than 7,000 miles (11,200
kilometers) of large diameter pipe for new systems and expansions of existing
systems. During this same period, we were also the engineering contractor for
over 80 compressor stations, including new stations and additions to existing
stations for 17 clients.
Liquids Pipelines and Storage Facility Design. We have engineered a number
of crude oil and refined petroleum products systems throughout the world, and
have become recognized for our expertise in the engineering of systems for the
storage and transportation of petroleum products and crude oil. In 2001, we
provided engineering and field services for conversion of a natural gas system
in the Midwest United States, involving over 794 miles (1,279 kilometers) of
24-inch to 26-inch diameter pipeline to serve the upper Midwest with refined
petroleum products. We recently completed EPC services for the expansion of
another petroleum products pipeline to the Midwest involving 12 new pump
stations, modifications to another 13 pump stations and additional storage.
15
U.S. Government Services. Since 1981, we have established our position with
U.S. government agencies as a leading engineering contractor for jet fuel
storage and aircraft fueling facilities, having performed the engineering for
major projects at seven U.S. military bases including three air bases outside
the U.S. The award of these projects was based largely on contractor experience
and personnel qualifications. In the past four years, we have won four of seven
so-called "Build, Own, and Operate", or "BOO" projects to provide fueling
facilities at four military bases in the United States for the U.S. Defense
Energy Support Center.
Design of Peripheral Systems. Our expertise extends to the engineering of a
wide range of project peripherals, including various types of support buildings
and utility systems, power generation and electrical transmission,
communications systems, fire protection, water and sewage treatment, water
transmission, roads and railroad sidings.
Material Procurement. Because material procurement plays such a critical
part in the success of any project, we maintain an experienced staff to carry
out material procurement activities. Material procurement services are provided
to clients as a complement to the engineering services performed for a project.
Material procurement is especially critical to the timely completion of
construction on the EPC contracts we undertake. We maintain a computer-based
material procurement, tracking and control system, which utilizes software
enhanced to meet our specific requirements.
16
GEOGRAPHIC REGIONS
We operate, or have operated, in the following geographic regions: Africa,
North America, South America, the Middle East, Asia and Australia. The following
table shows our contract revenue by geographic region for 2003, 2002 and 2001.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
Africa............................... $ 181,708 43% $ 243,260 42% $ 146,200 37%
North America........................ 153,578 37 245,237 42 208,626 54
South America........................ 32,509 8 77,962 13 16,968 4
Middle East.......................... 50,942 12 17,244 3 14,303 4
Asia and Australia................... -- -- -- -- 4,037 1
----------- --- ----------- --- --------- ---
Total........................... $ 418,737 100% $ 583,703 100% $ 390,134 100%
=========== === =========== === ========= ===
See Note 14 of the "Notes to Consolidated Financial Statements" included in
Item 8 of this Form 10-K for additional information about operations in our work
countries.
Africa
Africa has been and will continue to be an important strategic market for
us. We believe that there will be opportunities to expand our business in
Africa, particularly through the development of natural gas projects. There are
large, potentially exploitable reserves of natural gas in West Africa, extending
from the Ivory Coast to Angola. Depending upon the world market for natural gas
and the availability of financing, the amount of potential new work could be
substantial. We intend to maintain our presence in Africa and seek to increase
our share of available work. Currently, we are monitoring or bidding major work
prospects in Algeria, Egypt, Gabon, and Nigeria.
Over the past 50 years, we have completed major projects in a number of
African countries including Algeria, Chad, Cameroon, Egypt, Gabon, Ivory Coast,
Libya, Morocco and Nigeria. We have management staff resident in Africa,
assisted by engineers, managers and craftsmen with extensive African experience,
capable of providing construction expertise, repair and maintenance services,
dredging operations, pipe coating and engineering support. Strong local
relationships have enabled us to satisfy the varied needs of our clientele in
this region.
We have maintained a continuous presence in Nigeria since 1962. Our
activities in Nigeria are directed from a fully staffed operational base near
Port Harcourt. This 150-acre site includes office and living facilities,
equipment and vehicle repair shops, a marine jetty, warehouses and fabrication
and lay-down areas for both the client's and our materials and spare parts. We
have diversified our range of services by adding dredging and pipe coating
expertise and drydock facilities. Having diverse yet complementary capabilities
has often given us a competitive advantage on projects that contain several
distinct work elements within a project's scope of work. For example, we believe
that we are currently the only contractor operating in the Nigerian oil and gas
sector capable, with our own resources, of executing EPC projects for pipelines
and related facilities for onshore, swamp, and offshore locations.
Since our purchase of the Willbros 318 in 1998 and the WB82 in 2001, we
have successfully completed several offshore projects, including repair and
maintenance, installation of decks and other production facilities on offshore
platforms, multiple offshore pipeline construction projects, the installation of
a single-point mooring, and various other services for our clients.
North America
We have provided services to the U.S. oil and gas industry for more than 90
years. We believe that the United States will continue to be an important market
for our services. Market conditions for the short-term are expected to begin to
improve in late 2004, as many of the energy transportation companies improve
their financial condition and focus on core businesses. To improve their
liquidity, some of our traditional clients have sold some pipeline assets; in
some cases, to new industry participants. We expect these new owners to begin to
develop and implement their capital budgets for these newly acquired assets in
2004 as
17
they complete their evaluation of the newly acquired assets and finalize their
strategies for maximizing the return on their investments in these assets.
Deregulation of the electric power and natural gas pipeline industries in the
United States has led to the consolidation and reconfiguration of existing
pipeline infrastructure and the establishment of new energy transport systems,
which we expect will result in continued demand for our services in the mid to
long-term. The demand for natural gas for industrial and power usage in the
United States should increase the demand for additional new natural gas
transportation infrastructure. We anticipate that additional supply to satisfy
such market demand for natural gas will come from existing and new production in
western Canada, the Rocky Mountain region, the Gulf of Mexico, the Canadian
Atlantic offshore region, and newly proposed liquefied natural gas (LNG)
regasification terminals. Environmental concerns will likely continue to require
careful, thorough and specialized professional engineering and planning for all
new facilities within the oil, gas and power sectors. Furthermore, the demand
for replacement and rehabilitation of pipelines is expected to increase as
pipeline systems in the United States approach the end of their design lives and
population trends influence overall energy needs.
We are recognized as an industry leader in the United States for providing
state-of-the-art project management, engineering, procurement and construction
services. We maintain a staff of experienced management, construction,
engineering and support personnel in the United States. We provide these
services through engineering offices located in Tulsa, Oklahoma; Portland,
Oregon; and Salt Lake City (Murray), Utah. Construction operations based in
Houston, Texas, (RPI); Fruita, Colorado (Willbros Mt. West); and Ft. McMurray,
Alberta (MSI) provide the majority of construction services in North America.
We have also provided significant engineering services to the U.S.
Government during the past 15 years, particularly in fuel storage and
distribution systems and aircraft fueling facilities.
On January 24, 2000, we acquired Willbros RPI, Inc., formerly Rogers &
Phillips, Inc., a closely held pipeline construction company in Houston, Texas,
with an experienced management team and a strong market position in the U.S.
Gulf Coast area. On October 12, 2001, we acquired Willbros MSI Canada, Inc.,
formerly MSI Energy Services Inc., a Canadian contractor with a strong position
in the oil sands area of northern Alberta; an area in which production is
projected to expand from 600,000 barrels per day in 2000 to more than 1.8
million barrels per day by 2010. On October 23, 2002, we acquired the Mt. West
Group to enhance our gas processing and facilities engineering and construction
services. These acquisitions add technical management capabilities to improve
and enhance our service offerings to our clients worldwide. Additionally, these
acquired companies extend Willbros' presence to new geographic areas.
South America
We have been active in South America since 1939. Developments involving
political changes and privatization efforts in some of the South American
countries make this region attractive to us. In particular, privatization and
deregulation in this region are allowing more foreign and domestic private
investment in the energy sector which, until recently, had traditionally been
controlled by state-owned energy companies. The medium to long-term market
outlook has not changed, but in the short-term, the markets in Venezuela and
Bolivia have been disrupted by political instability. We expect gas
transportation projects in Bolivia, Brazil, Chile, Peru and Venezuela to
continue to evolve to meet increasing demand for gas for industrial and power
usage in the rapidly growing urban areas. In Venezuela and Ecuador, crude oil
transportation systems will likely need to be built and/or upgraded so that the
vast crude reserves in these countries can be efficiently exported to the world
market. We are aggressively pursuing business opportunities throughout South
America and currently bidding work or monitoring prospects in Bolivia, Ecuador,
Peru and Venezuela.
We have performed numerous major projects in South America, where our
accomplishments include the construction of five major pipeline crossings of the
Andes Mountains and setting a world altitude record for constructing a pipeline.
Venezuela is the largest oil producer in South America and conservative
estimates place proven reserves at more than 77 billion barrels of oil and 146
trillion cubic feet of natural gas. The government of Venezuela, under
Presidente Hugo Chavez, has separated the natural gas initiative from the oil
interests of Petroleos de Venezuela, S. A., or "PDVSA", the government owned oil
company, to place natural gas projects on an equal footing with oil projects.
This new emphasis on natural gas projects should translate into more demand for
natural gas engineering and construction capabilities such as ours; however, at
present, the timing of such projects remains uncertain. The Chavez government
has also experienced extreme civil unrest culminating in a national strike
beginning in December 2002. This strike resulted in a decision by us in
mid-December 2002 to suspend all work in Venezuela until satisfactory conditions
had
18
resumed for the safe and efficient conduct of project activities. In mid-March
2003, the impact of the strike had moderated and we returned to work. The
negative impact of the strike was felt throughout 2003. Some reductions in
revenue and earnings in 2003 were the result of these disruptions as actual
operations did not achieve the planned physical progress on the project. Some
revenue and earnings originally forecasted for 2003 have been deferred into
2004. The outcome of negotiations between the government and opposition groups
is uncertain, and we believe significant new foreign investment is unlikely
until these negotiations are satisfactorily completed.
In Venezuela, we maintain a fully staffed facility including offices,
equipment, yard and dock facilities on a 15-acre waterfront site on Lake
Maracaibo. We also have a representation office in Caracas. Resident personnel
provide services for both onshore and offshore projects. Services include
pipeline construction, repair and maintenance services, fabrication and
installation of concrete piles and platforms, marine related services,
engineering support and other needed services. In 1998, a consortium in which we
hold a 10 percent equity interest was awarded a 16-year contract valued at
$785.0 million to operate, maintain and refurbish the Lake Maracaibo water
injection program for PDVSA Gas. In 2000, we completed the construction of a
major crude oil pumping station for Petrozuata. Current activities include
operations, maintenance and refurbishment services for the above-mentioned
consortium and recurring service and maintenance work for various clients. In
2002, in a joint contract with a Venezuelan company, we were awarded a project
for the engineering, procurement and construction of a marine loading terminal
for Petrolera Ameriven, a joint venture of Conoco Phillips, Chevron Texaco and
PDVSA.
Late in 2001, we were selected, in an alliance with another international
contractor, to construct a 144-mile (230-kilometer) 32-inch natural gas pipeline
in Bolivia for the Transierra consortium. This project was completed in the
first half of 2003.
Middle East
Hostilities in the Middle East during 2003 caused the short-term outlook
for projects to be very limited. However, we continue to believe that increased
exploration and production activity in the Middle East will be the primary
factor influencing the construction of new energy transportation systems in the
region. The majority of future transportation projects in the region are
expected to be centered around natural gas due to increased regional demand,
governments' recognition of gas as an important asset and an underdeveloped gas
transportation infrastructure throughout the region. In April 2003, we were
awarded an EPC contract for a natural gas pipeline system in Oman and expect to
complete that project in 2004. We are currently performing work as a
subcontractor to Kellogg Brown & Root ("KBR") to repair damaged pipelines in
northern Iraq. We are also a qualified subcontractor to Perini Corporation,
which was awarded an indefinite delivery/indefinite quantity ("IDIQ") contract
valued at up to $1.5 billion. The IDIQ contract allows the U.S. Army Corps of
Engineers ("USACE") to call upon the contracted companies to rapidly provide
design and construction services as needed to support the USACE needs in Iraq
and elsewhere. Projects delayed in the region, by uncertainty associated with
the hostilities in Iraq, are now being tendered and awarded. We believe the
Middle East in general will present opportunities to provide an increased level
of services in 2004 and 2005. We continue to monitor project opportunities
throughout the Middle East and are currently investigating prospects in Abu
Dhabi, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and Yemen.
Our operations in the Middle East date back to 1948. We have worked in most
of the countries in the region, with particularly heavy involvement in Iran,
Kuwait, Oman and Saudi Arabia. Currently, we have ongoing operations in Oman,
where we have been active continuously for more than 35 years. We maintain a
fully staffed facility in Oman with equipment repair facilities and spare parts
on site and offer construction expertise, repair and maintenance services,
engineering support, oil field transport services, materials procurement and a
variety of related services to our clients. In November 1999, we were awarded a
five-year contract by Oman LNG for general maintenance services. In 2003 we
established an administrative and engineering office in Abu Dhabi to provide
additional support services to this market. We believe our presence in Oman and
our experience there and in other Middle Eastern countries will enable us to
successfully win and perform projects in this region.
Asia and Australia
Australia and Asia continue to be geographic areas of interest due to the
relative abundance of undeveloped natural gas resources. That abundance, and
environmental concerns, favor the use of natural gas for power generation and
industrial and residential usage in Australia and Asia. We are currently
19
conducting marketing and business development activities in this market and
bidding on projects in Thailand.
20
BACKLOG
In our industry, backlog is considered an indicator of potential future
performance since it represents a portion of the future revenue stream. Our
strategy is not focused solely on backlog additions but, rather, on capturing
quality backlog with margins commensurate with the risks associated with a given
project.
Backlog consists of anticipated revenue from the uncompleted portions of
existing contracts and contracts whose award is reasonably assured. At December
31, 2003, backlog was $224.7 million, compared to $216.0 million at December 31,
2002. We believe the backlog figures are firm, subject only to the cancellation
and modification provisions contained in various contracts. We expect that
approximately $170 million, or 76%, of our existing backlog at December 31,
2003, will be recognized in revenue during 2004. Historically, a substantial
amount of our revenue in a given year has not been reflected in our backlog at
the beginning of that year. Additionally, due to the short duration of many
jobs, revenue associated with jobs performed within a reporting period will not
be reflected in backlog. We generate revenue from numerous sources, including
contracts of long or short duration entered into during a year as well as from
various contractual processes, including change orders, extra work, variations
in the scope of work and the effect of escalation or currency fluctuation
formulas. These revenue sources are not added to backlog until realization is
assured.
Breakdown of our backlog by geographic region as of December 31, 2003 and
2002:
2002 2003
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
Africa....................................... $ 49,942 22% $ 77,084 35%
North America................................ 93,687 42 66,567 31
South America................................ 23,230 10 65,991 31
Middle East.................................. 57,853 26 6,343 3
------------ ---- ----------- ----
Total........................................ $ 224,712 100% $ 215,985 100%
============ ==== =========== ====
Breakdown of our backlog by line of business as of December 31, 2003:
AMOUNT PERCENT
------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
Construction................................... $ 136,082 61%
Engineering.................................... 5,245 2
Specialty Services............................. 83,385 37
------------ ---
Total.......................................... $ 224,712 100%
============ ===
COMPETITION
We operate in a highly competitive environment. We compete against
government-owned or supported companies and other companies that have financial
and other resources substantially in excess of those available to us. In certain
markets, we compete against national and regional firms against which we may not
be price competitive.
Our primary competitors for international onshore construction projects in
developing countries include Technip (France), CCC (Lebanon), Saipem (Italy),
AMEC Spie-Capag (France), Techint (Argentina), Bechtel (U.S.), Stroytransgaz
(Russia), Tekfen (Turkey), and Nacap (Netherlands). We believe that we are one
of the few companies among our competitors possessing the ability to carry out
large projects in developing countries on a turnkey basis (engineering,
procurement and construction), without subcontracting major elements of the
work. As a result, we may be more cost effective than our competitors in certain
instances or offer a superior value proposition.
We have different competitors in different markets. In Nigeria, we compete
for pipe coating work with ShawCor Ltd. (Canada), while our dredging competitors
include Bos Kalis Westminster (Netherlands),
21
Dredging International (Belgium), Bilfinger + Berger (Germany), Nigerian
Dredging & Marine (Netherlands) and Ham Dredging (Netherlands). In offshore West
Africa, we compete with SaiBos, Stolt Offshore, Global Industries, Inc., and
Adamac Group. In Oman, competitors in oil field transport services include
Desert Line, Al Ahram, Hamdam and TruckOman, all Omani companies; and in
construction and the installation of flowlines and mechanical services, we
compete with Taylor Woodrow Towell (Britain), CCC (Lebanon), Dodsal (India),
Saipem (Italy), Desert Line (Oman) and Galfar (Oman). In Venezuela, competitors
in marine support services include Raymond de Venezuela, Petrolago, and
Siemogas, all Venezuelan companies. In the Southern Cone of South America, major
competitors include Techint (Argentina), Conduto (Brazil), Odebrecht (Brazil),
and Contreras Hermanos (Argentina).
In the United States, our primary construction competitors on a national
basis include Associated Pipeline Contractors, Gregory & Cook, H. C. Price,
Sheehan Pipeline Construction, U.S. Pipeline and Welded Construction. In
addition, there are a number of regional competitors, such as Sunland, Dyess,
Flint, and Jomax.
Primary competitors for engineering services include:
- Alliance Engineering;
- Bechtel;
- Colt Engineering;
- Fluor;
- Gulf Interstate;
- Jacobs Engineering;
- Kellogg Brown and Root;
- Mustang Engineering;
- Paragon Engineering;
- Snamprogetti;
- Technip;
- Trigon Sheehan; and
- Universal Ensco.
JOINT VENTURES
From time to time in the ordinary course of our business, we enter into
joint venture agreements with other contractors for the performance of specific
projects. Typically, 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. Our joint venture agreements
identify the work to be performed by each party, procedures for managing the
joint venture work, the manner in which profits and losses will be shared by the
parties, the equipment, personnel or other assets that each party will make
available to the joint venture and the means by which any disputes will be
resolved. We completed the construction of the onshore pipeline for the Chad
Development Project in Chad and Cameroon, in such a joint venture with
Spie-Capag (Jersey) Ltd in 2003.
CONTRACT PROVISIONS AND SUBCONTRACTING
Most of our revenue is derived from construction, engineering, and
specialty service contracts. We enter into four basic types of construction and
specialty service contracts:
- firm fixed-price or lump sum fixed-price contracts providing for a
single price for the total amount of work or for a number of fixed
lump sums for the various work elements comprising the total price;
- unit-price contracts which specify a price for each unit of work
performed;
- time and materials contracts under which personnel and equipment are
provided under an agreed schedule of daily rates with other direct
costs being reimbursable; and
- a combination of the above (such as lump sums for certain items and
unit rates for others).
We enter into three types of engineering contracts:
- firm fixed-price or lump sum fixed-price contracts;
22
- time and materials contracts pursuant to which engineering services
are provided under an agreed schedule of hourly rates for different
categories of personnel, and materials and other direct costs are
reimbursable; and
- cost-plus-fee contracts, common with U.S. government clients under
which income is earned solely from the fee received. Cost-plus-fee
contracts are often used for material procurement services.
Changes in scope of work are defined by change orders agreed to by both
parties. These changes can affect our contract revenue either positively or
negatively.
We usually obtain contracts through competitive bidding or through
negotiations with long-standing clients. We are typically invited to bid on
projects undertaken by our clients who maintain approved bidder lists. Bidders
are pre-qualified by virtue of their prior performance for such clients, as well
as their experience, reputation for quality, safety record, financial strength
and bonding capacity.
In evaluating bid opportunities, we consider such factors as the client,
the geographic location, the difficulty of the work, our current and projected
workload, the likelihood of additional work, the project's cost and
profitability estimates, and our competitive advantage relative to other likely
bidders. We give careful thought and consideration to the political and
financial stability of the country or region where the work is to be performed.
We use computer-based estimating systems. The bid estimate forms the basis of a
project budget against which performance is tracked through a project control
system, enabling management to monitor projects effectively.
All U.S. government contracts and many of our other contracts provide for
termination of the contract for the convenience of the client. In addition, many
contracts are subject to certain completion schedule requirements that include
liquidated damages in the event schedules are not met as the result of
circumstances within our control.
We act as prime contractor on a majority of the construction projects we
undertake. In our capacity as prime contractor and when acting as a
subcontractor, we perform most of the work on our projects with our own
resources and typically subcontract only such specialized activities as
hazardous waste removal, non-destructive inspection, tank erection, catering and
security. In the construction industry, the prime contractor is normally
responsible for the performance of the entire contract, including subcontract
work. Thus, when acting as a prime contractor, we are subject to the risk
associated with the failure of one or more subcontractors to perform as
anticipated.
A substantial portion of our projects are currently performed on a
fixed-price basis. Under a fixed-price contract, we agree on the price that we
will receive for the entire project, based upon specific assumptions and project
criteria. If our estimates of our own costs to complete the project are below
the actual costs that we may incur, our margins will decrease, and we may incur
a loss. The revenue, cost and gross profit realized on a fixed-price contract
will often vary from the estimated amounts because of unforeseen conditions or
changes in job conditions and variations in labor and equipment productivity
over the term of the contract. If we are unsuccessful in mitigating these risks,
we may realize gross profits that are different from those originally estimated
and may incur losses on projects. Depending on the size of a project, these
variations from estimated contract performance could have a significant effect
on our operating results for any quarter or year. In some cases, we are able to
recover additional costs and profits from the client through the change order
process. In general, turnkey contracts to be performed on a fixed-price basis
involve an increased risk of significant variations. This is a result of the
long-term nature of these contracts and the inherent difficulties in estimating
costs and of the interrelationship of the integrated services to be provided
under these contracts whereby unanticipated costs or delays in performing part
of the contract can have compounding effects by increasing costs of performing
other parts of the contract. Our accounting policy related to contract
variations and claims requires recognition of all costs as incurred. Revenue
associated with these contract variations and claims is recognized only when
agreement is reached with the client with respect to scope and price.
Consequently, revenue and income may be reported in periods after the periods in
which corresponding expenses were reported.
EMPLOYEES
At December 31, 2003, we employed directly or through our joint ventures, a
multi-national work force of approximately 3,300 persons, of which 78% are
citizens of the respective countries in which they work. Although the level of
activity varies from year to year, we have maintained an average work force of
approximately 3,200 over the past five years. The minimum employment during that
period has been 2,010
23
and the maximum 6,020. At December 31, 2003, approximately 46% of our employees
were covered by collective bargaining agreements. We believe our relations with
our employees are satisfactory.
The following table sets forth the location of employees by work countries
as of December 31, 2003:
NUMBER OF
EMPLOYEES(1) PERCENT
------------ -------
Nigeria......................................... 1,423 43%
Oman............................................ 674 20
U.S. Construction............................... 415 13
Venezuela....................................... 381 12
U.S. Engineering................................ 167 5
Canada.......................................... 142 4
U.S. Administration............................. 57 2
Bolivia......................................... 20 1
Other........................................... 3 --
----- ----
Total........................................... 3,282 100%
===== ===
(1) Includes joint ventures
EQUIPMENT
We own, lease, and maintain a fleet of generally standardized construction,
transportation and support equipment and spare parts. In 2003 and 2002,
expenditures for capital equipment and spare parts were $40.6 million and $30.2
million, respectively. At December 31, 2003, the net book value of our property,
plant, equipment and spare parts was $101.9 million.
Historically, we have elected to own rather than lease equipment to ensure
the required equipment is available as needed. We believe this has resulted in
lower equipment costs. We are constantly evaluating the availability of
equipment and may from time to time pursue the leasing of equipment to support
projects. In recent years the leasing market for heavy construction equipment in
international locales has become much more competitive. As a result, we have
recently made more significant use of leasing to support our project equipment
requirements. We continue to evaluate expected equipment utilization, given
anticipated market conditions, and may dispose of underutilized equipment from
time to time. All equipment is subject to scheduled maintenance to maximize
fleet readiness. We have maintenance facilities at Port Harcourt, Nigeria;
Azaiba, Oman; Maracaibo, Venezuela; Houston, Texas; Fruita, Colorado and Ft.
McMurray, Canada as well as temporary site facilities on major jobs to minimize
downtime.
FACILITIES
We own a 14-acre equipment yard/maintenance facility and an adjoining
29-acre undeveloped industrial site (that is under lease to a third party) at
Broken Arrow, Oklahoma, a short distance from Tulsa, Oklahoma. In Channelview,
Texas, near Houston, we own a 20-acre equipment and maintenance facility, which
includes an office and maintenance shop building. In Houston, we own a 10 acre
equipment yard and maintenance facility which includes an 8,500 square foot
maintenance/warehouse building and two office buildings totaling approximately
8,200 square feet. Also, in Tulsa, Oklahoma we own a 100,000 square foot office
building. In Canada, we own a 10,000 square foot fabrication shop on 3 acres of
land in Ft. McMurray, Canada. In Venezuela, our offices and construction
facilities are located on 15 acres of land, which we own, on the shores of Lake
Maracaibo. In addition, our subsidiary, Willbros Pacific Industrial Electric,
Inc. owns an office/shop/warehouse facility in Gillette, Wyoming, which consists
of a 50 foot by 150 foot building on a 4.5 acre site. We lease all other
facilities used in our operations, including corporate offices in Panama;
administrative and engineering offices in Houston, Texas; Fruita, Colorado;
Portland, Oregon; Salt Lake City (Murray), Utah and various office facilities,
equipment sites and expatriate housing units in the United States, Bolivia,
Canada, England, Nigeria, Oman, and Venezuela. Rent expense for these facilities
was $2.1 million in 2003 and $1.8 million in 2002.
INSURANCE AND BONDING
Operational risks are analyzed and categorized by our risk management
department and are insured through a major international insurance broker under
a comprehensive insurance program, which includes
24
commercial insurance policies, consisting of the types and amounts typically
carried by companies engaged in the worldwide construction industry. We maintain
worldwide master policies written mostly through highly rated insurers. These
policies cover our land and marine property, plant, equipment and cargo against
all normally insurable risks, including war risk, political risk and terrorism,
in third-world countries. Other policies cover our workers and liabilities
arising out of our operations. Primary and excess liability insurance limits are
consistent with the level of our asset base. Risks of loss or damage to project
works and materials are often insured on our behalf by our clients. On other
projects, "builders all risk insurance" is purchased when deemed necessary. All
insurance is purchased and maintained at the corporate level, other than certain
basic insurance, which must be purchased in some countries in order to comply
with local insurance laws.
The insurance protection we maintain may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. An
enforceable claim for which we are not fully insured could have a material
adverse effect on our results of operations. In the future, our ability to
maintain insurance, which may not be available or at rates we consider
reasonable, may be affected by events over which we have no control, such as
those that occurred on September 11, 2001.
We often are required to provide surety bonds guaranteeing our performance
and/or financial obligations. The amount of bonding available to us depends upon
our experience and reputation in the industry, financial condition, backlog and
management expertise, among other factors. We maintain relationships with two
highly rated surety companies to provide surety bonds. We also use letters of
credit in lieu of bonds to satisfy performance and financial guarantees on some
projects when required.
POLITICAL, ECONOMIC AND OPERATIONAL RISKS
Our revenue and cash flow are primarily dependent upon major engineering
and construction projects. The availability of these types of projects is
dependent upon the condition of the oil, gas and power industries, and
specifically, the level of capital expenditures of oil, gas and power companies
on infrastructure. Our failure to obtain major projects, the delay in awards of
major projects, the cancellation of major projects or delays in completion of
contracts are factors that could result in the under-utilization of our
resources, which would have an adverse impact on our revenue and cash flow.
There are numerous factors beyond our control that influence the level of
capital expenditures of oil, gas and power companies.
We currently have substantial operations and assets in developing countries
in Africa, the Middle East and South America. Approximately 47% of our contract
revenue from 2003 was derived from activities in developing countries, and
approximately 41% of our long-lived assets as of December 31, 2003 were located
in developing countries. For a list of revenue and assets by location, see Note
14 of "Notes to Consolidated Financial Statements" included in Item 8 of this
Form 10-K. Accordingly, we are subject to risks which ordinarily would not be
expected to exist in the United States, Canada, Japan or Western Europe.
Some of these risks include:
- Foreign currency restrictions, which may prevent us from repatriating
foreign currency received in excess of local currency requirements and
converting it into dollars or other fungible currency.
- Exchange rate fluctuations, which can reduce the purchasing power of
local currencies and cause our costs to exceed our budget, reducing
our operating margin in the affected country.
- Expropriation or deprivation of assets, by either a recognized or
unrecognized foreign government, which can disrupt our business
activities and create delays and corresponding losses.
- Civil uprisings, riots, terrorism and war, which can make it
impractical to continue operations, adversely affect both budgets and
schedules and expose us to losses.
- Availability of suitable personnel and equipment, which can be
affected by government policy, or changes in policy, which limit the
importation of skilled craftsmen or specialized equipment in areas
where local resources are insufficient.
- Government instability, which can cause investment in capital projects
by our potential customers to be withdrawn or delayed, reducing or
eliminating the viability of some markets for our services.
- Legal systems of decrees, laws, regulations, interpretations and court
decisions which are not always fully developed and which may be
retroactively applied and cause us to incur unanticipated and/or
unrecoverable costs as well as delays which may result in real or
opportunity costs. In Venezuela, for example, a new hydrocarbons law,
which went into effect on January 1, 2002 and
25
which increases royalty rates from approximately 17% to between 20%
and 30%, is expected to reduce investment in that country.
Terrorist attacks, such as those which occurred on September 11, 2001,
could impact insurance rates, insurance coverages, the level of economic
activity and produce instability in financial markets. The terrorist attacks on
September 11, 2001, and the changes in the insurance markets attributable to the
terrorist attacks, have resulted in increased insurance premiums.
Our operations in developing countries may be adversely affected in the
event any governmental agencies in these countries interpret laws, regulations
or court decisions in a manner which might be considered inconsistent or
inequitable in the United States, Canada, Japan or Western Europe. We may be
subject to unanticipated taxes including income taxes, excise duties, import
taxes, export taxes, sales taxes, or other governmental assessments, which could
have a material adverse effect on our results of operations for any quarter or
year.
Given the unpredictable nature of the risks described in the preceding
paragraphs, we cannot assure you that such risks will not result in a loss of
business which could have a material adverse effect on our results of
operations. We have attempted to mitigate the risks of doing business in
developing countries by separately incorporating our operations in many such
countries; working with local partners in certain countries; contracting
whenever possible with major international oil and gas companies; obtaining
sizeable pre-payments or securing payment guarantees; entering into contracts
providing for payment in U.S. dollars instead of the local currency whenever
possible; maintaining reserves for credit losses; maintaining insurance on
equipment against certain political risks and terrorism; and limiting our
capital investment in each country. We retain local advisors to assist us in
interpreting the laws, practices and customs of the countries in which we
operate.
Over the years, we have experienced periodic interruptions on some
projects. However, we have successfully operated in Nigeria for the past 41
years with very favorable relationships with the local communities, and believe
that we can continue to operate in the area. In Venezuela, we have completed
several projects and believe that our Venezuelan organization can continue to
meet project requirements in this market. Worldwide, we have historically been
able to remain neutral with respect to local political issues. We have also
observed that, due to the importance of the oil and gas markets to local
economies in developing countries, changes in government have resulted in only
short-term interruptions in these markets.
Due to the limited number of major projects worldwide, we may, at any one
time, have a substantial portion of our resources dedicated to projects located
in a few countries. Our results of operations are, therefore, susceptible to
adverse events beyond our control, which may occur in a particular country in
which one of our businesses may be concentrated. Economic downturns in such
countries could also adversely affect our operations.
We operate primarily in a single operating segment in the oil, gas and
power industries, providing construction, engineering and specialty services to
a limited number of clients. Much of our success depends on developing and
maintaining relationships with our major clients and obtaining a share of
contracts from these clients. The loss of any of our major clients could have a
material adverse effect on our operations.
Our operations include pipeline construction, dredging, pipeline
rehabilitation services, marine support services and the operation of vessels
and heavy equipment. These operations involve a high degree of operational risk.
Natural disasters, adverse weather conditions, collisions, and operator or
navigational error could cause personal injury or loss of life, severe damage to
and destruction of property, equipment and the environment and suspension of
operations. In locations where we perform work with equipment that is owned by
others, our continued use of the equipment can be subject to unexpected or
arbitrary interruption or termination. The occurrence of any of these events
could result in work stoppage, loss of revenue, casualty loss, increased costs
and significant liability to third parties. Litigation arising from the
occurrence of any of these events could result in our being named as a defendant
in lawsuits asserting substantial claims.
We maintain risk management and safety programs to reduce risks and to
mitigate the effects of loss or damage. While we maintain such insurance
protection as we deem prudent, there can be no assurance that any such insurance
will be sufficient or effective under all circumstances or against all hazards
to which
26
we may be subject. An enforceable claim for which we are not fully insured could
have a material adverse effect on our financial condition and results of
operations. Moreover, no assurance can be given that we will be able to maintain
adequate insurance in the future at rates that we consider reasonable.
27
GOVERNMENT REGULATIONS
General
Many aspects of our operations are subject to government regulations in the
countries in which we operate, including those relating to currency conversion
and repatriation, taxation of our earnings and earnings of our personnel, and
our use of local employees and suppliers. In addition, we depend on the demand
for our services from the oil, gas and power industries and, therefore, our
business is affected by changing taxes, price controls and laws and regulations
relating to the oil, gas and power industries generally. The ability of the
Organization of Petroleum Exporting Countries to meet and maintain production
targets also influences the demand for our services. The adoption of laws and
regulations by the countries or the states in which we operate for the purpose
of curtailing exploration and development drilling for oil and gas or the
development of power generation facilities for economic and other policy
reasons, could adversely affect our operations by limiting demand for our
services. Our operations are also subject to the risk of changes in foreign and
U.S. laws and policies which may impose restrictions on our business, including
trade restrictions, which could have a material adverse effect on our
operations.
Other types of government regulation which could, if enacted or
implemented, adversely affect our operations include:
- expropriation or nationalization decrees;
- confiscatory tax systems;
- primary or secondary boycotts directed at specific countries or
companies;
- embargoes;
- extensive import restrictions or other trade barriers;
- mandatory sourcing rules; and
- unrealistically high labor rates and fuel price regulation.
Our future operations and earnings may be adversely affected by new
legislation, new regulations or changes in, or new interpretations of, existing
regulations and the impact of these changes could be material.
Environmental
Our operations are subject to numerous environmental protection laws and
regulations, which are complex and stringent. We regularly perform work in and
around sensitive environmental areas such as rivers, lakes and wetlands.
Significant fines and penalties may be imposed for non-compliance with
environmental laws and regulations, and certain environmental laws provide for
joint and several strict liability for remediation of releases of hazardous
substances, rendering a person liable for environmental damage without regard to
negligence or fault on the part of such person. In addition to potential
liabilities that may be incurred in satisfying these requirements, we may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances. Such laws and regulations may expose
us to liability arising out of the conduct of operations or conditions caused by
others, or for our own acts including those which were in compliance with all
applicable laws at the time such acts were performed. We are not aware of any
non-compliance with or liability under any environmental law that could have a
material adverse effect on our business or operations.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of legal proceedings. We believe that the nature
and number of these proceedings are typical for a firm of our size engaged in
our type of business and that none of these proceedings is material to our
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2003 through the solicitation of proxies or otherwise.
28
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our executive
officers. Officers are elected annually by, and serve at the discretion of, our
Board of Directors:
Name Age Position(s)
- ---- --- -----------
Michael F. Curran........................ 63 Director, Vice Chairman of the Board of Directors, Chief Executive Officer,
President and Chief Operating Officer
John K. Allcorn.......................... 42 Executive Vice President of Willbros Group, Inc. and Willbros USA, Inc.
James K. Tillery......................... 45 Executive Vice President of Willbros International, Inc. and Senior Vice
President of Willbros USA, Inc.
Jay T. Dalton............................ 52 Senior Vice President and General Counsel of Willbros Group, Inc.
Warren L. Williams....................... 48 Senior Vice President, Chief Financial Officer and Treasurer of Willbros
Group, Inc.
Michael F. Curran joined Willbros in March 2000 as a Director, Vice
Chairman of the Board of Directors, President and Chief Operating Officer. In
May 2002, Mr. Curran was elected Chief Executive Officer, in addition to his
other duties. Mr. Curran served from 1972 to March 2000 as Chairman and CEO of
Michael Curran & Associates, a mainline pipeline constructor in North America
and West Africa, prior to joining Willbros. He has over 42 years of diversified
experience in pipeline construction around the world, including 33 years as
President and Chief Executive Officer of various domestic and international
pipeline construction firms. Mr. Curran also served as President of the Pipe
Line Contractors Association.
John K. Allcorn joined Willbros in May 2000 as Senior Vice President of
Willbros International, Inc. and was elected Executive Vice President of
Willbros Group, Inc. and Willbros USA, Inc. in 2001. Mr. Allcorn was employed at
U.S. Pipeline, Inc., a North American pipeline construction company, as Senior
Vice President, from July 1997 until joining Willbros in May 2000. He served as
Vice President at Gregory & Cook Construction, Inc., an international pipeline
construction company, from June 1996 to July 1997. Mr. Allcorn has over 16 years
of pipeline industry experience including an established record in operations
management, finance, and business development.
James K. Tillery joined Willbros in 1983 as a field engineer. He has over
21 years of experience as an engineer and project manager working in both U.S.
and international pipeline construction. In 1995, he was named Managing Director
of Willbros (Nigeria) Limited and in 2001, he was named Senior Vice President -
Operations of Willbros International, Inc. and Senior Vice President of Willbros
USA, Inc. In 2003 he was promoted to Executive Vice President of Willbros
International, Inc. with responsibility for global operations outside North
America.
Jay T. Dalton joined Willbros in November 2002 and was elected Senior Vice
President and General Counsel. From 1993 to November 2002, Mr. Dalton served as
outside counsel to the Company with responsibility for contracts. Between 1980
and 1993, Mr. Dalton was employed by Occidental Petroleum Corporation
("Occidental") where he served as an officer and chief legal counsel to various
business units in Occidental's oil and gas division, both domestically and
internationally in Colombia, Pakistan and the United Kingdom. Before entering
private practice in 1993, Mr. Dalton's last position with Occidental was Vice
President and General Counsel of Island Creek Corporation in Lexington,
Kentucky.
Warren L. Williams joined Willbros in July 2000 as Vice President, Finance
and Accounting, for Willbros USA, Inc. In 2001, he was elected Vice President,
Chief Financial Officer and Treasurer of Willbros Group, Inc. In 2002, Mr.
Williams was elected Senior Vice President of Willbros Group, Inc. Prior to
joining Willbros, Mr. Williams was employed at TransCoastal Marine Services,
Inc. ("Transcoastal"), a marine construction company, from April 1998 to July
2000. Mr. Williams served as Vice President during the entire period of his
employment at TransCoastal and was named Chief Financial Officer in early 2000.
TransCoastal declared bankruptcy under Chapter 7 of the U.S. Bankruptcy Code in
June 2000. Mr. Williams worked as an independent financial consultant from 1994
to April 1998. Prior to 1994, Mr. Williams worked at the public accounting firm
of Ernst & Young, the last four years as a partner.
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock commenced trading on the New York Stock Exchange on August
15, 1996, under the symbol "WG." The following table sets forth the high and low
sale prices per share of our common stock, as reported in the New York Stock
Exchange composite transactions, for the periods indicated:
High Low
---- ---
2002:
First Quarter $ 16.85 $ 14.10
Second Quarter 19.24 15.55
Third Quarter 17.35 10.30
Fourth Quarter 11.24 5.84
2003:
First Quarter $ 8.89 $ 7.02
Second Quarter 10.72 6.95
Third Quarter 10.85 8.86
Fourth Quarter 13.99 10.20
Substantially all of our stockholders maintain their shares in "street
name" accounts and are not, individually, stockholders of record. As of March 5,
2004, our common stock was held by 81 holders of record and an estimated 2200
beneficial owners.
In order to fund the development and growth of our business, we intend to
retain our earnings rather than pay dividends in the foreseeable future. Since
1991, we have not paid any dividends, except dividends in 1996 on our
outstanding shares of preferred stock, which were converted into shares of
common stock on July 15, 1996. Subject to restrictions under credit
arrangements, the payment of any future dividends will be at the discretion of
our Board of Directors and will depend upon, among other things, our financial
condition, funds from operations, the level of our capital expenditures and our
future business prospects. Our present credit agreement prohibits us from paying
cash dividends on our common stock.
30
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002(1) 2001(2) 2000(3) 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Contract revenue $ 418,737 $ 583,703 $ 390,134 $ 314,290 $ 176,564
Operating expenses (income):
Contract cost 365,625 488,256 317,186 269,418 147,039
Termination of benefit plans -- -- (9,204) -- --
Depreciation and amortization 22,285 23,304 19,522 22,408 21,313
General and administrative 36,060 33,846 29,975 30,218 27,548
--------- --------- --------- --------- ---------
Operating income (loss) (5,233) 38,297 32,655 (7,754) (19,336)
Net interest income (expense) (1,222) (1,551) (2,588) (1,865) 587
Other income (expense) (171) (1,549) (603) (716) 2,031
--------- --------- --------- --------- ---------
Income (loss) before income taxes (6,626) 35,197 29,464 (10,335) (16,718)
Provision (benefit) for income taxes (3,413) 5,448 10,384 5,257 3,300
--------- --------- --------- --------- ---------
Net income (loss) $ (3,213) $ 29,749 $ 19,080 $ (15,592) $ (20,018)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ (.16) $ 1.63 $ 1.32 $ (1.11) $ (1.54)
Diluted (.16) 1.59 1.27 (1.11) (1.54)
CASH FLOW DATA:
Cash provided by (used in):
Operating activities $ (7,777) $ 28,855 $ 24,756 $ 3,040 $ (14,041)
Investing activities (39,171) (31,624) (36,066) (10,035) 4,866
Financing activities 18,030 33,100 18,373 10,442 8,641
Effect of exchange rate changes 430 (163) 287 686 93
OTHER DATA:
EBITDA (4) $ 16,881 $ 60,052 $ 51,574 $ 13,938 $ 4,008
Capital expenditures, excluding acquisitions $ 40,566 $ 30,227 $ 28,818 $ 15,351 $ 12,245
Backlog (at period end) (5) $ 224,712 $ 215,985 $ 407,553 $ 373,947 $ 253,080
Number of employees (at
period end) (6) 3,282 4,620 3,790 2,194 2,030
Cash dividends per common share $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $ 20,969 $ 49,457 $ 19,289 $ 11,939 $ 7,806
Working capital 90,129 90,900 45,985 32,079 25,801
Total assets 311,422 298,193 224,135 176,125 153,153
Total debt 18,322 1,171 39,284 26,298 15,981
Stockholders' equity 210,281 210,780 96,557 71,746 80,427
(1) We acquired Mt. West Group, comprised of four companies providing
design-build services to the western U.S. energy industry, on October 23,
2002. Accordingly, its results of operations since that date are
consolidated with our results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Significant
Business Developments" and Note 2 of the "Notes to Consolidated Financial
Statements" included in this Form 10-K.
(2) We acquired MSI, a general contractor in Alberta, Canada, on October 12,
2001. Accordingly, its results of operations since that date are
consolidated with our results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Significant
Business Developments" and Note 2 of the "Notes to Consolidated Financial
Statements" included in this Form 10-K.
(3) We acquired RPI, a U.S. pipeline construction company, on January 24, 2000.
Accordingly, its results of operations since that date are consolidated
with our results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Significant Business
Developments".
(4) EBITDA represents earnings before net interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent cash flows for the
respective period, nor has it been presented as an alternative to operating
income as an indicator of operating performance. It should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with accounting principles generally accepted in the
United States. See our Consolidated Statements of Cash Flows in our
Consolidated Financial Statements included elsewhere in this Form 10-K.
EBITDA is included in this Form 10-K because it is one of the measures
through which we assess our financial performance. EBITDA as presented may
not be comparable to other similarly titled measures used by other
companies. A reconciliation of EBITDA to GAAP financial information is
provided in the following table.
31
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------
RECONCILIATION OF NON-GAAP FINANCIAL MEASURE:
Net income (loss) $ (3,213) $ 29,749 $ 19,080 $ (15,592) $ (20,018)
Interest, net 1,222 1,551 2,588 1,865 (587)
Provision (benefit) for income taxes (3,413) 5,448 10,384 5,257 3,300
Depreciation and amortization 22,285 23,304 19,522 22,408 21,313
---------- ---------- ---------- ---------- ----------
EBITDA $ 16,881 $ 60,052 $ 51,574 $ 13,938 $ 4,008
========== ========== ========== ========== ==========
(5) Backlog is anticipated contract revenue from contracts for which award is
either in hand or reasonably assured.
(6) Includes joint ventures in 2002 and 2001.
32
ITEM 7. 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 construction, engineering and
specialty services to 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
- Delays in the performance of our work due to intermittent political
and social unrest in Iraq, Nigeria and Venezuela during the year.
33
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 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
34
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 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.
35
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 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
Our 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.
36
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
Contract revenue decreased $165.0 million (28%) to $418.7 million in 2003
from $583.7 million in 2002. Engineering revenue declined $141.0 million or 80%
in 2003 to $36.2 million from $177.2 million in 2002. The Explorer Pipeline
project, which was completed in early 2003 and was not replaced by another
comparably sized project, had project revenue of $20.8 million in 2003, compared
to $90.9 million in 2002.
Construction revenue also declined $51.1 million or 15% as the result of
completing two large projects in the first half of 2003. Construction revenue in
2003 was $293.7 million versus $344.8 million in 2002. The 2003 completion of
the Chad-Cameroon Pipeline project resulted in a year-to-year construction
revenue decline of $74.5 million. The completion of the Bolivia Transierra
Pipeline in early 2003 resulted in an additional $44.4 million in year-to-year
construction revenue decline. The combined $118.9 million reduction in
construction revenue from the two 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).
The combined $192.1 million engineering and construction revenue decline
was partially offset by a $27.1 million or 44% increase in specialty services
revenue. Specialty services revenue in 2003 was $88.8 million versus $61.7
million in 2002. The increase was attributable to new and expanded work in
Nigeria and Canada.
CONTRACT COSTS
Contract costs declined $122.6 million or 25% to $365.6 million in 2003
from $488.2 million in 2002. Variations in contract costs by country were
closely related to the variations in contract revenue.
The 25% year-to-year contract cost decline versus the equivalent 28%
contract revenue decline reflects declining margins accompanying declining
revenue. Contract margin for 2003 is down from 2002 levels by 3.7 percentage
points at 12.7% versus 16.4%. However, fourth quarter 2003 margins adjusted to
remove the effect of the contract variation settlement, were comparable to the
same period in the prior year. During 2003, engineering contract costs of $44.6
million exceeded revenue by $8.4 million. Margins declined slightly in
construction mainly as a result of completing several large projects where
contract variations remain to be settled. Revenue from contract claims is not
recognized until agreement is reached with our customers. Specialty Services
margin increased slightly.
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:
37
- Bidding and estimating;
- Insurance; and
- Legal and consulting.
38
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
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
Contract revenue increased $193.6 million (50%) to $583.7 million due to
(a) $130.4 million (60%) of increased construction revenue due primarily to
construction on the Chad-Cameroon Pipeline Project, work on a project in Bolivia
and increased activity in Offshore West Africa, net of reduced activities on the
Nembe Creek Projects in Nigeria as they neared completion and reduced
construction activity in the United States; (b) increased engineering revenue of
$56.9 million (47%) due to an increase of engineering and procurement services
in the United States primarily related to the Explorer Pipeline Project; and (c)
an increase of $6.3 million (11%) in Specialty Services revenue principally from
revenue generated by MSI in Canada, which was acquired in October 2001, offset
by reduced activity in Venezuela. Revenue in the United States increased $26.3
million (13%) due primarily to an increase in engineering and procurement
services and the acquisition of Mt. West Group in October 2002, offset by a
decrease in construction activity. Chad-Cameroon revenue increased $101.3
million resulting from construction work begun in the fourth quarter of 2001 on
the Chad-Cameroon Pipeline Project. Revenue from Offshore West Africa increased
$15.3 million as a result of increased vessel utilization on several projects
during the first six months of 2002. Work that began in 2002 on a project in
Bolivia resulted in $47.4 million in revenue in that country. A project in the
Dominican Republic during 2002 produced $17.7 million in revenue, and revenue in
Canada increased $10.4 million resulting from the acquisition of MSI in October
2001. Nigeria revenue decreased $19.5 million (29%) due primarily to reduced
activity on the Nembe Creek Projects. The combined revenue in all other areas
decreased $5.3 million (15%).
39
CONTRACT COSTS
Contract costs increased $171.1 million (54%) to $488.3 million due to an
increase of $107.7 million (62%) in construction services cost, $54.9 million
(56%) in engineering services cost and $8.5 million (19%) in specialty services
cost. Variations in contract costs by country were closely related to the
variations in contract revenue.
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-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.
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
40
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 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
41
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 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.
42
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 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
=========== ===========
43
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.
44
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 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.
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is our exposure to changes in non-U.S. currency
exchange rates. We attempt to negotiate contracts which provide for payment in
U.S. dollars, but we may be required to take all or a portion of payment under a
contract in another currency. To mitigate non-U.S. currency exchange risk, we
seek to match anticipated non-U.S. currency revenue with expenses in the same
currency whenever possible. To the extent we are unable to match non-U.S.
currency revenue with expenses in the same currency, we may use forward
contracts, options or other common hedging techniques in the same non-U.S.
currencies. We had no forward contracts or options at December 31, 2003 and
2002.
The carrying amounts for cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued liabilities shown in the
consolidated balance sheets approximate fair value at December 31, 2003 due to
the generally short maturities of these items. We invest primarily in short-term
dollar denominated bank deposits, and at December 31, 2003 did not have any
investment in instruments with a maturity of more than a few days or in any
equity securities. We have the ability and expect to hold our investments to
maturity.
Our exposure to market risk for changes in interest rates relates primarily
to our long-term debt. At December 31, 2003, $14.0 million of indebtedness was
subject to variable interest rates. The weighted average effective interest rate
on the variable rate debt for the twelve months ended December 31, 2003 was
5.0%. The detrimental effect of a hypothetical 100 basis point increase in
interest rates for the year would be less than $0.1 million. At December 31,
2003, our fixed rate debt approximated fair value based upon discounted future
cash flows using current market rates.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements of Willbros Group, Inc. and Subsidiaries
Independent Auditors' Report..................................................................... 48
Consolidated Balance Sheets as of December 31, 2003 and 2002..................................... 49
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001............................................................. 50
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
years ended December 31, 2003, 2002 and 2001................................................. 51
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001............................................................. 52
Notes to Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001............................................................. 53
47
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
48
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.
49
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.
50
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.
51
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------------------
Cash flows from operating activities: 2003 2002 2001
-------- -------- --------
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.
52
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 construction,
engineering and specialty services to the oil, gas and power industries. 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
53
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.
54
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
55
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
converted at prevailing rates throughout the year. Foreign currency transaction
adjustments and translation 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.
56
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.
57
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
58
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
59
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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
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,
60
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
contract cost and recognized income not yet billed, property, plant and
equipment, and spare parts.
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)
============= ============
61
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.
62
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
============ =========== ===========
63
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, 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.
64
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
9. INCOME TAXES (CONTINUED)
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.
65
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 Average
Exercise Prices Vested Options 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 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.
66
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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).
67
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
14. SEGMENT INFORMATION
The Company operates in a single operating segment providing construction,
engineering and specialty services to the oil, gas and power industries. Due to
a limited number of major projects and clients, the Company may at any one time
have a substantial part of its operations dedicated to one project, client and
country.
Customers 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 (1) $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
======== ======== ========
(1) Net of intercountry revenue of $9,009 in 2003, $25,849 in 2002, and $59,284
in 2001.
68
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 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.
69
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. CONTINGENCIES, COMMITMENTS AND OTHER CIRCUMSTANCES (CONTINUED)
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
(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,
70
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED
major projects are usually fixed-price contracts that may result in uneven
quarterly financial results due to the method by which revenue is recognized.
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934) as of December 31, 2003. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of December 31, 2003, the
disclosure controls and procedures are effective in alerting them on a timely
basis to material information required to be included in our periodic filings
with the Securities and Exchange Commission.
No change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
fiscal quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
72
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to our directors is
incorporated by reference from the sections of our definitive Proxy Statement
for our 2004 Annual Meeting of Stockholders (the "Proxy Statement") entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
CODE OF CONDUCT
We have adopted both a code of business conduct and ethics for directors,
officers and employees and an additional separate code of ethics for the Chief
Executive Officer and senior financial officers. This information is available
on our website at http://www.willbros.com under the "Governance" captions on the
"Investors" page. We intend to satisfy the disclosure requirements, including
those of Item 406 of Regulation S-K, regarding certain amendments to, or waivers
from, provisions of our code of business conduct and ethics and code of ethics
for the Chief Executive Officer and senior financial officers by posting such
information on our website. Additionally, our corporate governance guidelines
and the charters of the Audit Committee, the Compensation Committee and the
Nominating/Corporate Governance Committee of the Board of Directors are also
available on our website. A copy of the codes, governance guidelines and
charters will be provided to any of our stockholders upon request.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
sections of the Proxy Statement entitled "Election of Directors" and "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the
sections of the Proxy Statement entitled "Equity Compensation Plan Information"
and "Principal Stockholders and Security Ownership of Management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Certain Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Audit and Other Fees Paid to
Independent Auditors."
73
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Our financial statements and those of our subsidiaries and independent
auditors' report are listed in Item 8 of this Form 10-K.
2003
Form 10-K
Page(s)
-------
(2) Financial Statement Schedule:
Independent Auditors' Report............................................... 77
Schedule II - Consolidated Valuation and Qualifying Accounts............... 78
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or included in the
footnotes thereto.
(3) Exhibits:
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
3.1 Amended and Restated Articles of Incorporation of Willbros Group,
Inc. (Filed as Exhibit 3.1 to our report on Form 10-Q for the quarter
ended September 30, 2002, filed November 14, 2002).
3.2 Restated By-Laws of Willbros Group, Inc. (Filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-5413 (the
"S-1 Registration Statement")).
4.1 Form of stock certificate for our Common Stock, par value $.05 per
share (Filed as Exhibit 4 to the S-1 Registration Statement).
4.2 Rights Agreement, dated April 1, 1999, between us and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (Filed as an Exhibit to
our Registration Statement on Form 8-A, dated April 9, 1999).
4.3 Certificate of Designation of Series A Junior Participating Preferred
Stock (Filed as Exhibit 3 to our report on Form 10-Q for the quarter
ended March 31, 1999, filed May 17, 1999).
10.1 Credit Agreement dated June 14, 2002, by and among us, certain
designated subsidiaries, Credit Lyonnais New York Branch, as
administrative agent, certain financial institutions, and Canadian
Imperial Bank of Commerce, as syndication agent (Filed as Exhibit
10.1 to our report on Form 10-Q for the quarter ended June 30, 2002,
filed on August 14, 2002).
10.2* Form of Indemnification Agreement between our officers and us (Filed
as Exhibit 10.7 to the S-1 Registration Statement).
10.3* Form of Indemnification Agreement between our directors and us (Filed
as Exhibit 10.16 to the S-1 Registration Statement).
10.4* Willbros Group, Inc. 1996 Stock Plan (Filed as Exhibit 10.8 to the
S-1 Registration Statement).
10.5* Amendment Number 1 to Willbros Group, Inc. 1996 Stock Plan dated
February 24, 1999 (Filed as Exhibit A to the Company's Proxy
Statement for Annual Meeting of Stockholders dated March 31, 1999).
10.6* Amendment Number 2 to Willbros Group, Inc. 1996 Stock Plan dated
March 7, 2001, (Filed as Exhibit B to our Proxy Statement for Annual
Meeting of Stockholders dated April 2, 2001).
74
10.7* Form of Incentive Stock Option Agreement under the Willbros Group,
Inc. 1996 Stock Plan (Filed as Exhibit 10.13 to our report on Form
10-K for the year ended December 31, 1996, filed March 31, 1997 (the
"1996 Form 10-K")).
10.8* Form of Non-Qualified Stock Option Agreement under the Willbros
Group, inc. 1996 Stock Plan (Filed as Exhibit 10.14 to the 1996 Form
10-K).
10.9* Willbros Group, Inc. Director Stock Plan (Filed as Exhibit 10.9 to
the S-1 Registration Statement).
10.10* Amendment Number 1 to Willbros Group, Inc. Director Stock Plan dated
January 1, 2002 (Filed as Exhibit 10.13 to our report on Form 10-K
for the year ended December 31, 2001, filed February 20, 2002).
10.11* Amendment Number 2 to the Willbros Group, Inc. Director Stock Plan
dated February 18, 2002 (Filed as Exhibit 10.2 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
10.12* Form of Secured Promissory Note under the Willbros Group, Inc.
Employee Stock Purchase Program (Filed as Exhibit 10.5 to our report
on Form 10-Q for the quarter ended June 30, 2002, filed August 14,
2002).
10.13* Willbros Group, Inc. Severance Plan (as amended and restated
effective September 25, 2003) (Filed as Exhibit 10.1 to our report on
Form 10-Q for the quarter ended September 30, 2003, filed November
13, 2003).
10.14 Registration Rights Agreement dated April 9, 1992, between us and
Heerema Holding Construction, Inc., Yorktown Energy Partners, L.P.,
Concord Partners II, L.P., Concord Partners Japan Limited and certain
other stockholders of the Company (Filed as Exhibit 10.13 to the S-1
Registration Statement).
10.15* Consulting Services Agreement dated June 1, 2002, between Willbros
USA, Inc., and Larry J. Bump (Filed as Exhibit 10.4 to our report on
Form 10-Q for the quarter ended June 30, 2002, filed August 14,
2002).
21. Subsidiaries.
23. Consent of KPMG LLP, included on page 77 of this Form 10-K.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
Reports on Form 8-K.
(b) No reports on Form 8-K were filed during the fourth quarter of 2003.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WILLBROS GROUP, INC.
Date: March 12, 2004 By: /s/ Michael F. Curran
---------------------
Michael F. Curran
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Larry J. Bump Director and Chairman of the Board March 12, 2004
- ----------------------------
Larry J. Bump
/s/ Michael F. Curran Director, Vice Chairman of the Board, March 12, 2004
- ---------------------------- President and Chief Executive Officer
Michael F. Curran (Principal Executive Officer)
/s/ Warren L. Williams Senior Vice President, March 12, 2004
- ---------------------------- Chief Financial Officer and Treasurer
Warren L. Williams (Principal Financial Officer and Principal
Accounting Officer)
/s/ Peter A. Leidel Director March 12, 2004
- ----------------------------
Peter A. Leidel
/s/ John H. Williams Director March 12, 2004
- ----------------------------
John H. Williams
/s/ Michael J. Pink Director March 12, 2004
- ----------------------------
Michael J. Pink
/s/ James B. Taylor, Jr. Director March 12, 2004
- ----------------------------
James B. Taylor, Jr.
/s/ Rodney B. Mitchell Director March 12, 2004
- ----------------------------
Rodney B. Mitchell
Director March , 2004
- ---------------------------- --
S. Fred Isaacs
76
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
AND CONSENT
The Stockholders and Board of Directors
Willbros Group, Inc.:
The audits referred to in our report dated February 20, 2004, except for
Note 7 which is as of March 12, 2004, included the related consolidated
financial statement schedule as of December 31, 2003 and for each of the years
in the three-year period ended December 31, 2003. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statement
schedule based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the registration statements
(Nos. 333-18421, 333-21399, 333-53748 and 333-74290) on Form S-8 and (Nos.
333-96201, 333-63096 and 333-101448) on Form S-3 of Willbros Group, Inc. of our
reports dated February 20, 2004, except for Note 7 which is as of March 12,
2004, relating to the consolidated balance sheets of Willbros Group, Inc. and
subsidiaries 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 and
the related financial statement schedule, which reports appear in the December
31, 2003 annual report on Form 10-K of Willbros Group, Inc. Our report on the
consolidated financial statements refers to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
certain provisions from SFAS No. 142, "Goodwill and Other Intangible Assets" in
2001 and the remaining provisions of SFAS No. 142 in 2002.
/s/ KPMG LLP
Houston, Texas
March 12, 2004
77
WILLBROS GROUP, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charged
(Credited)
Balance at to Costs Charge Balance
Beginning and Offs and at End
Year Ended Description of Year Expenses Other of Year
---------- ------------------------- ---------- ----------- -------- ----------
December 31, 2001 Allowance for bad debts $ 508 $(290) $ 516 $ 734
December 31, 2002 Allowance for bad debts $ 734 $ (58) $ 49 $ 725
December 31, 2003 Allowance for bad debts $ 725 $ 199 $ (7) $ 917
December 31, 2001 Overhaul Accrual $3,330 $ -- $(1,194) $2,136
December 31, 2002 Overhaul Accrual $2,136 $ -- $ 141 $2,277
December 31, 2003 Overhaul Accrual $2,277 $ -- $ (852) $1,425
78
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of Willbros Group,
Inc. (Filed as Exhibit 3.1 to our report on Form 10-Q for the quarter
ended September 30, 2002, filed November 14, 2002).
3.2 Restated By-Laws of Willbros Group, Inc. (Filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-5413 (the
"S-1 Registration Statement")).
4.1 Form of stock certificate for our Common Stock, par value $.05 per
share (Filed as Exhibit 4 to the S-1 Registration Statement).
4.2 Rights Agreement, dated April 1, 1999, between us and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (Filed as an Exhibit to
our Registration Statement on Form 8-A, dated April 9, 1999).
4.3 Certificate of Designation of Series A Junior Participating Preferred
Stock (Filed as Exhibit 3 to our report on Form 10-Q for the quarter
ended March 31, 1999, filed May 17, 1999).
10.1 Credit Agreement dated June 14, 2002, by and among us, certain
designated subsidiaries, Credit Lyonnais New York Branch, as
administrative agent, certain financial institutions, and Canadian
Imperial Bank of Commerce, as syndication agent (Filed as Exhibit
10.1 to our report on Form 10-Q for the quarter ended June 30, 2002,
filed on August 14, 2002).
10.2* Form of Indemnification Agreement between our officers and us (Filed
as Exhibit 10.7 to the S-1 Registration Statement).
10.3* Form of Indemnification Agreement between our directors and us (Filed
as Exhibit 10.16 to the S-1 Registration Statement).
10.4* Willbros Group, Inc. 1996 Stock Plan (Filed as Exhibit 10.8 to the
S-1 Registration Statement).
10.5* Amendment Number 1 to Willbros Group, Inc. 1996 Stock Plan dated
February 24, 1999 (Filed as Exhibit A to the Company's Proxy
Statement for Annual Meeting of Stockholders dated March 31, 1999).
10.6* Amendment Number 2 to Willbros Group, Inc. 1996 Stock Plan dated
March 7, 2001, (Filed as Exhibit B to our Proxy Statement for Annual
Meeting of Stockholders dated April 2, 2001).
10.7* Form of Incentive Stock Option Agreement under the Willbros Group,
Inc. 1996 Stock Plan (Filed as Exhibit 10.13 to our report on Form
10-K for the year ended December 31, 1996, filed March 31, 1997 (the
"1996 Form 10-K")).
10.8* Form of Non-Qualified Stock Option Agreement under the Willbros
Group, Inc. 1996 Stock Plan (Filed as Exhibit 10.14 to the 1996 Form
10-K).
10.9* Willbros Group, Inc. Director Stock Plan (Filed as Exhibit 10.9 to
the S-1 Registration Statement).
10.10* Amendment Number 1 to Willbros Group, Inc. Director Stock Plan dated
January 1, 2002 (Filed as Exhibit 10.13 to our report on Form 10-K
for the year ended December 31, 2001, filed February 20, 2002).
10.11* Amendment Number 2 to the Willbros Group, Inc. Director Stock Plan
dated February 18, 2002 (Filed as Exhibit 10.2 to our report on Form
10-Q for the quarter ended June 30, 2002, filed August 14, 2002).
79
10.12* Form of Secured Promissory Note under the Willbros Group, Inc.
Employee Stock Purchase Program (Filed as Exhibit 10.5 to our report
on Form 10-Q for the quarter ended June 30, 2002, filed August 14,
2002).
10.13* Willbros Group, Inc. Severance (as amended and restated effective
September 25, 2003) (Filed as Exhibit 10.1 to our report on Form 10-Q
for the quarter ended September 30, 2003, filed November 13, 2003).
10.14 Registration Rights Agreement dated April 9, 1992, between us and
Heerema Holding Construction, Inc., Yorktown Energy Partners, L.P.,
Concord Partners II, L.P., Concord Partners Japan Limited and certain
other stockholders of the Company (Filed as Exhibit 10.13 to the S-1
Registration Statement).
10.15* Consulting Services Agreement dated June 1, 2002, between Willbros
USA, Inc. and Larry J. Bump and us (Filed as Exhibit 10.4 to our
report on Form 10-Q for the quarter ended June 30, 2002, filed August
14, 2002).
21. Subsidiaries.
23. Consent of KPMG LLP, included on page 77 of this Form 10-K.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
80