Item 1B.
Unresolved Staff Comments
None.
For information regarding legal proceedings, see the discussion under the captions “Contingencies - Facility Construction Project Termination” in Note 16 - Contingencies, Commitments and Other Circumstances and “Nigeria Assets and Nigeria-Based Operations - Share Purchase Agreement” in Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement of our “Notes to Consolidated Financial Statements” in Item 8 of Part II of this Form 10-K, which information from Notes 16 and 21 is incorporated by reference herein.
We are a party to a number of other legal proceedings. We believe that the nature and number of these other proceedings are typical for a company of our size engaged in our type of business and that none of these other proceedings will result in a material adverse effect on our business, results of operations or financial condition.
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, the Board of Directors.
Robert R. Harl was elected to the Board of Directors and President and Chief Operating Officer of Willbros Group, Inc. in January 2006 and as Chief Executive Officer in January 2007. Mr. Harl has over 30 years experience working with Kellogg Brown & Root, a global engineering, construction and services company (“KBR”), and its subsidiaries in a variety of officer capacities, serving as President of several of KBR’s business units. Mr. Harl’s experience includes executive management responsibilities for units serving both upstream and downstream oil and gas sectors as well as power, governmental and infrastructure sectors. He was President and Chief Executive Officer of KBR from March 2001 until July 2004 when he was appointed Chairman, a position he held until January 2005. KBR filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in December 2003 in order to discharge certain asbestos and silica personal injury claims. The order confirming KBR’s plan of reorganization became final in December 2004, and the plan of reorganization became effective in January 2005. Mr. Harl was engaged as a consultant to Willbros from August 2005 until he became an executive officer and member of the Board of Directors of Willbros in January 2006. In October 2010, Mr. Harl resigned from the office of Chief Operating Officer prior to Mr. Gibson’s election to that office.
Van A. Welch joined Willbros in 2006 as Senior Vice President, Chief Financial Officer and Treasurer of Willbros Group, Inc.; he served as Treasurer until September 2007. Mr. Welch has over 28 years experience in project controls, administrative and finance positions with KBR, a global engineering, construction and services company, and its subsidiaries, serving in his last position as Vice President - Finance and Investor Relations and as a member of KBR’s executive leadership team. From 1998 to 2006, Mr. Welch held various other positions with KBR including Vice President, Accounting and Finance of the Engineering and Construction Division, Vice President, Accounting and Finance of Onshore Operations and Senior Vice President of Shared Services. Mr. Welch is a Certified Public Accountant.
James L. Gibson was named Chief Operating Officer of Willbros in October 2010. Mr. Gibson joined Willbros in March 2008. He was named President, Willbros Canada in July 2008, and appointed President of Downstream Oil & Gas in February 2010. Mr. Gibson brings more than 39 years of diversified construction experience in managing all aspects of project performance including: cost, schedules, quality, safety, budget, regulatory requirements and subcontracting. Prior to joining Willbros, he was employed by KBR, for the majority of his career, beginning in 1972. He held a number of positions at KBR in project management services performing work in refineries and chemical plants. He has managed projects for Syncrude Canada Limited in Alberta and other projects in the oil sands industry in the Fort McMurray area. Mr. Gibson holds several contractor certifications and licenses and graduated from the University of Texas with a Bachelor of Science in Engineering.
Peter W. Arbour joined Willbros in May 2010 as Senior Vice President, General Counsel, and Corporate Secretary. Before joining Willbros, he served in senior legal positions with the Expro International Group from August 2006 to April 2010, Power Well Services from August 2004 to July 2006, and KBR, where he managed a worldwide Law Department for over 10 years. KBR filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in December 2003 in order to discharge certain asbestos and silica personal injury claims. The order confirming KBR’s plan of reorganization became final in December 2004, and the plan of reorganization became effective in January 2005. Mr. Arbour’s legal experience includes work with mergers and acquisitions, engineering and construction contracts, construction claims, litigation management, and compliance matters. He has extensive experience in overseas projects, particularly in the Middle East, Asia Pacific, and Latin America. Mr. Arbour is a member of the state bar associations of Texas and Louisiana and holds undergraduate and Juris Doctorate degrees from Louisiana State University. Mr. Arbour resigned from the office of Corporate Secretary in December 2010.
J. Robert Berra joined Willbros in February 2011 as Executive Vice President, Sales & Marketing. Mr. Berra has over 20 years’ experience in the energy industry including the oil and gas, refining, petrochemicals, LNG, offshore, government and technology sectors, and has worked in capacities ranging from engineering, construction, program management, business development, operations and executive management. Prior to joining Willbros, from December 2008 to February 2011, Mr. Berra served as Senior Vice President, Commercial Operations for Foster Wheeler USA Corporation, a global engineering and construction contractor, where he was responsible for sales, marketing, proposals and estimating, and executive oversight of its heavy oil technology portfolio and chemicals business line. During his tenure with ConocoPhillips, from August 2006 to December 2008, Mr. Berra served in senior management positions in the Project Development function where he was responsible for global EPC contracting and led the portfolio management for major pipeline projects. Mr. Berra has also served in senior leadership positions with engineering and construction contractors, The Shaw Group from November 2004 to August 2006 and KBR from May 1990 to October 2004. Mr. Berra graduated from The University of Texas at Austin with a Bachelor of Science in Mechanical Engineering and is a licensed professional engineer in the State of Texas. He is a member of the executive board of the Engineering Construction and Contracting (ECC) Association, and served as chairman of this organization in 2010.
Jerrit M. Coward joined Willbros in 2002 as a Project Manager, and assumed full operations responsibility for our Nigerian operations in 2005, overseeing the discontinuation and sale of our Nigerian interests. He was promoted to President of our Upstream Oil & Gas segment in January 2008 and also currently serves as a Senior Vice President of the Company. Prior to joining Willbros, he worked for Global Industries as Project Manager, Operations Manager and Commercial Manager. He has held foreign assignments in Nigeria and Mexico as well as executing international projects in various other countries. He has worked his entire professional career in the oil and gas construction industry. Mr. Coward is a graduate of Texas A&M University at Galveston with a Bachelor of Science in Maritime Systems Engineering.
Richard E. Cellon was named President Downstream Oil & Gas and Senior Vice President of the Company in October 2010. Mr. Cellon joined Willbros in January 2010 and was named as President, Government Services. He was named President, Government, Tank, & Construction Tank Services within the Downstream Oil & Gas segment in July 2010. Prior to joining Willbros, Mr. Cellon had more than 30 years of federal government leadership experience with the United States Navy in facilities management, construction, and acquisition, as well as contingency operations. His breadth of experience includes strategic planning, financial management, and operations management of multi-year construction programs, including global leadership of the Naval Construction Force of 16,000 Seabees. Mr. Cellon holds degrees from the U.S. Naval Academy, the Naval War College, the University of Florida and completed the Advanced Management Program at the Wharton School, University of Pennsylvania. He retired from the U.S. Navy as a Rear Admiral in 2009.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 by the New York Stock Exchange for the periods indicated:
Substantially all of our stockholders maintain their shares in “street name” accounts and are not, individually, stockholders of record. As of March 10, 2011, our common stock was held by 123 holders of record and an estimated 7,400 beneficial owners.
Dividend Policy
Since 1991, we have not paid any cash dividends on our capital stock, except dividends in 1996 on our outstanding shares of preferred stock, which were converted into shares of common stock on July 15, 1996. We anticipate that we will retain earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Our 2010 Credit Facility prohibits us from paying cash dividends on our common stock.
Issuer Purchases of Equity Securities
The following table provides information about purchases of our common stock by us during the fourth quarter of 2010:
(1)
Represents shares of common stock acquired from certain of our officers and key employees under the share withholding provisions of our 1996 Stock Plan and 2010 Stock and Incentive Compensation Plan for the payment of taxes associated with the vesting of shares of restricted stock granted under such plans.
(2)
The price paid per common share represents the closing sales price of a share of our common stock as reported by the New York Stock Exchange on the day that the stock was acquired by us.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
(1)
Historically, we have shown depreciation and amortization as a separate line item on our Consolidated Statements of Operations. Effective for the fiscal year ended December 31, 2007, depreciation and amortization related to operating activities is included in Contract and depreciation and amortization related to general and administrative activities is included General and Administrative (“G&A”). This change in presentation was made to bring our presentation of financial results in line with our peers and provide greater comparability of our results within the industry.
(2)
Backlog is anticipated contract revenue from uncompleted portions of existing contracts and contracts whose award is reasonably assured.
(3)
EBITDA from continuing operations represents earnings from continuing operations before net interest, income taxes, depreciation and amortization and impairment of intangible assets. EBITDA from continuing operations is not intended to represent cash flows for the respective period, nor has it been presented as an alternative to operating income from continuing operations 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 from continuing operations is included in this Form 10-K because it is one of the measures through which we assess our financial performance. EBITDA from continuing operations as presented may not be comparable to other similarly titled measures used by other companies. A reconciliation of EBITDA from continuing operations to GAAP financial information is provided in the table below.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except share and per share amounts or unless otherwise noted)
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. Additional sections in this Form 10-K which should be helpful to the reading of our discussion and analysis include the following: (i) a description of our services provided, by segment found in Items 1 and 2 “Business and Properties”-“Services Provided” (ii) a description of our business strategy found in Items 1 and 2 “Business and Properties”-“Our Strategy”; and (iii) a description of risk factors affecting us and our business, found in Item 1A “Risk Factors.”
Inasmuch as the discussion below and the other sections to which we have referred you pertain to management’s comments on financial resources, capital spending, our business strategy and the outlook for our business, such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management’s judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in this Form 10-K, particularly in Item 1A “Risk Factors” and in “Forward-Looking Statements.”
OVERVIEW
Willbros is a global provider of engineering and construction services to the oil, gas, refinery, petrochemical and power industries with a focus on infrastructure such as oil & gas pipeline systems, electric transmission and distribution (T&D) services and refinery downstream markets. Our offerings include engineering, procurement and construction (either individually or as an integrated “EPC” service offering), turnarounds, maintenance and other specialty services.
2010 Year in Review
During 2010, revenue decreased $67,361 (5.3 percent) to $1,192,412 from $1,259,773 in 2009. Operating income, excluding Special Items decreased $79,902 (197.3 percent) to an operating loss of $39,406 from operating income of $40,496 in 2009, and operating margin decreased 6.5 percentage points to a negative 3.3 percent in 2010 from an operating margin of 3.2 percent in 2009. Refer to the “Financial Summary” section included in this MD&A for further discussion and detail of our fourth quarter and full year operating results and for details on Special Items.
Although market conditions started to improve during the year, we continued to be challenged by weaker demand for our services, which was compounded by poor visibility for the timing of both committed projects, as well as anticipated projects. As a result, we found ourselves maintaining our operations at resource levels sufficient to initiate and complete these projects. This situation resulted in a misalignment of our fixed costs as a result of the uncertain timing of revenues.
We also incurred upfront costs to invest in the future of the Company by diversifying our end market exposure through the InfrastruX acquisition and expanding our service offerings through opening new offices in the gas shale play areas to increase our presence in our customers’ work areas. We believe these investments advance our strategy to diversify our end market exposure and to increase our revenue stream from recurring services. Growing our revenue stream associated with more recurring services will provide improved stability and predictability. Strategically, we are in the midst of a transformation. We have successfully refocused our business model on North America, expanded our addressable markets to include significant exposure to the second largest hydrocarbon reserves in the world - the oil sands in Canada, the massive unconventional shale play developments in the U.S., the industrial process and refining market and the expansion and improvement of the North American electric utility grid. We believe each of these markets carries with it significant recurring services opportunities.
Our acquisition of InfrastruX came with more costly debt than originally expected and substantial overhead and indirect costs. The delays, which we discussed in our third quarter earnings call, also contributed to our loss position and reduced our financial flexibility. For the projects that we have been awarded in our upstream and downstream businesses, the market remains highly competitive and we bid most of these projects with tighter margins, and results in Canada were negatively impacted by delays and cost overruns on certain projects.
On the positive side, we had many successes. We had good results on our major project execution in the United States, which can be highlighted by our superior performance executing the Fayetteville Express Pipeline (“FEP”) project, which we completed under budget and on schedule. Additionally, our Upstream Oil & Gas engineering unit exceeded its plan and our Downstream Oil & Gas segment improved its performance to better than breakeven in the second half of the year as we anticipated.
Looking Forward to 2011
As we move into 2011, our number one priority is restoring our financial strength. Our management team is focused on four priority objectives:
1.
Reduce debt by approximately $50 to $100 million to significantly reduce interest expense and provide better financial flexibility. This should translate more of our EBITDA into earnings;
2.
Maintain our focus on North America. Our presence in the Canadian oil sands and the U.S. electric transmission markets present the best growth opportunities for us. This is where our key markets and resources come together to offer the best risk adjusted returns. Currently, we are not planning to pursue large international projects like we did in 2010;
3.
Continue to emphasize and improve our project management tools and capabilities. We have large projects in backlog that can make a significant impact on our bottom line; and
4.
Remain focused on Safety. Our objective for the year is to reduce injuries by 50 percent. We differentiate Willbros on this value both as an employer and as a provider of services.
These objectives overarch actions already underway including:
•
Fully integrating InfrastruX into Willbros;
•
Adapting our Upstream business to meet changing market conditions and execute the newly awarded and currently underway Acadian project to the same standards as FEP;
•
Reducing operating costs and creating efficiencies that will enhance our competitiveness and improve our bottom line; and
•
Continue moving our model to an operating company structure while fostering a common set of values and culture.
Our primary financial objective is reducing our leverage position by paying down debt. This requires us to modify some of our 2010 Credit Agreement covenants. On March 4, 2011, we reached an agreement with our lenders to amend our 2010 Credit Agreement which will allow us to sell equipment, real estate and business units; and in most cases, proceeds from these divestitures would be required to pay down the Term Loan. We are also continuing to evaluate under-utilized and non-strategic assets with the aim of monetizing assets to pay down debt. In 2010, we sold under-utilized equipment with a net book value of $12,226, and to date in 2011, we have identified additional properties and equipment with a net book value of $18,867. As part of this debt reduction process, we have a study underway to assist us in determining the strategic fit and potential future contributions of various business units. The outcome of this study is expected to yield targets for divestment, which will contribute to our overall debt reduction objective.
We are focused on executing our 2011 plan, while concurrently identifying opportunities to reduce operating costs and create efficiencies that will enhance our competitiveness and improve our bottom line. Our overhead and indirect costs are too high to sustain our desired financial performance level in a weak market. Accordingly, we are in the process of identifying additional cost reduction opportunities. We continue to audit our costs in all our segments, and we are encouraged that the new cost structure in our Downstream Oil & Gas has aided its return to profitability.
During 2011, we expect to see continued improvement from each of our businesses.
Our Strategy
As expanded upon in detail in Items 1 and 2 - “Business and Properties” of this Form 10-K, our vision is to be a leading provider to the global infrastructure and government services markets of diversified professional construction and maintenance solutions addressing the entire asset lifecycle. Adherence to our values of safety, honesty and integrity, our people, our customers, superior financial performance, vision and innovation and effective communication will guide us in the execution of our strategy which consists of the following:
•
Stabilizing our revenue stream with recurring services;
•
Focusing on managing risk;
•
Leveraging our industry position and reputation into a broader service offering;
•
Maintaining financial flexibility; and
•
Leveraging our core service expertise into additional full EPC contracts.
Successfully executing our strategy will ensure that we are not only well positioned to address the challenges of 2011, but also are positioned for success and to drive shareholder value for years to come.
Significant Developments
Fayetteville Express Project (“FEP”). On April 1, 2010, we commenced work on the construction contract for spreads three and four of the FEP project. The approximately 185-mile natural gas pipeline originates in Conway County, Arkansas, continues eastward through White County, Arkansas, and terminates at an interconnection with Trunkline Gas Company in Panola County, Mississippi. FEP parallels existing utility corridors, where possible, to minimize the impact to the environment, communities and landowners. FEP is a joint venture between Energy Transfer Partners, L.P. and Kinder Morgan Energy Partners, L.P. Our scope of work included 120 miles of 42-inch pipeline, beginning near Bald Knob, Arkansas and ending at the Trunkline interconnection. This project concluded in the fourth quarter of 2010.
Williams Energy Canada Boreal Pipeline. In June 2010, our Canadian business was awarded construction of the Williams Energy Canada Boreal Pipeline. The new 12-inch diameter pipeline will transport high vapor pressure liquids approximately 420 km from Williams’ Liquid Extraction Plant north of Fort McMurray to their Redwater Olefins Facility northeast of Edmonton, Alberta. Construction will be completed in three construction seasons commencing in the fall of 2010 with final completion in the spring of 2012. This project commenced in the third quarter of 2010.
InfrastruX Acquisition. On July 1, 2010, we completed the acquisition of 100 percent of the outstanding stock of InfrastruX for a purchase price of approximately $486,000, before final working capital and other transaction adjustments. This acquisition significantly diversifies our capabilities and end markets. In addition to providing meaningful access to the attractive electric transmission and distribution market, the acquisition also expands the breadth of our natural gas capabilities and better positions us in targeted markets such as the Marcellus shale play. InfrastruX and its results of operations in the electric transmission and distribution end markets are included in a newly established segment, Utility T&D. Any goodwill recognized through this transaction will be allocated to this segment, which will also be the reporting unit. Goodwill associated with this transaction is not expected to be deductible for tax purposes.
The acquisition of InfrastruX diversifies our end-market exposure while expanding our capabilities into attractive geographies, including the Marcellus shale region where we are already expanding our presence and are providing services to a major alliance partner, and more liquids oriented plays such as the Eagle Ford and Bakken shales. The combination creates a higher component of recurring services and is expected to provide additional stability, through the many master service agreements (“MSA”) InfrastruX has in place, with longstanding client relationships, some as long as 50 years. In addition, we believe this acquisition will allow us to offer the complementary pipeline services of a larger InfrastruX subsidiary that is focused on smaller diameter, distribution and pipe-related field services. We believe the market for pipeline systems construction services will be characterized by more projects of smaller scope and scale, and that the combination of our large diameter pipeline construction, project management and engineering expertise with the InfrastruX model will better meet client needs and expectations going forward. We also recognize market fundamentals which lead us to believe the national transmission grid in the United States will undergo significant expansion to meet reliability goals and link new, renewable generation with distant end markets. Our new Utility T&D segment should benefit from our established and proven project management systems as we apply them to major electric transmission line construction opportunities.
Finally, this transaction significantly adds to our scale. We believe customers today are favoring players with the capabilities to provide a broader and more integrated set of services. With the larger geographic footprint, complementary service offerings and client bases, the InfrastruX acquisition broadens our prospects with additional cross-selling and integrated EPC opportunities.
Pembina Pump Stations. In August 2010, Pembina Pipeline Corporation awarded our Canadian business a project for the construction of six pump stations for the Nipisi Heavy Crude Pipeline Project. The scope of work includes site grading at select sites, piling, pipe rack, process pipe, installation of process pumps, underground drain tanks, concrete work and site fencing. The project began in August 2010 and is scheduled for completion in the first quarter of 2011.
NAVFAC Task Orders. In August 2010, the Naval Facilities Engineering Command (NAVFAC) awarded our government services business five separate task orders under its global $350 million multiple-award indefinite delivery-indefinite quantity (IDIQ) construction and construction services contract for Petroleum, Oil and Lubricant (POL) fuel systems. The task orders include various inspections, construction and repair at Eielson Air Force Base, AK; Misawa Air Force Base, Japan; Naval Air Station Oceana, Virginia Beach, VA; Naval Support Activity, Panama City, FL; and Naval Air Weapons Station, China Lake, CA. The work began in August and is scheduled for completion in early 2011.
Nipisi Pipeline Project. In September 2010, our Canadian business executed a contract to perform construction of “Spread C” for Pembina Pipeline Corporation’s Nipisi & Mitsue Pipeline Projects. We will construct approximately 90 km of dual 20 inch and 8 inch pipeline near Slave Lake, Alberta. Construction began in November and the pipeline is expected to be in service in mid-2011. The two pipelines will expand Pembina’s operating system in the vicinity of Whitecourt, Swan Hills, Slave Lake and north to the existing Nipisi Terminal.
Oxy Elk Hills. In September 2010, CB&I selected our Upstream Oil & Gas segment to provide EPC of 45 miles of export pipelines associated with a new gas processing plant to be owned and operated by Occidental of Elk Hills, Inc. CB&I has been awarded the engineering, procurement and construction of the new processing plant at the Elk Hills oil and gas field in central California. Our portion of the total project is valued in excess of $40 million.
McKee Flare Gas Recovery. Diamond Shamrock Refining Company selected our Downstream Oil & Gas segment to provide EPC of the new Flare Gas Recovery Facilities at the Valero McKee Refinery located in Sunray, Texas. The project is valued at approximately $14 million.
Defense Logistics. In September 2010, our government services business, was awarded a contract for approximately $28 million by the Defense Logistics Agency-Energy (DLA-Energy) to design, build, own, and operate six automated fuel dispensing facilities at Camp Pendleton, California. The five-year contract includes options for three additional five-year periods. The facility will provide petroleum products and services for government operations.
BP Solar Project. In November 2010, BP Solar International awarded the Hawkeye unit of our Utility T&D segment a contract to construct an approximately 37 MW (direct current) solar photovoltaic project to be located in the Town of Brookhaven on Long Island, New York. The project commenced construction in November 2010 and is expected to be complete during the second half of 2011.
Central Maine Power. In December 2010, Central Maine Power Company awarded our Utility T&D business unit Hawkeye, LLC a contract to construct two regions of the Maine Power Reliability Program, comprising a total of approximately 60 miles of new single circuit 345 kV transmission lines and the rebuild of certain existing transmission lines in southern Maine. The work is expected to commence in spring 2011 and to be complete in early 2014.
Bangor Hydro Project. In December 2010, Bangor Hydro Electric Company awarded the Hawkeye unit of our Utility T&D segment a contract to rebuild Bangor Hydro’s existing 115kV Line 64 transmission line, which originates in Bangor, Maine and extends north to Chester, Maine, for a total of approximately 44 miles (“Line 64 Project”). The Line 64 Project is comprised of two segments: the Northern Segment, which extends from the Enfield Substation to the Keene Road Substation, for a distance of approximately 12 miles; and the Southern Segment, which extends from the Enfield Substation to the Gorham Substation, for a distance of approximately 32 miles. The work commenced in December 2010 and is expected to be complete in December 2011.
Haynesville Extension, Acadian Pipeline. In January 2011, Enterprise Products Partners awarded our U.S. Construction Segment 1 of the Haynesville Extension Project which includes approximately 106 miles of 42-inch pipeline. Segment 1 originates in the northwest portion of Red River Parish, LA and terminates near Boyce, LA. The work began in February 2011 and is expected to be complete in August 2011.
Financial Summary
During 2010, we generated revenue from continuing operations of $1,192,412 and an operating loss of $44,616, resulting in a net loss of $31,764, or $0.74 per diluted share. There are two large non-cash transactions reflected in these results. In the third quarter, operating income was improved by $45,340 ($45,340 after tax) as a result of reducing our 2011 contingent earnout liability related to the March 11, 2010 agreement to purchase InfrastruX. Also in the third quarter, an initial $12,000 ($7,200 after tax) estimate was recorded as a minimum Downstream Oil & Gas segment goodwill impairment. The fourth quarter annual impairment testing resulted in a final $60,000 ($36,000 after tax) goodwill impairment; the additional $48,000 ($28,800 after tax) was charged to operating income in the fourth quarter. Excluding the impact of the contingent earnout adjustment and the goodwill impairment (collectively referred to as “Special Items”), the fourth quarter and full year results were as follows:
(1)
Operating income (loss) before Special Items, Net income (loss) from continuing operations before Special Items and Diluted income (loss) per share from continuing operations before Special Items, non-GAAP financial measures, exclude items that management believes affect the comparison of results for the periods discussed below. Management also believes results excluding these items are more comparable to estimates provided by securities analysts and therefore are useful in evaluating operational trends of the Company and its performance relative to other engineering and construction companies. There were no Special Items during 2009.
Full Year 2010 Results
During 2010, revenue decreased $67,361 (5.3 percent) to $1,192,412 from $1,259,773 in 2009. This decrease is primarily due to a reduction of large diameter pipeline projects in our Upstream Oil & Gas segment, exacerbated by delays in execution schedules on pipeline and facilities work in our Canadian business, offset by $317,512 contributed by our newly acquired Utility T&D segment.
Operating income, excluding Special Items, decreased $79,902 (197.3 percent) to an operating loss of $39,406 from operating income of $40,496 in 2009, and operating margin decreased 6.5 percentage points to a negative 3.3 percent in 2010 from an operating margin of 3.2 percent in 2009. The legacy segments, Upstream Oil & Gas and Downstream Oil & Gas, both experienced substantial year-over-year reductions to their operating results. Upstream Oil & Gas decreased $28,283 or 70.7 percent to $11,714 and Downstream Oil & Gas decreased $15,714 to a loss of $15,215 as compared to operating income of $499 in 2009. These unfavorable variances reflect a full year of a very difficult economic cycle for the engineering and construction industry as compared to only a partial year in 2009, compounded by significant project losses in our Upstream Oil & Gas Canadian business previously discussed. Work carried forward from 2008 buffered the reduction to operating income in the first half of 2009. Almost two thirds of 2009’s revenue of $1,259,773 occurred in the first six months of the year.
Also contributing to the successive year operating loss was $26,455 in operating loss contributed by Utility T&D, representing six months of results for our new segment acquired July 1, 2010. The loss is attributable to a combination of a weak electric distribution business and large electric construction projects being delayed from 2010 into 2011. In addition, during 2010, we incurred acquisitions costs of $10,055, an increase of $7,556 from 2009, primarily from the pursuit and acquisition of InfrastruX.
Interest, net expense increased $19,237 (231.0 percent) to $27,565 from $8,328 in 2009. The increase in net expense is a direct result of the $300,000 Term Loan used to acquire InfrastruX on July 1, 2010.
Other, net income increased $4,655 (568.4 percent) to $5,474 from $819 in 2009. This change was primarily driven by approximately $3,300 in gains recognized on the sale of assets and $2,200 in certain goods and services tax (“GST”) refunds obtained in our Canadian business. We had $1,539 in gains on asset sales recognized, offset by $720 in other net expense during 2009.
The provision for income taxes for 2010 decreased $44,884 to a tax benefit of $36,150 on losses from continuing operations before income taxes of $66,707, as compared to a provision for income taxes of $8,734 on income from continuing operations before income taxes of $32,987 in 2009. The decrease in the provision for income taxes is primarily due to the decrease in operating income recognized during 2010 and no tax expense recognized in connection with the release of $45,340 of the contingent earnout liability associated with the acquisition of InfrastruX.
Refer to the “Results of Operations” section for further discussion and detail of the operating results for each of our segments.
Fourth Quarter 2010 Results
In the fourth quarter of 2010, we incurred a net loss of $66,302 or $1.41 per basic and diluted share from continuing operations revenue of $398,496 as compared to net income of $36,698 from continuing operations revenue of $408,792 for the third quarter of 2010. Excluding the fourth quarter Special Item of $48,000, or $28,800 after-tax, the fourth quarter loss is reduced to $37,502. See the table above for a reconciliation of operating income and net income excluding Special Items.
The fourth quarter of 2010’s sequential quarter revenue was fairly consistent with the previous quarter. The revenue decrease of $10,296 (2.5 percent) is primarily attributable to the mechanical completion of a large U.S. pipeline project during the third quarter and the lack of U.S. pipeline and power construction activity during the fourth quarter as this work returns to a more seasonal pattern of execution concentrated from early spring to late fall (drier months). These factors were offset by the commencement of two large pipeline projects and one facilities project during the fourth quarter of 2010 in our Canadian business, which had minimal project revenue in the third quarter of 2010 and follows a seasonal pattern from late fall to early spring.
The corresponding sequential quarter decrease in operating income was $132,814 (292.5 percent). The fourth quarter of 2010 had an operating loss of $87,406 versus operating income of $45,408 in the third quarter of 2010. Excluding the Special Items, the sequential quarter decrease is $51,474 and is primarily the result of limited work by the higher margin U.S. Pipeline operations. Although the U.S. Pipeline revenue loss was partially made up by Canada pipeline and facilities projects, the recognized Canada margins were minimal. Two Canada projects reverted to loss projects in the fourth quarter because of schedule and adverse weather delays. The operating margins, excluding Special Items, for the fourth quarter and third quarter of 2010 were negative 6.8 percent and positive 3.0 percent, respectively.
Other Financial Measures
Backlog
In our industry, backlog is considered an indicator of potential future performance as it represents a portion of the future revenue stream. Our strategy is focused on capturing quality backlog with margins commensurate with the risks associated with a given project, and for the past several years we have put processes and procedures in place to identify contractual and execution risks in new work opportunities and believe we have instilled in the organization the discipline to price, accept and book only work which meets stringent criteria for commercial success and profitability.
We believe the backlog figures are firm, subject only to the cancellation and modification provisions contained in various contracts. Additionally, due to the short duration of many jobs, revenue associated with jobs performed within a reporting period will not be reflected in quarterly backlog reports. We generate revenue from numerous sources, including contracts of long or short duration entered into during a year as well as from various contractual processes, including change orders, extra work and variations in the scope of work. These revenue sources are not added to backlog until realization is assured.
Backlog broadly consists of anticipated revenue from the uncompleted portions of existing contracts and contracts whose award is reasonably assured. Historically, our backlog has only included estimated work under MSAs for a period of 12 months or the remaining term of the contract, whichever is less. However, with the July 2010 acquisition of InfrastruX, we gained a significant alliance agreement with Oncor and other customers with work defined by MSAs. Under the Oncor MSA, we are the preferred contractor for the construction of Oncor’s portion of the Competitive Renewable Energy Zone (“CREZ”) work that is scheduled to be completed in 2013. We expect this assignment to generate over $500 million in construction revenue for our Utility T&D segment over the next three years. With this as the primary catalyst, we have updated our backlog presentation to reflect not only the 12 month MSA work estimate, but also the full-term value of the contract as we believe that this information is helpful in providing additional long-term visibility. We determine the amount of backlog for work under ongoing MSA maintenance and construction contracts by using recurring historical trends inherent in the MSAs, factoring in seasonal demand and projecting customer needs based upon ongoing communications with the customer. We also include in backlog our share of work to be performed under contracts signed by joint ventures in which we have an ownership interest.
At December 31, 2010, 12 month backlog from continuing operations increased $556,965 (143.0 percent) to $946,315 from $389,350 at December 31, 2009, driven primarily by an additional $527,912 of 12 month backlog contributed by the newly acquired Utility T&D segment. The Upstream Oil & Gas segment, with a 12 month backlog of $311,326, also contributed to the overall rise in backlog by increasing $68,132, or 28% from the 2009 12 month backlog level. These increases were offset by a decrease in the Downstream Oil & Gas segment 12 month backlog of $39,079 or 27%.
In our Upstream Oil & Gas segment, 12 month backlog increased $68,132 from 2009 driven primarily by our Canadian and engineering businesses, which experienced year over year increases of $199,545 and $48,299, respectively. This was offset, however, by a decrease of $179,712 in all other business units primarily due to the completion of our largest 2010 pipeline construction project, FEP, not replaced with equivalently sized work in the latter part of 2010. Our pipeline construction services contracting has experienced a return to a historical North America contracting model that is characterized by competitive fixed price bids and short time periods from project bid to execution, except for large EPC contracts that can span more than one year. With the return to historical contracting patterns, we expect to experience lower backlog numbers partially as a result of eliminating the much longer lead times between the award of and the execution of projects.
The Downstream Oil & Gas segment continued to experience a slower than expected return to business levels realized in 2008. During 2010, turnaround work continued to be completed faster than new work was added.
In our Utility T&D segment, six customer relationships are expected to contribute $209,400 in revenue during 2011. As previously discussed, a significant portion of the Utility T&D backlog is associated with recurring services on MSA contracts that extend beyond 2011.
When factoring in the backlog beyond the current 12 months, an additional $1,229,712 in revenue is anticipated. MSA agreements account for $1,178,191 of this amount. The remaining $51,521 is attributable to current lump sum projects in the Upstream Oil & Gas and Utility T&D segments. The Utility T&D segment currently accounts for $854,367 of the reported MSA backlog beyond 12 months and is derived from agreements extending until July of 2017. The remaining $323,824 is associated with Upstream Oil & Gas segment MSA work and is primarily comprised of work from a single Canada MSA extending through 2017 and valued at $303,000.
Backlog for discontinued operations was $0 at December 31, 2010 and $2,392 at December 31, 2009.
The following table shows our backlog by operating segment as of December 31, 2010 and 2009:
EBITDA and Adjusted EBITDA from Continuing Operations
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 from continuing operations for 2010 decreased $4,542 (5.6 percent) to $75,816 from $80,358 in 2009. The decrease in EBITDA during 2010 is primarily a result of the $45,340 change in fair value of the contingent earnout liability recognized in the third quarter of 2010 and an overall decrease in restructuring costs of $8,923, offset by decreased contract income of $23,110 (excluding depreciation) and an increase in G&A of $35,646 (excluding depreciation).
In addition to EBITDA, management uses Adjusted EBITDA for:
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Comparing normalized operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
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Presentations made to analysts, investment banks and other members of the financial community who use this information in order to make investment decisions about us.
Adjustments to EBITDA broadly consist of items which management does not consider representative of the ongoing operations of the Company. These generally include costs or benefits that are unusual, non-cash or one-time in nature. These adjustments are included in various performance metrics under our credit facilities and other financing arrangements. The EBITDA adjustments to determine Adjusted EBITDA are itemized in the following table. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. generally accepted accounting principles, or U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, net income, operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Because all companies do not use identical calculations, our presentation of EBITDA and Adjusted EBITDA may be different from similarly titled measures of other companies.
A reconciliation of EBITDA and Adjusted EBITDA from continuing operations to U.S. GAAP financial information follows:
Discontinued Operations
For the year ended December 31, 2010, loss from discontinued operations was $5,272 or $0.12 per share. This compares to a loss from discontinued operations of $4,613 or $0.12 per share for the year ended December 31, 2009. The 2010 loss from discontinued operations is primarily due to the classification of our Libyan operations as discontinued operations as of December 31, 2010. Our investment in establishing a presence in Libya, while resulting in contract awards, has not yielded any notice to proceed on subject awards, and we have, therefore, exited this market due to the delays and identification of other more attractive opportunities.
Transition Services Agreement (“TSA”)
The TSA expired on February 7, 2009, which ended our obligation to provide any further support or other services to Ascot in West Africa or otherwise. Although the Transition Services Agreement expired, we continue to incur legal fees related to the West African Gas Pipeline Company Limited (‘WAPCo”) parent company guarantee assertions as further discussed in Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement. These legal fees are expected to escalate and continue over the next several years. At this time, we are unable to estimate the likely total legal costs.
Parent Company Guarantees
Although the Nigeria letters of credit and the TSA have expired, we continue to have potential financial exposure from parent company performance guarantees related to several projects in Nigeria that were contracted by our subsidiary, Willbros West Africa, Inc. (“WWAI”), at the time of our February 7, 2007 sale of WWAI to Ascot. On February 15, 2010, we received a letter from attorneys representing WAPCo advising us that we were liable for approximately $265,000 of damages allegedly incurred by WAPCo to complete the remaining portion of the scope of work (a portion of the West Africa Gas Pipeline project or “WAGP”) originally contracted by WWAI. After WWAI was sold to Ascot, on February 27, 2008, WAPCo provided WWAI with notice of termination of the WAGP contract. We intend to contest this claim for damages vigorously. At this time, no estimate can be made on the likely outcome of what is expected to be a prolonged period of litigation.
Additional financial disclosures and information on discontinued operations and the February 15, 2010 WAPCo letter are provided in Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement included in Item 8 and in Item 1A - Risk Factors of this Form 10-K.
RESULTS OF OPERATIONS
Our contract revenue and contract costs are significantly impacted by the capital budgets of our clients and the timing and location of development projects in the oil and gas, refinery, petrochemical and power industries worldwide. Contract revenue and cost vary by country from year-to-year as the result of: entering and exiting work countries; the execution of new contract awards; the completion of contracts; and the overall level of demand for our services.
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.
Fiscal Year Ended December 31, 2010 Compared to Fiscal Year Ended December 31, 2009
Contract Revenue
Contract revenue decreased $67,361 (5.3 percent) to $1,192,412 from $1,259,773. A year-to-year comparison of revenue is as follows:
Upstream Oil & Gas revenue decreased $408,727 (41.6 percent) to $573,796 from $982,523 in 2009. We believe the decrease in revenue was the result of our customers’ reduction in capital and maintenance spending in 2010 as a continued reaction to the overall global economic recession. This was evidenced by an overall decrease in large diameter pipeline projects available for bid. Further, projects that were initially being bid for 2010 completion were postponed or cancelled. As a result of these conditions, the segment began to pursue midstream pipeline projects which opened a new market in one of the major regional shale plays. This market generated $41,518 in revenue for
us in 2010. The engineering business also contributed higher than expected revenues of $66,206 as a result of developing alliances. Overall, our North American Upstream Oil & Gas business units experienced revenue decreases from 9.4 percent to 56.7 percent. The sole business unit to grow revenue year-over-year was in Oman, where revenue grew 12.6 percent driven by maintenance services. The majority of our 2010 revenue (57.5 percent) was awarded and executed in 2010, with the largest exception being the FEP project that was awarded for approximately $195,000 in 2009 and executed in 2010. This marks a return to the business environment where we expect short lead-times between award and execution for our construction projects in the United States.
Our U.S. business units’ revenues decreased $341,009 (51.4 percent) to $321,791 from $662,800 in 2009. This was primarily due to reduced utilization of large-diameter cross-country pipeline construction assets of $264,927 and a reduction of pipeline facility construction work of $98,711. We believe the reduction of pipeline construction revenue was directly linked to the reduced capital budgets approved and executed by our core customer base in 2010. We believe the reduction of facility construction revenue was also impacted by significantly reduced capital budgets for our core customers. These decreases were partially offset by increased revenue from our regional pipeline construction activity of $41,518 and increased revenue from our engineering services of $4,321. We believe the increased demand for our engineering services, while modest at 10.1 percent, demonstrates a turning point in the market for front-end design work for gas and liquid transportation systems which is the precursor to construction of these systems.
Our Canada business unit revenue decreased $75,935 (29.9 percent) to $178,418 from $254,353 in 2009. The decrease was primarily due to reduced capital budgets of the oil-sand producers and pipeline companies, driven by uncertain crude pricing. Revenue from our pipeline construction group decreased $35,355, revenue from our field services group declined $22,698, and revenue from our facility construction group declined $18,277. Our Oman business unit revenue increased $8,221 (12.6 percent) to $73,589 from $65,368 in 2009. This increase was largely attributable to increased work order activity from our largest customers for which we provide both capital construction and maintenance services.
Downstream Oil & Gas revenue increased primarily as a result of increased maintenance and turnaround activity and development of downstream services in Canada. We experienced revenue increases of 17.5 percent to 78.8 percent in several of our business units and revenue decreases from 35.5 percent to 75.2 percent in our other business units. Revenue increased quarter-over-quarter throughout 2010 as we worked off existing backlog from 2009 and filled in the year with new contract awards.
Our Construction Services business unit revenue decreased $25,193 (75.2 percent) to $8,290 from $33,484 in 2009. While this business unit has maintained a consistent level of consulting services for our customers’ long-term capital expansion projects, our involvement in the physical construction of these projects has decreased from six projects in 2009 to one project in 2010. Our consulting services arrangements were largely negotiated in prior years for projects that are still ongoing. New capital project activity and construction opportunities relating to our consulting services have decreased since the latter part of 2008.
Our Manufacturing Services business unit revenue decreased $13,478 (35.5 percent) to $24,514 from $37,992 in 2009, primarily due to a 62.0 percent decrease in revenue from fabrication of process heaters. As capital spending by our customers decreased throughout 2009, we worked off existing backlog but were unable to replace that work in 2010. As our customers’ capital budgets increase, we fully expect that the demand for process heaters will increase. Partially offsetting the revenue decline from fabrication of process heaters was a 221.4 percent increase in revenue from fabrication of replacement transfer lines, which represents maintenance expenditures for our customers.
Our Tank Services business unit revenue increased $16,322 (64.5 percent) to $41,620 from $25,298 in 2009. Our 2009 and 2010 investments in expanding tank services into Canada resulted in our first contract award in 2010. We realized revenue of $15,355 from this contract in 2010 and are actively pursuing additional contract awards in Canada. Services provided in the U.S. consisted of less new tank construction than in previous years as a result of decreased capital spending by our customers in 2009 and early 2010. We were able to win additional tank inspection and repair work in 2010 to offset the decrease in new tank construction awards. Proposal requests from our customers for new tank construction projects increased during the latter half of 2010, resulting in several multiple-tank construction contract awards that began in late 2010.
Our Maintenance and Turnaround business unit revenue increased $25,804 (17.5 percent) to $172,980 from $147,176 in 2009. We benefited in 2010 from our position as a contractor of choice for our customers’ maintenance and turnaround needs, the impact of delayed maintenance activities in 2009, and our investments in equipment to provide exchanger tube bundle extraction services.
Our Engineering business unit revenue increased $17,634 (59.2 percent) to $47,428 from $29,794 in 2009. We experienced a $19,958 increase in revenue resulting from a full year of activity for Downstream Engineering, acquired in July 2009. Engineering revenue declined during the latter half of 2010 as several significant contracts were completed. Bid activity on new capital work remains high. However, we continue to experience customer-imposed delays on awarded contracts. The decline in engineering revenue during the latter half of 2010 was partially offset by the award of an EPC contract from an existing customer in Texas. This project began late in the third quarter of 2010. We continue to market our EPC service offering to new and existing customers.
Our Government Services business unit revenue increased $2,765 (78.8 percent) to $6,272 from $3,507 in 2009. This resulted primarily from the reclassification of Government Services from the Upstream Oil & Gas segment to the Downstream Oil & Gas segment in July 2009. We were successful in winning nine task orders from the U.S. Navy under the Engineering Service Center’s IDIQ contract, six of which commenced during the second half of 2010 and will continue into 2011. We continue to bid on task orders under this contract as they are released.
Utility T&D, a new segment, resulting from the acquisition of InfrastruX, contributed revenue of $317,512 as a result of revenues derived from a broad range of transmission and distribution construction and maintenance services from July 1, 2010 through December 31, 2010. This segment includes the business units of Hawkeye, Chapman Construction, and Willbros T&D, which accounted for $75,778, $57,143 and $40,873, respectively, or 54.7% of the segment’s total revenue. Hawkeye’s contract revenue is driven primarily by MSA contracts related to overhead and underground transmission, distribution and telecommunication systems. The business generated revenue of $61,880 for the six months ended December 31, 2010 as a direct result of established MSAs. These agreements vary in length from one month to three years. Chapman generated $44,948 or 78.6% of the business units’ revenue through an alliance agreement with Oncor providing turnkey transmission and substation construction and maintenance solutions. Willbros T&D produced $28,289 or 72.1% of that business unit’s revenue through an alliance agreement with Oncor to provide overhead and underground utility construction services.
Operating Income
Operating income decreased $130,452 (322.1 percent) to a loss of $89,956 from income of $40,496 in 2009. A year-to-year comparison of operating income is as follows:
(1)
This table does not reflect change in fair value of contingent earnout consideration of $45,340 in 2010 which is included in operating results. The change in fair value of contingent earnout consideration was characterized as a corporate change in estimate and is not allocated to the reporting segments.
Upstream Oil & Gas operating income decreased $28,283 (70.7 percent) to $11,714 from $39,997 in 2009. The decrease was caused by reduced revenue across the segment, as noted above. Our operating margin was consistent year-over-year primarily due to improved project margins in the United States partially offset by reduced margins in Canada as well as increased general and administrative (“G&A”) expense as a percent of revenue, across the segment. The increased G&A was primarily attributed to increased proposal activity as well as growth initiatives expanding our regional service delivery capabilities.
Operating income for our United States business units decreased $468 (1.8 percent) to $25,741 from $26,209 in 2009. Our operating income remained constant in-spite of significant revenue declines of 51.4% for these businesses. Our construction business suffered the most from revenue decline, but our focus on execution of the available work allowed us to improve our contract margins and still deliver strong operating income at a significantly smaller volume. This continued profitability came as we saw the market shift back fully to lump-sum contracting terms, marking the end of the cost-reimbursable work that we completed in 2009 for large diameter cross-country pipeline construction. Our engineering business experienced a much more modest revenue decline, but had a significant improvement in profitability. In 2009, our engineering business had significant operating losses, which were reversed in 2010 to significant operating income due to stronger market demand for our services and active cost management.
Operating income for our Canada business unit decreased $29,826 (371.4 percent) to a loss of $21,796 from income of $8,030 in 2009. This decrease was primarily caused by loss projects in our pipeline and facility construction groups, compounded by the reduction of recurring oil-sands maintenance contracts in northern Alberta. The four lump-sum projects that were in a loss position as of year-end accounted for approximately $19,000 of contract losses. In 2010, we were awarded a multiple year extension for our maintenance work for Syncrude in Canada. Operating income for our Oman business unit increased $749 (7.7 percent) to $10,509 from $9,760 in 2009. The increase in operating income is primarily attributable to a revenue increase which we feel is driven by our long-term recurring service contracts with key customers in Oman. These recurring services helped to insulate this business unit from the constraints of capital spending that we experienced in other parts of our business in 2010. Operating losses for our other international business units decreased $550 (18.0 percent) to a loss of $2,502 from a loss of $3,052 in 2009. These costs are primarily related to international new business development and pursuing new opportunities, as well as the proposal costs associated with submitting multiple qualified international bids in places like Libya and Australia in 2010.
Downstream Oil & Gas operating income decreased primarily as a result of the $60,000 goodwill impairment charge taken in the third and fourth quarters of 2010 and the previously discussed decreases in revenue from our Manufacturing Services and Construction Services business units, as well as operating losses contributed by our Engineering business unit ($6,148) and Tank Services business unit ($4,537). Our Maintenance and Turnaround business unit contributed an operating loss for the year that was driven largely by a loss on a fixed price contract early in the year.
Contract margins declined in each business unit during 2010. These declines were caused by continued pricing pressure from our customers and a more competitive bidding environment. As a result, our fixed price bids and our rates on cost reimbursable projects subsequently awarded and performed during 2010 reflected lower margins. These lower bid margins, combined with losses experienced on several contracts, resulted in contract margin decreases of 12.8 percent in Tank Services, 13.4 percent in Manufacturing Services, and 2.9 percent in Maintenance and Turnaround Services. Contract margins for the Downstream Oil & Gas segment decreased 5.9 percent, driven primarily by these three business units.
As part of our continuing effort to decrease costs in this segment and remain competitive in our market, we successfully reduced indirect contract costs and G&A costs by $12,750 and $7,095, respectively, compared to 2009. Included in operating costs is $536 in costs associated with headcount reductions.
The Utility T&D segment generated an operating loss of $26,455. The segment incurred costs totaling $26,309 of which non-recurring acquisition costs of $9,814, and restructuring fees of $2,638 associated with the Seattle office closure were recorded for the six months ended December 31, 2010. Other significant costs charged to the segment were labor of $2,889 and depreciation of $1,267.
The Willbros T&D business experienced an operating loss of $3,597 as a result of lower volumes and a shift in the mix in transmission construction revenues associated with the Oncor work in Texas, resulting in a heavier mix of lower margin work. In addition, these lower volumes and delays created an underutilization of equipment. For the six months ended December 31, 2010, Willbros T&D incurred equipment rental expense of $2,994 and depreciation expense of $2,144 associated with an underutilized fleet.
Hawkeye reported an operating loss of $3,280 primarily due to the project delays experienced in the Northeast (both of which are currently underway); and in general a weaker market for electric and gas distribution work. In addition, depreciation costs on an underutilized fleet were $3,310.
Partially offsetting the operating losses were UtilX with operating income of $5,379 and Chapman with operating income of $3,661. Utilx’s international operations performed well due to Cablewise® projects in Europe and increased royalty revenue. Chapman provided operating income despite a shift in the mix of transmission construction revenue associated with the CREZ build out.
Non-Operating Items
Interest, net expense increased $19,237 (231.0 percent) to $27,565 from $8,328 in 2009. The increase in net expense is primarily a result of increased interest expense of $16,106 related to the new Term Loan, debt issuance cost amortization of $1,994 related to the 2010 Credit Agreement and a reduction in interest income of $1,211 due to lower levels of and rates of return on invested cash.
Other, net income increased $4,655 (568.4 percent) to a net income of $5,474 from net income of $819 in 2009. The increase in income is attributed to increased gains on the sale of assets of $1,748 in 2010 as compared to 2009, a reduction in expense of $1,210 related to asset write-downs taken in 2009, $879 in income recorded in the second quarter of 2010 as a result of a refund of GST based on certain deductions made in 2010, and a reduction in foreign exchange losses of $235 on U.S. dollar to Canadian dollar transactions.
Provision for income taxes decreased $44,884 (513.9 percent) to a benefit of $36,150 from a provision of $8,734 in 2009. During 2010, we recognized a tax benefit of $36,150 on a loss from continuing operations before income taxes of $66,707 as compared to income tax expense of $8,734 on income from continuing operations before income taxes of $32,987 in 2009. The decrease in the provision for income taxes is due to the decrease in operating income recognized during 2010 and no tax expense incurred in connection with the release of the contingent earnout liability in the amount of $45,340 associated with the acquisition of InfrastruX.
Income (Loss) from Discontinued Operations, Net of Taxes
Income (loss) from discontinued operations, net of taxes increased $659 (14.3 percent) to a loss of $5,272 from a loss of $4,613 in 2009. As of December 31, 2010, we classified our Libyan operations as discontinued operations for all periods presented. Our investment in establishing a presence in Libya, while resulting in contract awards, has not yielded any notice to proceed on subject awards, and we have therefore exited this market due to the delays and identification of other more attractive opportunities. Our loss from discontinued operations related to Libya was $3,179 for the year ended December 31, 2010 and $3,116 for the year ended December 31, 2009. The loss during the twelve months ended December 31, 2010 is also related to the legal fees incurred in connection with the previously discussed WAPCo parent company guarantee assertions. The legal fees are expected to escalate and continue over the next several years. At this time, we are unable to estimate the likely total legal fees. The change is also related to a $1,750 charge taken during the second quarter of 2009 to write-off the net book value of the note related to the Venezuela sale, as management determined it unlikely to collect due to the nationalization of various oil contractors within the country.
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Contract Revenue
Contract revenue decreased $652,931 (34.1 percent) to $1,259,773 from $1,912,704 primarily due to decreased Upstream Oil & Gas revenue, although Downstream Oil & Gas did incur a significant percentage decrease in revenue. A year-to-year comparison of revenue is as follows:
Upstream Oil & Gas revenue decreased $563,106 (36.4 percent) to $982,523 from $1,545,629 in 2008. We believe the decrease in revenue was the result of our customers’ reduction in capital and maintenance spending in 2009 as a reaction to the overall global economic recession. At each of our Upstream Oil & Gas business units, we experienced revenue decreases from 23.0 percent to nearly 70.0 percent. The majority of our 2009 revenue (67.6 percent) was earned in the first six-months of 2009 as we worked off existing backlog from 2008.
Our U.S. Construction business unit revenue decreased $253,305 (30.0 percent) to $589,736 from $843,041 in 2008. This was primarily due to reduced utilization of large-diameter cross-country pipeline construction assets of $156,263 and a reduction of pipeline construction EPC work of $126,754. We believe both of these reductions were directly linked to the reduced capital budgets of our primary client base for this business. These decreases were partially offset by increased revenue from our facility construction group of $21,985 and increased revenue from our Manage & Maintain group of $6,825. The facility construction revenue was primarily attributable to one large project that included the construction of seven pump stations.
Our Canada business unit revenue decreased $133,143 (34.4 percent) to $254,355 from $387,498 in 2008. The decrease was primarily due to reduced capital budgets of the oil-sand producers and pipeline companies, driven by the decline in crude oil prices year-over-year and the production costs associated with the oil-sands. Revenue from our pipeline construction group decreased $109,602. Additionally, our long-term contracts for recurring maintenance at the oil-sand production facilities generated $24,782 less in revenue in 2009.
Our U.S. Engineering business unit revenue decreased $159,495 (68.6 percent) to $73,064 from $232,559 in 2008. Revenue from core engineering services declined $95,403, reflecting the significant drop-off in market demand for front-end design work for gas and liquid transportation systems. The EPC component of our offering, which declined $68,748, was affected by reduced capital expenditure budgets combined with owners increasing their risk tolerance associated with managing multiple aspects of these large projects.
Our Oman business unit revenue decreased $19,599 (23.1 percent) to $65,368 from $84,967 in 2008. This decrease was largely due to reduced work order activity of $21,124 from our primary client, to whom we provide both capital construction and maintenance services. This reduction was partially offset by an increase of $3,331 in our rig moving services.
Downstream Oil & Gas revenue decreased $89,825 (24.5 percent) to $277,250 from $367,075 in 2008, primarily as the result of declining construction revenue from capital projects. The decline in refining profit margins slowed the release of capital projects by our customers. As a result, while we continued to complete capital contracts awarded in 2008 and early 2009, we were not able to replace them to the same extent as in the prior year.
Construction services revenue decreased $72,616 (68.4 percent) to $33,484 primarily due to the completion of a major EPC project early in 2009, which was a significant source of construction services revenue in 2008. Tank construction revenue decreased $31,963 (55.8 percent) to $25,298. The slow release of capital projects has increased competition and impacted the volume of contract awards that we have been able to obtain in both of these business units in 2009.
The decline in profit margins in 2009 in the refining industry also resulted in the delay of several maintenance and turnaround projects from 2009 into 2010. This caused maintenance and turnaround revenue to decrease $6,695 (4.4 percent) to $147,176.
Downstream engineering revenue increased $21,856 (275.4 percent) to $29,794 primarily the result of our acquisition of Wink in July 2009.
Operating Income
Operating income decreased $31,310 (43.6 percent) to $40,496 from $71,806 in 2008. A year-to-year comparison of operating income is as follows:
Upstream Oil & Gas operating income decreased $70,888 (63.9 percent) to $39,997 from $110,885 in 2008. The decrease was caused by reduced revenue across the segment, as noted above, combined with increased margin pressure for most of our service offerings. With fewer prospects available in 2009, the competition for each project grew, forcing us to reduce margin expectations across the segment. Our contract margins for 2009 were lower than 2008 at three of our four primary business units, suffering declines from 2.6 percentage points to 13.0 percentage points. The only business unit that improved contract income, year-over-year, was our U.S. Construction group, which improved 0.9 percentage points. In 2009, we focused on reducing our overhead expenses to remain competitive in a market with fewer opportunities. These efforts resulted in a reduction of our total G&A costs of $14,527 in 2009. As a percent of segment revenue, G&A costs represented 7.0 percent, although this was an increase as compared to the equivalent 5.3 percent in 2008. G&A costs reductions lagged behind the 36.4 percent revenue decline in 2009.
Operating income for our U.S. Construction business unit decreased $11,419 (25.9 percent) to $32,702 from $44,121 in 2008. While operating income was down, operating margin was steady year-over-year, increasing 0.3 percentage point to 5.5 percent from 5.2 percent in 2008. In the face of increased competition and an overall weaker economy, this performance helped support the Upstream Oil & Gas segment. While this business unit was able to improve contract margin year-over-year, this improvement did not offset the impact to operating income associated with the revenue decline of 30.0 percent. Contract margin improvement was largely driven by two key factors, the completion of the Midcontinent Express Pipeline project, a large multi-spread cost reimbursable pipeline project, and the successful transition to and completion of TIPS, a lump-sum two-spread pipeline construction project. TIPS performance exceeded expectations and contributed to the slight year-over-year margin improvement. By comparison, our 2008 contract margin was largely attributable to two large multi-spread pipeline construction projects with cost reimbursable terms, Southeast Supply Header (“SESH”) and MEP. The cost reimbursable nature of these jobs ensured our profitability, but negatively impacted margin as the size of the projects increased revenue while our profit opportunity remained fixed. These projects were also offset by smaller lump-sum pipeline construction projects that did not perform to the as-bid expectations. We reduced our U.S. Construction G&A costs by $7,645 in 2009.
Operating income for our Canada business unit decreased $19,356 (74.4 percent) to $6,656 from $26,012 in 2008. This decrease was primarily caused by the reduction of revenue associated with our pipeline construction group in Canada. Pipeline construction revenue decreased 60.2 percent year-over-year. In 2008, our two largest pipeline construction projects generated $181,688 of revenue, compared to our two largest projects in 2009 which generated $71,204. This significant decrease was representative of the overall reduction of oil-sands related pipeline construction projects in Canada. Our maintenance and fabrication services were relatively constant year-over-year, providing some insulation from the cyclical pipeline construction market. We reduced our Canada G&A costs by $3,976 in 2009.
Operating income for our U.S. Engineering business unit decreased $31,803 (125.5 percent) to a loss of $6,470 from income of $25,333 in 2008. A continuing reduction of our work load resulted in reduced utilization of resources throughout the year, and in response we initiated several reductions of force to match the resource base to the available work. We began the year with approximately 450 engineering and support staff, and we ended the year with approximately 250. In addition to these reductions, we continued to evaluate and make corresponding reductions in other support. In 2009, we reduced our U.S. Engineering G&A costs by $4,199.
Operating income for our Oman business unit decreased $5,780 (37.2 percent) to $9,760 from $15,540 in 2008. The decrease in operating income is primarily attributable to reduced revenue in 2009 as noted previously. Our contract margins decreased 3.3 percent year-over-year, negatively impacting operating income. These reductions were the result of fewer work-orders and qualified prospects compounded by a more competitive bidding environment. These decreases were partially offset by a reduction of overall business unit G&A costs of $4,287.
Operating income for our other international business units decreased $1,494 (94.7 percent) to a loss of $3,072 from a loss of $1,578 in 2008. These costs are primarily related to international new business development and pursuing new opportunities, as well as the proposal costs associated with submitting multiple qualified bids.
Downstream Oil & Gas operating income increased $39,578 (101.3 percent) to $499 from a loss of $39,079 in 2008, primarily from the $62,295 impairment charge taken in 2008. This increase is partially offset by an operating income decrease of $22,717 caused primarily by the previously discussed revenue variances, as well as declining margins across most business units.
Construction services operating income decreased $2,907 (78.8 percent) to $782 primarily as a result of the slow release of capital work. Tank services operating income decreased $7,606 (95.0 percent) to $403 due to the slow release of capital work and fewer fixed price contract awards, which traditionally result in higher margins, in 2009 as compared to 2008. The reduction in fixed price work was caused by pricing pressures from our customers and also contributed to the $5,793 (77.3 percent) reduction in maintenance and turnaround operating income.
Downstream engineering operating income decreased $6,694 to a loss of $5,476 as a result of our acquisition of Wink in July 2009.
Downstream Oil & Gas incurred $3,141 in other charges in 2009, of which $1,963 occurred in the engineering business unit almost entirely related to lease impairment charges taken on Wink’s leased office space.
Non-Operating Items
Interest, net expense decreased $704 (7.8 percent) to $8,328 from $9,032 in 2008. The decrease in net expense is the result of a decrease in interest expense of $2,285 primarily due to decreased capital lease obligations as a result of buy-outs during the second quarter of 2009, offset by $1,581 of decreased interest income earned on cash and cash equivalents due to declining interest rates throughout 2009.
Other, net income decreased $7,072 (89.6 percent) to a net income of $819 from net income of $7,891 in 2008. The decrease was primarily a result of selling one of our fabrication facilities located in Edmonton, Alberta, Canada, which resulted in a gain on sale of $7,694 during 2008.
Provision for income taxes decreased $17,208 (66.3 percent) to $8,734 from $25,942 in 2008. During 2009, we recognized $8,734 of income tax expense on income from continuing operations before income taxes of $32,987 as compared to income tax expense of $25,942 on income from continuing operations before income taxes of $70,665 in 2008. The decrease in the provision for income taxes is due to the decrease in operating income recognized during 2009 and a decrease in effective tax rate primarily due to the reversal of uncertain tax positions.
Income (Loss) from Discontinued Operations, Net of Taxes
Income (loss) from discontinued operations, net of taxes decreased $5,358 (719.2 percent) to a loss of $4,613 from income of $745 in 2008. During 2009, a $1,750 charge to write off the net book value of a note receivable related to the sale of our Venezuela assets and operations was recorded. Management determined the collection of this outstanding commitment was highly unlikely due to nationalization of various oil-field service contractors within the country. The income recognized during the same period in 2008 was the result of two pre-Nigeria sale insurance claim recoveries totaling $3,004 for events of loss we suffered prior to the sale of our Nigeria operations. Additionally, as of December 31, 2010 we classified our Libyan operations as discontinued operations. We recognized a loss from discontinued operations related to Libya of $3,116 and $2,012 respectively for the years ended December 31, 2009, and 2008.
LIQUIDITY AND CAPITAL RESOURCES
Our financing objective is to maintain financial flexibility to meet the material, equipment and personnel needs to support our project commitments, and pursue our expansion and diversification objectives, while reducing debt. As of December 31, 2010, we had cash and cash equivalents of $141,101. Our cash and cash equivalent balances held in the United States and foreign countries were $59,437 and $81,664, respectively. We have analyzed our operations in all jurisdictions and while our current operating strategy is to reinvest any earnings of operations internationally rather than to distribute dividends to the U.S. parent or its U.S. affiliates, we are continually evaluating the use of cash available in our foreign subsidiaries for use to pre-pay debt. No dividends were paid from foreign operations to Willbros Group, Inc. or its domestic subsidiaries during 2010. At this time, there are other avenues available to management to consider for pre-payment of debt and the likelihood that cash would be repatriated from foreign operations is low.
We are also able to secure funds from a three year revolving credit facility of $175,000 that was established primarily to provide letters of credit. As of December 31, 2010, we had no outstanding borrowings and $25,678 of letters of credit outstanding under our 2010 Credit Facility, leaving remaining capacity of $149,322. Our ability to use the 2010 Credit Facility for revolving loans, however, has been restricted as a result of the amendment to the 2010 Credit Facility in March of 2011 as discussed below.
During 2010, our working capital position for continuing operations decreased by $27,811 (9.4 percent) to $269,584 from $297,395 at December 31, 2009. This was primarily the result of a significant reduction in income from continuing operations due to a reduction of large diameter pipeline projects in our Upstream Oil & Gas segment, amplified by delays in execution schedules on pipeline and facilities work in our Canadian business, offset by additional working capital associated with our new Utility T&D segment in the second half of 2010.
Our overall cash balance has been negatively impacted by an ongoing contract dispute with TransCanada. See Note 16 in the accompanying financial statements for additional background information. As of December 31, 2010, we have $71,159 of unpaid TransCanada receivables. We have submitted this dispute to arbitration for resolution; however, final resolution may not occur for a year or more. We have not established a collectability reserve, and we believe adequate financial reserves are available during the interim period prior to receiving payment.
Additional Sources and Uses of Capital
2010 Credit Facility
Concurrent with our acquisition of InfrastruX, we entered into the 2010 Credit Agreement dated June 30, 2010, that consists of a four year, $300,000 Term Loan maturing in July 2014 and a three year revolving credit facility of $175,000, maturing in July 2013 and replaced our existing three year $150,000 senior secured credit facility, which was scheduled to expire in November 2010. The proceeds from the Term Loan were used to pay part of the cash portion of the merger consideration payable in connection with our acquisition of InfrastruX. See Note 10 - Long-term Debt in Item 8 of this Form 10-K for further discussion of the 2010 Credit Facility.
Our 2010 Credit Agreement (and the 6.5% Senior Convertible Notes for debt incurrence test only) contain various provisions that require us to, among other things, comply with the following requirements in which we were in compliance as of December 31, 2010:
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minimum interest coverage ratio;
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maximum total leverage ratio;
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minimum tangible net worth;
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minimum consolidated EBITDA and a minimum cash balance during the Interim Period;
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limitations on indebtedness;
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limitations on certain asset sales and dispositions; and
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limitations on certain acquisitions and asset purchases if certain liquidity levels are not maintained.
Our 2010 Credit Agreement, 2.75% Convertible Senior Notes and 6.5% Senior Convertible Notes contain default and cross-default provisions. An Event of Default under the 2010 Credit Agreement would permit Crédit Agricole and the lenders to terminate their commitment to make cash advances or issue letters of credit, require the immediate repayment of any outstanding cash advances with interest and require the cash collateralization of outstanding letter of credit obligations. An Event of Default under the 2.75% Convertible Senior Notes and 6.5% Senior Convertible Notes would require an accelerated payment of such notes before the scheduled date of maturity. Events of Default in the 2010 Credit Agreement, 2.75% Convertible Senior Notes, or the 6.5% Senior Convertible Notes may trigger cross-default provisions under these debt instruments.
Events of Default under the 2010 Credit Agreement, 2.75% Convertible Senior Notes and 6.5% Senior Convertible Notes may include, but are not limited to, covenant breaches that are not waived or cured, a failure to make scheduled payments of interest or principal of any debt obligation greater than a certain amount, a change in control of the Company or certain insolvency proceedings.
Our 2010 Credit Agreement was amended on March 4, 2011 (the “Amendment”). The Amendment allows us to make certain dispositions of equipment, real estate and business units. In most cases, proceeds from these dispositions would be required to pay down the existing Term Loan made pursuant to the 2010 Credit Agreement. Financial covenants and associated definitions, such as Consolidated EBITDA, were also amended to permit us to carry out our business plan and to clarify the treatment of certain items. We have agreed to limit our revolver borrowings under the 2010 Credit Agreement to $25,000, with the exception of proceeds from revolving borrowings used to make any payments in respect of the Convertible Senior Notes, until our total leverage ratio is 3.0 to 1.0 or less. However, the Amendment does not change the limit on obtaining letters of credit. The Amendment also modifies the definition of Excess Cash Flow to include proceeds from the TransCanada Pipeline Arbitration, which would require us to use all or a portion of such proceeds to further pay down the existing Term Loan in the following fiscal year of receipt. For prepayments made with Net Debt Proceeds or Equity Issuance Proceeds (as those terms are defined in the 2010 Credit Agreement), the Amendment requires a prepayment premium of 4% of the principal amount of the Term Loans prepaid before December 31, 2011 and 1% of the principal amount of the Term Loans prepaid on and after December 31, 2011 but before December 31, 2012. Premiums for prepayments made with proceeds other than Net Debt Proceeds or Equity Issuance Proceeds remain the same as set forth under the 2010 Credit Agreement.
In connection with the Amendment, we incurred fees of $4,743 and $376 related to lender fees and third party legal costs, respectively, in the first quarter of 2011. Based on the Financial Accounting Standards Board (“FASB”) accounting standard on debt modifications, we have capitalized lender fees and will amortize them over the three and four-year terms of the revolving credit facility and Term Loan, respectively. Based on the same standard, the third party legal fees were expensed as incurred during the first quarter of 2011.
Cash Flows
Statements of cash flows for entities with international operations that use the local currency as the functional currency exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash charges. As a result, changes reflected in certain accounts on the Consolidated Statements of Cash Flows may not reflect the changes in corresponding accounts on the Consolidated Balance Sheets.
As of December 31, 2010, we had cash and cash equivalents of $141,101, working capital excluding discontinued operations of $269,584 and long-term obligations of $304,470, net of current maturities. These long-term obligations consist of $272,420 on the Term Loan and $32,050 related to the 6.5% Notes, which have an aggregate principal amount of $316,300.
Operating Activities
Cash flow from operations is primarily influenced by demand for our services, operating margins and the type of services we provide, but can also be influenced by working capital needs such as the timing of collection of receivables and the settlement of payables and other obligations. Working capital needs are generally higher during the summer and fall months when the majority of our capital intensive projects are executed. Conversely, working capital assets are typically converted to cash during the winter months. Operating activities from continuing operations provided net cash to us of $58,293 during 2010 as compared to $57,425 during 2009 and $190,556 during 2008. The slight increase in operating cash flows in 2010 as compared to 2009 is due primarily to:
Investing Activities
During 2010, we used net cash in investing activities of $404,651 as compared to $34,036 and $11,725 used in investing activities in 2009 and 2008, respectively. Investing activities in 2010 included:
During 2009 and 2008, we used $13,107 and $35,185, respectively, for capital expenditures, offset by $9,585 and $21,212 of proceeds from the sale of equipment. The decrease in capital expenditures of $22,078 in 2009 compared to 2008 is related primarily to a significant purchase of large construction equipment made during 2008. We monitor our real estate, fleet and equipment size and utilization, and to the extent both financially and operationally beneficial, we actively seek potential buyers or renters of such equipment in order to limit our financial exposure resulting from their under-utilization. In 2010, we began a process of analyzing all under-utilized property and equipment and adopted a plan to dispose of such assets. In December 2010, we completed the sale of equipment having a net book value of $12,226, receiving proceeds of $15,103. In addition, we have committed to a plan of disposal of additional properties and equipment having a carrying value of $18,867. These assets are expected to be sold in 2011 and have been separately presented in the Consolidated Balance Sheet in the caption “Assets held for sale.”
Financing Activities
In 2010, financing activities provided net cash of $291,220 as compared to $35,056 and $60,044 used by financing activities in 2009 and 2008, respectively. Net cash provided by financing activities in 2010 resulted primarily from:
Net cash used by financing activities in 2009 and 2008 resulted primarily from payments made on capital leases as well as government fines of $22,097 and $6,575 for 2009 and $31,402 and $12,575 for 2008, respectively.
Discontinued Operations
Net cash from discontinued operations used $4,847 in 2010 as compared to $3,546 used in 2009. This resulted primarily from additional G&A costs incurred related to our Libyan operations in 2010 as compared to 2009 as well as additional legal fees incurred related to our ongoing WAPCo parent company guarantee assertions. In 2008, our net cash from discontinued operations provided cash to us of $1,090, which was primarily the result of two pre-Nigeria sale insurance claim recoveries of $3,004 that more than offset the loss incurred related to our Libyan operations in the same period.
Capital Requirements
During 2010, $58,293 of cash was provided by our continuing operations activities. Capital expenditures by segment amounted to $9,586 spent by Upstream Oil & Gas, $951 for Downstream Oil & Gas, $6,437 for Utility T&D, and $1,326 by Corporate, for a total of $18,300. Approved capital spending of $960 has been carried forward to 2011.
We believe that our financial results combined with our current liquidity, financial management and the 2010 Credit Facility, as amended and previously discussed, will ensure sufficient cash to meet our capital requirements for continuing operations. As such, we are focused on the following significant capital requirements:
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making the final installment payment to the government related to fines and profit disgorgement.
We believe that we will be able to support our ongoing working capital needs through our cash on hand, operating cash flows, sales of idle and under-utilized equipment and potentially, the previously discussed 2010 Credit Facility.
Contractual Obligations
As of December 31, 2010, we had $299,250 of outstanding debt related to our Term Loan and $91,407 of outstanding debt related to the convertible notes. In addition, we have various capital leases of construction equipment and property resulting in aggregate capital lease obligations of $15,262 at December 31, 2010.
The holders of the 6.5% Notes had the right to require us to purchase the 6.5% Notes for cash, including unpaid interest, on December 15, 2010. None of the 6.5% Notes were surrendered for purchase pursuant to this put option. Accordingly, the 6.5% Notes remain outstanding as of December 31, 2010 and continue to be subject to the terms and conditions of the Indenture governing the 6.5% Notes. Following the expiration of the put option, an aggregate principal amount of $32,050 remains outstanding (net of $0 discount) and has been classified as long-term and included within “Long-term debt” on the Consolidated Balance Sheet at December 31, 2010.
Based on information received from BOKF, NA dba Bank of Texas, as paying agent for the 2.75% Notes, we announced on March 14, 2011, that all of the 2.75% Notes, with an aggregate principal amount of $59,357, were validly surrendered and not withdrawn pursuant to the option of the holders of the 2.75% Notes to require us to purchase on March 15, 2011, all or a portion of such holders’ 2.75% Notes. We will use our revolving credit facility to fund the purchase of the 2.75% Notes and the remaining unamortized discount of $682 will be expensed during the first quarter of 2011.
In connection with the acquisition of InfrastruX on July 1, 2010, InfrastruX shareholders are eligible to receive earnout payments of up to $125,000 if certain EBITDA targets are met. During the third quarter of 2010, we recorded a $45,340 adjustment to the estimated fair value of the contingent earnout liability. This change in estimated contingent earnout liability to the former InfrastruX shareholders was due to a third quarter decrease in the probability-weighted estimated achievement of EBITDA targets as set forth in the merger agreement. Accordingly, $10,000 in contingent earnout liability is presented as a long term liability on the Consolidated Balance Sheet at December 31, 2010.
At December 31, 2010, we had uncertain tax positions which ultimately could result in a tax payment. As the amount of the ultimate tax payment is contingent on the tax authorities’ assessment, it is not practical to present annual payment information.
As of December 31, 2010, there were no borrowings under the 2010 Credit Facility and there were $25,678 in outstanding letters of credit. All outstanding letters of credit relate to continuing operations.
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 $6,541 at December 31, 2010. There were no outstanding borrowings at December 31, 2010 or 2009.
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, surety bonds and financial guarantees. Contracts with our customers may require us to provide letters of credit or surety 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 surety 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.
The letters of credit represent the maximum amount of payments we could be required to make if these letters of credit are drawn upon. Additionally, we issue surety bonds customarily required by commercial terms on construction projects. U.S. surety bonds represent the bond penalty amount of future payments we could be required to make if we fail to perform our obligations under such contracts. The surety bonds do not have a stated expiration date; rather, each is released when the contract is accepted by the owner. Our maximum exposure as it relates to the value of the bonds outstanding is lowered on each bonded project as the cost to complete is reduced. As of December 31, 2010, no liability has been recognized for letters of credit or surety bonds.
A summary of our off-balance sheet commercial commitments for both continuing and Discontinued Operations as of December 31, 2010 is as follows:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in application. There are also areas which require management’s judgment in selecting among available GAAP alternatives. We are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from our estimates and to the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We believe the following accounting estimates are the most critical in understanding and evaluating our reported financial results. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee.
The following discussion of our critical accounting estimates should be read in conjunction with Note 1, “Summary of Significant Accounting Policies” of our Notes to Consolidated Financial Statements in this Form 10-K.
Revenue
A number of factors relating to our business affect the recognition of contract revenue. We typically structure contracts as unit-price, time and materials, fixed-price or cost plus fixed fee. We believe that our operating results should be evaluated over a time horizon during which major contracts in progress are completed and change orders, extra work, variations in the scope of work, cost recoveries and other claims are negotiated and realized. Revenue from unit-price and time and materials contracts is recognized as earned.
Revenue for fixed-price and cost plus fixed fee contracts is recognized using 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, 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. Certain fixed-price and cost plus fixed fee contracts include, or are amended to include, incentive bonus amounts, contingent on accomplishing a stated milestone. Revenue attributable to incentive bonus amounts is recognized when the risk and uncertainty surrounding the achievement of the milestone have been removed. We do not recognize income on a fixed-price contract until the contract is approximately five to ten percent complete, depending upon the nature of the contract. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.
We consider unapproved change orders to be contract variations on which we have customer approval for scope change, but not for price associated with that scope change. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are expensed as incurred. We recognize revenue equal to cost incurred on unapproved changed orders when realization of price approval is probable and the estimated amount is equal to or greater than the cost related to the unapproved change order. Revenue recognized on unapproved change orders is included in contract costs and recognized income not yet billed on the balance sheet. Revenue recognized on unapproved change orders is subject to adjustment in subsequent periods to reflect the changes in estimates or final agreements with customers.
We consider claims to be amounts that we seek or will seek to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Revenue from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are expensed when incurred.
Goodwill and Other Intangible Assets
We utilize the purchase accounting method for business combinations and record intangible assets separate from goodwill. The FASB standard on goodwill stipulates a non-amortization approach to account for purchased goodwill and certain intangible assets with indefinite useful lives. Goodwill represents the excess of purchase price over fair value of net assets acquired. We do not have any other intangible assets with indefinite useful lives. We do have other intangible assets with finite lives. These other intangible assets consist of customer relationships and backlog recorded in connection with the acquisition of InServ in November 2007, customer relationships, trademarks and non-compete agreements recorded in connection with the acquisition of the engineering business of Wink, in July 2009 and customer relationships, tradenames and technology recorded in connection with the acquisition of InfrastruX in 2010. The value of existing customer relationships from the InServ, Wink and InfrastruX acquisitions was recorded at the estimated fair value determined by using a discounted cash flow method. Such acquired customer relationships have a finite useful life and are therefore being amortized over the estimated useful life of the relationships. Additionally, we were able to assign values to the trademarks and non-compete agreements purchased in the Wink acquisition. The trademarks and non-compete agreements were recorded at their fair value and are being amortized over the useful life of the contracts.
Impairment of Long-Lived Assets and Intangible Assets with Finite Lives
Whenever indicators of impairment exist, we evaluate the carrying values of our long-lived assets for possible impairment. This evaluation is based upon our projections of anticipated future cash flows (undiscounted and without interest charges) from the assets being evaluated. If the sum of the anticipated future cash flows over the expected useful life of the assets is less than the assets’ carrying value, then a permanent non-cash write-down equal to the difference between the assets’ carrying value and the assets’ fair value is required to be charged to earnings. In estimating future cash flows, we generally use a probability weighted average expected cash flow method with assumptions based on those used for internal budgets. The determination of future cash flows, and, if required, fair value of a long-lived asset is by its nature a highly subjective judgment. Significant assumptions are required in the forecast of future operating results used in the preparation of the long-term estimated cash flows. Changes in these estimates could have a material effect on the evaluation of our long-lived assets.
Impairment of Goodwill
We estimate the fair value of goodwill using the discounted cash flows methodology and an analysis of comparable companies. The principal factors used in the discounted cash flow analysis requiring judgment are the projected results of operations, weighted average cost of capital (“WACC”) and terminal value assumptions. This analysis requires the input of several critical assumptions including future growth rates, cash flow projections, WACC, operating cost escalation rates, rate of return, terminal value assumptions and long-term earnings and merger multiples for comparable companies in both the upstream and downstream markets. The WACC takes into account the relative weights of each component of the Company’s consolidated capital structure (equity and debt) and represents the expected cost of new capital adjusted as appropriate to consider lower risk profiles associated with longer term contracts and barriers to market entry. The terminal value assumptions are applied to the final year of the discounted cash flow model.
According to accounting standards for goodwill, goodwill and other intangibles are required to be evaluated whenever indicators of impairment exist and at least annually. During the third quarter of 2010, in connection with the completion of our preliminary forecasts for 2011, it became evident that a goodwill impairment associated with the Downstream Oil & Gas segment was probable. Due to time restrictions with the filing of our third quarter Form 10-Q, we were unable to fully complete our two step impairment test. According to the accounting standards for goodwill, if the second step (“Step Two”) of the goodwill impairment test is not complete before the financial statements are issued or are available to be issued and a goodwill impairment loss is probable and can be reasonably estimated, the best estimate of that loss shall be recognized. Using a preliminary discounted cash flow analysis supported by comparative market multiples to determine the fair value of the segment versus its carrying value, an estimated range of likely impairment was determined and an impairment charge of $12,000 was recorded during the third quarter of 2010.
During the fourth quarter of 2010, we performed our required annual test for goodwill impairment. The results of the first step (“Step One”) are as follows:
(1)
Under GAAP, a company has up to one year subsequent to closing an acquisition to perform its annual testing for goodwill impairment, unless indicators of an impairment exist. We closed on the acquisition of InfrastruX, or Utility T&D, during the third quarter of 2010. No indicators of impairment, including the events that led to the reduction in the contingent earnout liability, for the Utility T&D segment were identified by management during the fourth quarter of 2010. Accordingly, we have excluded them from our 2010 annual assessment of goodwill. We will perform impairment testing for this segment during the second quarter of 2011, or earlier should we identify any indicators of impairment.
(2)
Represents goodwill prior to fourth quarter write-downs.
If an impairment is indicated in Step One of the assessment, Step Two is necessary and measures the amount of the impairment. Step Two is performed by comparing the “implied fair value” of our reporting units’ goodwill with the carrying value of the reporting units’ goodwill. For this purpose, the “implied fair value” of goodwill for each reporting unit that had goodwill associated with its operations was determined in the same manner as the amount of goodwill is determined in a business combination. Step Two was performed for the Downstream Oil & Gas segment’s as its carrying value did not exceed fair value. This assessment resulted in a further write-down of goodwill of $48,000 during the fourth quarter of 2010. As the Step One fair value exceeded the carrying value for the Upstream Oil & Gas by 15%, no impairment was taken.
Additionally, we treated the write-down of goodwill as a triggering event for all long-lived assets with finite lives within the Downstream Oil & Gas segment. As such, we reviewed these assets for impairment. Based on our review, at December 1, 2010, the effective date of our annual goodwill impairment testing, estimated future cash flows over the expected useful life for these assets exceeded their carrying value by approximately $112,000. Accordingly, no impairment was taken.
At December 31, 2010, we have $211,753 in goodwill, of which $184,822 relates to our Utility T&D segment $13,754 relates to our Downstream Oil & Gas segment and $13,177 relates to our Upstream Oil & Gas segment.
Leases
We have entered into operating lease agreements, some of which contain provisions for future rent increases, rent free periods, or periods in which rent payments are reduced (abated). Consistent with the FASB’s standard on leases, the total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is included in “Accounts payable and accrued liabilities” in the Consolidated Balance Sheets.
Interest Rate Contracts
We have designated certain interest rate contracts as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. All changes in fair value of outstanding derivatives in cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon release from comprehensive income is the same as that of the underlying exposure.
When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.
See Note 17 - “Fair Value Measurements” of our Notes to Consolidated Financial Statements in this Form 10-K for further discussion of our derivative financial instruments.
Insurance
We are insured for workers’ compensation, employer’s liability and general liability claims, subject to a deductible of $750 per occurrence. We are also insured for auto liability claims, subject to a deductible of $500 per occurrence. Additionally, our largest non-union employee-related health care benefit plan is subject to a deductible of $250 per claimant per year.
Losses are accrued based upon our estimates of the ultimate liability for claims incurred (including an estimate of claims incurred but not reported), with assistance from third-party actuaries. For these claims, to the extent we have insurance coverage above the deductible amounts, we have recorded a receivable reflected in “Other assets” in the Consolidated Balance Sheets. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends.
Income Taxes
The FASB standard for income taxes takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. At December 31, 2010, we had deferred tax assets of $27,574, of which $7,303 is related to state net operating losses with a
valuation allowance of $7,170 against it, and deferred tax liabilities of $79,174. Additionally, in 2010 we wrote off $3,865 of deferred tax assets related to equity based compensation. We evaluate the realizability of our deferred tax assets in determination of our valuation allowance and adjust the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. The provision or benefit for income taxes and the annual effective tax rate are impacted by income taxes in certain countries being computed based on a deemed profit rather than on taxable income and tax holidays on certain international projects.
ACCOUNTING PRONOUNCEMENTS
Recently Adopted
Effective January 1, 2009, we adopted the accounting standard that establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of business combinations. This standard requires that income tax benefits related to business combinations that are not recorded at the date of acquisition are recorded as an income tax benefit in the statement of operations when subsequently recognized. Previously, unrecognized income tax benefits related to business combinations were recorded as an adjustment to the purchase price allocation when recognized. Beginning in 2009, all acquisitions have been recorded based on this standard.
In January 2010, the FASB issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (iii) expanded fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. This guidance is effective for annual reporting periods beginning after December 15, 2009 except for (ii) above which is effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows. However, appropriate disclosures have been made. See Note 17 - “Fair Value Measurements” of our Notes to Consolidated Financial Statements in this Form 10-K.
In June 2009, the FASB issued a new accounting standard which provides amendments to previous guidance on the consolidation of variable interest entities (“VIE”). This standard clarifies the characteristics that identify a VIE and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This statement requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The standard was effective for fiscal years beginning after November 15, 2009. The adoption of the standard did not have any impact on our consolidated financial statements.
On December 17, 2010, the FASB issued an update to its standard on goodwill impairment, which (1) does not change the prescribed method of calculating the carrying value of a reporting unit in the performance of Step One of the goodwill impairment test and (2) requires entities with a zero or negative carrying value to assess, considering qualitative factors such as the impairment indicators listed in FASB’s standard on goodwill, (whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform Step Two of the goodwill impairment test. The update is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. The adoption of this update is not expected to have any impact on our consolidated financial statements.
Recently Proposed
In August 2010, the FASB issued a proposed accounting standard update on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed accounting standard update states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the longest possible term that is “more likely than not” to occur. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. Comments on this exposure draft were due December 15, 2010 and the final standard is expected to be issued sometime in 2011. While we believe that the proposed standard, as currently drafted, will likely have a material impact on our reported financial position and reported results of operations, it will not have a material impact on our liquidity; however, until the proposed standard is finalized, such evaluation cannot be completed.
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, equipment, fuel and materials through price escalation provisions in certain major contracts or by considering the estimated effect of such increases when bidding or pricing new work.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is our exposure to changes in non-U.S. (primarily Canada) 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 expense in the same currency whenever possible. To the extent we are unable to match non-U.S. currency revenue with expense 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, 2010 and 2009.
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, 2010 due to the generally short maturities of these items. At December 31, 2010, we invested primarily in short-term dollar denominated bank deposits. We have the ability and expect to hold our investments to maturity.
Under the 2010 Credit Agreement, we are subject to hedging arrangements to fix or otherwise limit the interest cost of the Term Loan. Therefore, in September 2010, we entered into two 18-month forward interest rate swap agreements for a total notional amount of $150,000 in order to hedge changes in the variable rate interest expense of half of the $300,000 Term Loan maturing on June 30, 2014. Under the swap agreement, we receive interest at a floating rate of three-month LIBOR, conditional on three-month LIBOR exceeding 2 percent (to mirror variable rate interest provisions of the underlying hedged debt), and pays interest at a fixed rate of 2.685 percent, effective March 28, 2012 through June 30, 2014. The swap agreement is designated and qualifies as a cash flow hedging instrument and is deemed to be a highly effective hedge. The fair value of the swap agreement at December 31, 2010 was $104 and was based on using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.
We also entered into two interest rate cap agreements for notional amounts of $75,000 each in order to limit exposure to an increase of the interest rate above 3 percent, effective September 28, 2010 through March 28, 2012. The cap agreements are designated and qualify as cash flow hedging instruments and are deemed to be highly effective hedges. The fair value of the interest rate caps was $12 and was based on using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Willbros Group, Inc.
We have audited the accompanying consolidated balance sheets of Willbros Group, Inc. (a Delaware corporation, formerly a Panama corporation) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects, the financial position of Willbros Group, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Willbros Group, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2011 expressed an adverse opinion and exclusion of Utility T&D segment.
/s/ GRANT THORNTON LLP
Houston, Texas
March 14, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Willbros Group, Inc.
We have audited Willbros Group, Inc.’s (a Delaware corporation, formerly a Panama corporation) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Willbros Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting included in Item 9A (Management’s Report). Our responsibility is to express an opinion on Willbros Group Inc.’s internal control over financial reporting based on our audit. Our audit of, and opinion on, Willbros Group, Inc.’s internal control over financial reporting does not include internal control over financial reporting of InfrastruX Group, Inc., a wholly owned subsidiary, whose financial statements reflect total assets and revenues constituting 54.4 and 26.6 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2010. As indicated in Management’s Report, InfrastruX Group, Inc. was acquired during 2010 and therefore, management’s assessment of the effectiveness of Willbros Group, Inc.’s internal control over financial reporting excluded internal control over financial reporting of InfrastruX Group, Inc (Utility T&D segment).
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
The Company identified a material weakness related to compliance with the established estimation process at its subsidiary in Canada. Management determined that project cost estimations were not prepared in sufficient detail to properly analyze job margin and management review was not thorough and did not include follow through on issues from prior month estimates. These operating deficiencies resulted in the failure to identify four loss contracts at the Canadian subsidiary in a timely manner.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Willbros Group, Inc. has not maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Willbros Group, Inc.’s consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2010 financial statements, and this report does not affect our report dated March 14, 2011, which expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Houston, Texas
March 14, 2011
WILLBROS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
WILLBROS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
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 Delaware corporation, and all of its majority-owned subsidiaries (the “Company”) is a provider of energy services to global end markets serving the oil and gas, refinery, petrochemical and power industries. The Company’s principal markets for continuing operations are the United States, Canada and Oman. The Company obtains its work through competitive bidding and through negotiations with prospective clients. Contract values may range from several thousand dollars to several hundred million dollars and contract durations range from a few weeks to more than a year.
The disclosures in the notes to the consolidated financial statements relate to continuing operations, except as otherwise indicated.
Discontinuance of Operations and Asset Disposals - During 2006, the Company chose to exit Nigeria and Venezuela. During 2010, the Company chose to exit the Libyan market. These three businesses are presented as discontinued operations in the Company’s consolidated financial statements and collectively are referred to as “Discontinued Operations.” The net assets and net liabilities related to the Discontinued Operations are shown on the Consolidated Balance Sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations”, respectively. The results of the Discontinued Operations are shown on the Consolidated Statements of Operations as “Income (loss) from discontinued operations net of provisions for income taxes” for all periods shown. For further discussion of Discontinued Operations, see Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement.
Principles of Consolidation - The consolidated financial statements of the Company include the accounts of WGI, all of its majority-owned subsidiaries and all of its wholly-controlled entities. Inter-company accounts and transactions are eliminated in consolidation. The ownership interest of noncontrolling participants in subsidiaries that are not wholly-owned (principally in Oman) is included as a separate component of equity. The noncontrolling participants’ share of the net income is included as “Income attributable to noncontrolling interest” on the Consolidated Statements of Operations. Interests in the Company’s unconsolidated joint ventures are accounted for using the equity method in the Consolidated Balance Sheets.
Use of Estimates - The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States and include certain estimates and assumptions made by management of the Company in the preparation of the consolidated financial statements. These estimates and assumptions relate to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the period. Significant items subject to such estimates and assumptions include: revenue recognition under the percentage-of-completion method of accounting, including estimates of progress toward completion and estimates of gross profit or loss accrual on contracts in progress; tax accruals and certain other accrued liabilities; quantification of amounts recorded for contingencies; valuation allowances for accounts receivable and deferred income tax assets; and the carrying amount of parts and supplies, property, plant and equipment and goodwill. The Company bases its estimates on historical experience and other assumptions that it believes relevant under the circumstances. Actual results could differ from these estimates.
Change in Estimate - The Company performed a review of the estimated useful lives of certain fixed assets at its Upstream Oil & Gas segment during the first quarter of 2010. This evaluation indicated that actual lives for the construction equipment were generally longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, the Company adjusted the estimated useful life on Upstream Oil & Gas segment’s construction equipment from a range of four to six years to a range of four to twelve years. The effect of this change in estimate was to reduce depreciation expense for the twelve months ended December 31, 2010 by $6,032 and increase income from continuing operations by $3,921, net of taxes, or $0.09 per basic share.
Consistency - Effective January 1, 2010, the Company has reclassified certain indirect overhead expenses to general and administrative expenses to apply a consistent approach in the classification of overhead across the Upstream Oil & Gas and Downstream Oil & Gas segments. If the Company reclassified these same costs in the twelve- month period ended December 31, 2010, the reported general and administrative costs would have increased, accompanied by a corresponding decrease to contract costs of $5,265. The Company is currently in the process of evaluating the impact, if any, that the treatment of these costs would have on the Utility Transmission & Distribution (“Utility T&D”) segment.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
Commitments and Contingencies - Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when management assesses that it is probable that a liability has been incurred and the amount can be reasonably estimated. Recoveries of costs from third parties, which management assesses as being probable of realization, are separately recorded as assets in “Other assets” on the Consolidated Balance Sheets. Legal costs incurred in connection with matters relating to contingencies are expensed in the period incurred. See Note 16 - Contingencies, Commitments and Other Circumstances for further discussion of the Company’s commitments and contingencies.
Accounts Receivable - Most of the accounts receivable and contract work in progress are from clients in the oil and gas, refinery, petrochemical and power industries around the world. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Most contracts require payments as the projects progress or, in certain cases, advance payments. The Company generally does not require collateral, but in most cases can place liens against the property, plant or equipment constructed or terminate the contract if a material default occurs. The allowance for doubtful accounts is the Company’s best estimate of the probable amount of credit losses in the Company’s existing accounts receivable. A considerable amount of judgment is required in assessing the realization of receivables. Relevant assessment factors include the creditworthiness of the customer and prior collection history. Balances over 90 days past due and over a specified minimum amount are reviewed individually for collectability. Account balances are charged off against the allowance after all reasonable means of collection are exhausted and the potential for recovery is considered remote. The allowance requirements are based on the most current facts available and are re-evaluated and adjusted on a regular basis and as additional information is received.
Inventories - Inventories, consisting primarily of parts and supplies, are stated at the lower of actual cost or market. Parts and supplies are evaluated at least annually and adjusted for excess and obsolescence. No excess or obsolescence allowances existed at December 31, 2010 or 2009.
Property, Plant and Equipment - Property, plant and equipment is stated at cost. Depreciation, including amortization of capital leases, is provided on the straight-line method using estimated lives as follows:
In connection with the acquisition of InfrastruX Group, Inc. (“InfrastruX”), the Company acquired $156,160 of property, plant and equipment.
Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term. 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 “Other, net” in the Consolidated Statements of Operations for the period. Normal repair and maintenance costs are charged to expense as incurred. Significant renewals and betterments are capitalized. Long-lived assets are evaluated for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This evaluation is based upon the Company’s projections of anticipated future cash flows (undiscounted and without interest charges) from the business units which own the assets being evaluated. If the sum of the anticipated future cash flows over the expected useful life of the assets is less than the assets’ carrying value, then a permanent write-down equal to the difference between the assets’ carrying value and the assets’ fair value is required to be charged to earnings. In estimating future cash flows, we generally use a probability weighted average expected cash flow method with assumptions based on those used for internal budgets. The determination of future cash flows, and, if required, fair value of a long-lived asset is, by its nature, a highly subjective judgment. Significant assumptions are required in the forecast of future operating results used in the preparation of the long-term estimated cash flows. Changes in these estimates could have a material effect on the evaluation of the Company’s long-lived assets.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets - The Company utilizes the purchase accounting method for business combinations and records intangible assets separate from goodwill. The Company also performs an annual impairment test by applying a fair-value-based test. Intangible assets with finite lives continue to be amortized over their useful lives. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity.
Goodwill - Goodwill is originally recorded as the excess of purchase price over fair value of net assets acquired. The Company applies a non-amortization approach to account for purchased goodwill and performs an annual test for impairment during the fourth quarter of each fiscal year and more frequently if an event or circumstance indicates that impairment may have occurred. The Company performs the required annual impairment test for goodwill by determining the fair values of its reporting units using a discounted cash flow analysis supported by comparative market multiples.
The fair values of each reporting unit are then compared to their book values. When a possible impairment for a reporting unit is indicated by an excess of carrying value over fair value, the implied fair value of goodwill is calculated by deducting the fair value of net assets of the business, excluding goodwill, from the total fair value of the business. When the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recorded to reduce the carrying value of goodwill to its implied value.
This analysis requires the input of several critical assumptions, including:
•
Long term earnings and cash flow projections based on the Company’s strategic budgeting process, subject to future revenue growth rates and operating cost escalation rates.
•
Merger multiples, based on enterprise value and EBITDA, for comparable companies in both the upstream and downstream markets, which are considered Level 3 inputs. For the definition of Level 3 inputs, see Note 17 - Fair Value Measurements.
•
Weighted average cost of capital, which takes into account the relative weights of each component of the Company’s consolidated capital structure (equity and debt) and represents the expected cost of new capital adjusted as appropriate to consider lower risk profiles associated with longer term contracts and barriers to market entry.
•
The U.S. Treasury 20-year rate was used as the risk free interest rate.
•
Terminal value assumptions are applied to the final year of the discounted cash flow model.
These critical assumptions require significant management judgment. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of the recorded goodwill, differences in assumptions may have a material effect on the results of the Company’s impairment analysis.
Other Intangible Assets - The Company does not have any intangible assets with indefinite useful lives other than goodwill. The Company does have other intangible assets with finite lives. These other intangible assets consist of customer relationships and backlog recorded in connection with the acquisition of Integrated Service Company, LLC (“InServ”) in November 2007; customer relationships, trademarks and non-compete agreements recorded in connection with the acquisition of the engineering business of Wink Companies, LLC in July 2009 (renamed Wink Engineering, LLC (“Wink”) in February 2010); and tradenames, customer relationships, and technology recorded in connection with the acquisition of InfrastruX in July 2010. The value of existing customer relationships from the InServ, Wink and InfrastruX acquisitions was recorded at the estimated fair value determined by using a discounted cash flow method. Such acquired customer relationships have a finite useful life and are therefore being amortized over the estimated useful life of the relationships. Additionally, the Company was able to assign values to the trademarks, tradenames, non-compete agreements and technology purchased in the Wink and InfrastruX acquisitions. The trademarks, tradenames, non-compete agreements and technology were recorded at their fair value and are being amortized over the useful life of the intangibles. For further discussion of Goodwill and Other Intangible Assets, see Note 7 - Goodwill and Other Intangible Assets.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
Revenue - A number of factors relating to the Company’s business affect the recognition of contract revenue. The Company typically structures contracts as unit-price, time and materials, fixed-price or cost plus fixed fee. The Company believes that its operating results should be evaluated over a 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. Revenue from unit-price and time and materials contracts is recognized as earned.
Revenue for fixed-price and cost plus fixed fee contracts is recognized using 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, 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 estimated amount and timing of revenue recognition. Certain fixed-price and cost plus fixed fee contracts include, or are amended to include, incentive bonus amounts, contingent on accomplishing a stated milestone. Revenue attributable to incentive bonus amounts is recognized when the risk and uncertainty surrounding the achievement of the milestone have been removed. The Company does not recognize income on a fixed-price contract until the contract is approximately five to ten percent complete, depending upon the nature of the contract. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.
The Company considers unapproved change orders to be contract variations on which the Company has customer approval for scope change, but not for price associated with that scope change. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are expensed as incurred. The Company recognizes revenue equal to cost incurred on unapproved change orders when realization of price approval is probable and the estimated amount is equal to or greater than the cost related to the unapproved change order. Revenue recognized on unapproved change orders is included in “Contract cost and recognized income not yet billed” on the Consolidated Balance Sheets. Revenue recognized on unapproved change orders is subject to adjustment in subsequent periods to reflect the changes in estimates or final agreements with customers.
The Company considers claims to be amounts that the Company seeks or will seek to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Revenue from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are expensed when incurred.
Depreciation - The Company depreciates assets based on their estimated useful lives at the time of acquisition using the straight-line method. Depreciation and amortization related to operating activities is included in contract costs; and depreciation and amortization related to general and administrative activities is included in “General and administrative” (“G&A”) expense in the Consolidated Statements of Operations. Contract costs and G&A expenses are included within “Operating expenses” in the Consolidated Statements of Operations. Further, amortization of assets under capital lease obligations is included in depreciation expense.
Insurance - The Company is insured for workers’ compensation, employer’s liability and general liability claims, subject to a deductible of $750 per occurrence. The Company is also insured for auto liability claims, subject to a deductible of $500 per occurrence. Additionally, the Company’s largest non-union employee-related health care benefit plan is subject to a deductible of $250 per claimant per year.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
Losses are accrued based upon the Company’s estimates of the ultimate liability for claims incurred (including an estimate of claims incurred but not reported), with assistance from third-party actuaries. For these claims, to the extent the Company has insurance coverage above the deductible amounts, a receivable is recorded and reflected in “Other assets” in the Consolidated Balance Sheets. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of the Company’s liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends.
Income Taxes - The Financial Accounting Standards Board (“FASB”) standard for income taxes takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. income tax examination by tax authorities for years before 2007 and no longer subject to Canadian income tax for years before 2001 or in Oman for years before 2006.
Other Current Liabilities - Included within other current liabilities is $3,154 and $6,072 of current deferred tax liabilities for the years ended December 31, 2010 and 2009.
Warranty Costs - In connection with the acquisition of InfrastruX, the Company warrants labor for new installations and construction and servicing of existing infrastructure. The anticipated costs are not considered significant and no reserve has been provided. One of the InfrastruX subsidiary companies maintains a warranty program which specifically covers its cable remediation services. A warranty reserve of $2,530 for cable remediation services is recorded in “Other long-term liabilities” on the Consolidated Balance Sheet as of December 31, 2010. Prior to the acquisition of InfrastruX, the Company has historically recorded an immaterial amount related to warranty reserve.
Retirement Plans and Benefits - The Company has a voluntary defined contribution retirement plan for U.S. based employees 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 employees. Additionally, the Company is subject to collective bargaining agreements with various unions. As a result, the Company participates with other companies in the unions’ multi-employer pension and other postretirement benefit plans. These plans cover all employees who are members of such unions.
Stock-Based Compensation - Compensation cost resulting from all share-based payment transactions is recognized in the financial statements measured based on the grant-date fair value of the instrument issued and is recognized over the vesting period. The Company uses the Black-Scholes valuation method to determine the fair value of stock options granted as of the grant date. Share-based compensation related to restricted stock and restricted stock rights, also described collectively as restricted stock units (“RSU’s”), is recorded based on the Company’s stock price as of the grant date. Awards granted are expensed ratably over the vesting period of the award. Expense on awards granted prior to March 12, 2009 is accelerated upon reaching retirement age. This provision does not exist for awards granted on or after March 12, 2009.
Foreign Currency Translation - All significant monetary asset and liability accounts denominated in currencies other than United States dollars are translated into United States dollars at current exchange rates. Translation adjustments are accumulated in other comprehensive income (loss). Non-monetary assets and liabilities in highly inflationary economies are translated into United States dollars at historical exchange rates. Revenue and expense accounts are converted at prevailing rates throughout the year. Gains or losses on foreign currency transactions and translation adjustments in highly inflationary economies are recorded in income in the period in which they are incurred.
Concentration of Credit Risk - The Company has a concentration of customers in the oil and gas, refinery, petrochemical and power industries which expose the Company to a concentration of credit risk within a single industry. The Company seeks to obtain advance and progress payments for contract work performed on major contracts. Receivables are generally not collateralized. The allowance for doubtful accounts was $4,499 and $1,936 at December 31, 2010 and 2009, respectively.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
Income (Loss) per Common Share - Basic income (loss) per share is calculated by dividing net income (loss), 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. Shares of common stock underlying the Company’s convertible notes are included in the calculation of diluted income per share using the “if-converted” method. Therefore, the numerator for diluted income per share is calculated excluding the after-tax interest expense associated with the convertible notes as long as the associated interest per weighted average convertible share does not exceed basic earnings per share.
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 expense in the same currency.
In conjunction with the 2010 Credit Agreement the Company entered into as of June 30, 2010, the Company is subject to hedging arrangements to fix or otherwise limit the interest cost of the term loans. The Company is subject to interest rate risk on its debt and investment of cash and cash equivalents arising in the normal course of business, as the Company does not engage in speculative trading strategies. In September 2010, the Company entered into two forward interest rate swap agreements in order to hedge changes in the variable rate interest expense. Also, in September 2010, the Company entered into two interest rate cap agreements in order to limit its exposure to an increase of the interest rate above 3 percent. The Company had no derivative financial instruments as of December 31, 2009.
Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Short-term Investments - The Company may invest a portion of its cash in short-term time deposits, some of which may have early withdrawal penalties. All of such deposits have maturity dates that exceed three months. There was $0 and $16,559 of short-term investments outstanding as of December 31, 2010 and 2009, respectively.
Recently Adopted Accounting Standards - Effective January 1, 2009, the Company adopted the accounting standard that establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of business combinations. This standard requires that income tax benefits related to business combinations that are not recorded at the date of acquisition are recorded as an income tax benefit in the statement of operations when subsequently recognized. Previously, unrecognized income tax benefits related to business combinations were recorded as an adjustment to the purchase price allocation when recognized. Beginning in 2009, all acquisitions have been recorded based on this standard.
In January 2010, the FASB issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (iii) expanded fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. This guidance is effective for annual reporting periods beginning after December 15, 2009 except for (ii) above which is effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows. However, appropriate disclosures have been made. See Note 17 - Fair Value Measurements for further discussion of the Company’s derivative financial instruments.
In June 2009, the FASB issued a new accounting standard which provides amendments to previous guidance on the consolidation of variable interest entities (“VIE”). This standard clarifies the characteristics that identify a VIE and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This statement requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The standard was effective for fiscal years beginning after November 15, 2009. The adoption of the standard did not have any impact on the Company’s consolidated financial statements.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies (continued)
On December 17, 2010, the FASB issued an update to its standard on goodwill impairment, which (1) does not change the prescribed method of calculating the carrying value of a reporting unit in the performance of step one of the goodwill impairment test and (2) requires entities with a zero or negative carrying value to assess, considering qualitative factors such as the impairment indicators listed in FASB’s standard on goodwill, (whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step two of the goodwill impairment test. The update is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Based on management's review, the adoption of this update is not expected to have any impact on the Company’s consolidated financial statements.
2. Acquisitions
InfrastruX
On July 1, 2010, the Company completed the acquisition of 100 percent of the outstanding stock of InfrastruX for a purchase price of $485,800, before final working capital and other transaction adjustments. The Company paid $372,382 in cash, a portion of which was used to retire InfrastruX indebtedness and pay InfrastruX transaction expenses, and issued approximately 7.9 million shares of the Company’s common stock to the shareholders of InfrastruX. Cash paid was comprised of $72,382 in cash from operations and $300,000 from a new term loan facility. The acquisition was completed pursuant to an Agreement and Plan of Merger (the “Merger”), dated March 11, 2010.
Under the agreement, InfrastruX shareholders are eligible to receive earnout payments of up to $125,000 if certain EBITDA targets are met. Refer to Note 17 - Fair Value Measurements for further discussion of the contingent earnout.
InfrastruX was a privately-held firm based in Seattle, Washington and provides design, construction, maintenance, engineering and other infrastructure services to the utility industry across the U.S. market.
This acquisition provides the Company the opportunity to strengthen its presence in the infrastructure markets within the utility industry.
Consideration
Total consideration transferred in acquiring InfrastruX is summarized as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. Acquisitions (continued)
This transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The preliminary allocation of purchase price to acquired assets and liabilities is as follows:
(1)
Includes post-acquisition purchase price adjustments.
The Company has consolidated InfrastruX in its financial results as the Utility T&D segment from the date of the acquisition. Our purchase price allocation has not been finalized due to the ongoing negotiation to determine working capital and other closing adjustments. These are expected to be finalized during the first quarter of 2011. However, under U.S. GAAP, the acquisition measurement period can last up to one year.
Property, plant and equipment (“PP&E”)
A step-up adjustment of $25,077 was recorded to present the PP&E acquired at its estimated fair value. The weighted average useful life used to calculate depreciation of the step up related to PP&E is approximately seven years.
Intangible assets
The following table summarizes the fair value estimates recorded for the identifiable intangible assets and their estimated useful lives:
The amortizable intangible assets have useful lives ranging between ten years and fifteen years and a weighted average useful life of 14.2 years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill associated with this transaction is not expected to be deductible for tax purposes. The goodwill recorded in connection with this acquisition is included in the Utility T&D segment. A significant portion of the customer relationship intangible recorded in this transaction relates to a single customer.
Deferred taxes
The Company provided deferred taxes and other tax liabilities as part of the acquisition accounting related to the estimated fair market value adjustments for acquired intangible assets and PP&E. An adjustment of $95,902 was recorded to present the deferred taxes and other tax liabilities at fair value.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. Acquisitions (continued)
Pro Forma Impact of the Acquisition
The following unaudited supplemental pro forma results present consolidated information as if the acquisition had been completed as of January 1, 2010 and January 1, 2009. The pro forma results include: (i) the amortization associated with an estimate of the acquired intangible assets, (ii) interest expense associated with debt used to fund a portion of the acquisition and reduced interest income associated with cash used to fund a portion of the acquisition, (iii) the impact of certain fair value adjustments such as additional depreciation expense for adjustments to property, plant and equipment and reduction to interest expense for adjustments to debt, and (iv) costs directly related to acquiring InfrastruX. The pro forma results do not include any potential synergies, cost savings or other expected benefits of the acquisition. Accordingly, the pro forma results should not be considered indicative of the results that would have occurred if the acquisition and related borrowings had been consummated as of January 1, 2009, or January 1, 2010, nor are they indicative of future results.
Wink Companies, LLC
Effective July 9, 2009, the Company acquired the engineering business of Wink, a privately-held firm based in Baton Rouge, Louisiana. Wink serves primarily the U.S. market from its regional offices in Louisiana and Mississippi, providing multi-disciplinary engineering services to clients in the petroleum refining, chemicals and petrochemicals and oil and gas industries. This acquisition provides the Company the opportunity to offer fully integrated engineering, procurement, and construction (“EPC”) services to the downstream hydrocarbon industries. The total purchase price of $17,431 was comprised of $6,075 in cash paid, $10,236 in debt assumed and $1,120 related to the assumption of an unfavorable lease relative to market value. In addition, the Company incurred transaction-related costs of approximately $600.
The Company has consolidated Wink in its financial results as part of its Downstream Oil & Gas segment from the date of acquisition. The allocation of purchase price to acquired assets and liabilities is as follows:
(1)
Includes an approximate $300 post-acquisition reclassification from customer relationships to goodwill.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2. Acquisitions (continued)
The amortizable intangible assets have useful lives ranging between five years and ten years and a weighted average useful life of 8.3 years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and is deductible for tax purposes. The goodwill recorded in connection with this acquisition is included in the Downstream Oil & Gas segment.
The results and operations for Wink have been included in the Consolidated Statements of Operations since the completion of the acquisition on July 9, 2009. This acquisition does not have a material impact on the Company’s results of operations. Accordingly, pro forma disclosures have not been presented.
3. Accounts Receivable
Accounts receivable, net as of December 31, 2010 and 2009 is comprised of the following:
The Company expects all accounts receivable to be collected within one year. The provision for bad debts included in “General and administrative” expenses in the Consolidated Statements of Operations was $2,887, $664, and $2,403 for the years ended December 31, 2010, 2009 and 2008, respectively.
4. Contracts in Progress
Contract cost and recognized income not yet billed on uncompleted contracts arise when recorded revenues for a contract exceed the amounts billed under the terms of the contracts. Contract billings in excess of cost and recognized income arise when billed amounts exceed revenues recorded. Amounts are billable to customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Also included in contract cost and recognized income not yet billed on uncompleted contracts are amounts the Company seeks to collect from customers for change orders approved in scope but not for price associated with that scope change (unapproved change orders). Revenue for these amounts is recorded equal to the lesser of the expected revenue or cost incurred when realization of price approval is probable. Estimating revenues from unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded unapproved change orders may be made in the near-term. If the Company does not successfully resolve these matters, a reduction in revenues may be required to amounts that have been previously recorded.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
4. Contracts in Progress (continued)
Contract cost and recognized income not yet billed and related amounts billed as of December 31, 2010 and 2009 were as follows:
Contract cost and recognized income not yet billed includes $3,216 and $1,551 at December 31, 2010 and 2009, respectively, on completed contracts.
5. Property, Plant and Equipment
Property, plant and equipment, which are used to secure debt or are subject to lien, at cost, as of December 31, 2010 and 2009 were as follows:
Amounts above include $3,698 and $4,401 of construction in progress as of December 31, 2010 and 2009, respectively. Depreciation expense included in operating expense for the years ended December 31, 2010, 2009 and 2008 was $46,441, $34,345 and $34,483, respectively.
6. Assets Held For Sale
In 2010, the Company began a process of analyzing all under-utilized property and equipment and adopted a plan to dispose of such assets. Pursuant to that plan, in December 2010, the Company completed the sale of equipment having a net book value of $12,226 receiving proceeds of $15,103. The resulting gain on sale of assets has been recorded within “Other, net” in the Consolidated Statements of Operations. In addition, the Company has committed to a plan of disposal of additional properties and equipment, which are expected to be sold in 2011. These assets have been separately presented in the Consolidated Balance Sheets in the caption ‘‘Assets held for sale’’ and are no longer depreciated. In connection with this plan of disposal, the Company determined that the carrying value of one facility within the Upstream Oil & Gas segment, exceeded its fair value. Consequently, the Company recorded an impairment loss of $931, which represents the excess of the carrying value over fair values, less cost to sell. The impairment loss is recorded within “Other, net” in the Consolidated Statements of Operations.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. Goodwill and Other Intangible Assets
The Company’s goodwill by segment as of December 31, 2010 and 2009 was as follows:
Goodwill and other purchased intangible assets are included in the identifiable assets of the segment to which they have been assigned. According to accounting standards for goodwill, goodwill and other intangibles are required to be evaluated whenever indicators of impairment exist and at least annually. During the third quarter of 2010, in connection with the completion of the Company’s preliminary forecasts for 2011, it became evident that a goodwill impairment associated with the Downstream Oil & Gas segment was probable. Due to time restrictions with the filing its third quarter Form 10-Q, the Company was unable to fully complete its two step impairment test. According to the accounting standards for goodwill, if the second step of the goodwill impairment test is not complete before the financial statements are issued or are available to be issued and a goodwill impairment loss is probable and can be reasonably estimated, the best estimate of that loss shall be recognized. Using a preliminary discounted cash flow analysis supported by comparative market multiples to determine the fair value of the segment versus its carrying value, an estimated range of likely impairment was determined and an impairment charge of $12,000 was recorded during the third quarter of 2010.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
7. Goodwill and Other Intangible Assets (continued)
During the fourth quarter of 2010, in connection with the completion of its required annual goodwill impairment testing, the Company completed its step two impairment testing, which resulted in an additional $48,000 charge to the Downstream Oil & Gas segment bringing the total to $60,000 for 2010.
Under GAAP, a Company has up to one year subsequent to closing an acquisition to perform its annual testing for goodwill impairment, unless indicators of an impairment exist. The Company closed on the acquisition of InfrastruX, or Utility T&D during the third quarter of 2010. No indicators of impairment for the Utility T&D segment were identified by management during the fourth quarter of 2010. Accordingly, the Company has excluded them from its 2010 annual assessment of goodwill. The Company will perform impairment testing for this segment during the second quarter of 2011, or whenever indicators of impairment are identified.
The Company’s other intangible assets as of December 31, 2010 and 2009 were as follows:
Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 5 to 15 years.
Amortization expense related to intangible assets other than goodwill included in operating expense for the years ended December 31, 2010 and 2009 was $9,724 and $6,515, respectively. Estimated amortization expense for each of the subsequent five years and thereafter is as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of December 31, 2010 and 2009 were as follows:
9. Government Obligations
Government obligations represent amounts due to government entities, specifically the United States Department of Justice (“DOJ”) and the SEC, in final settlement of the investigations involving violations of the Foreign Corrupt Practices Act (the “FCPA”) and violations of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). These investigations stem primarily from the Company’s former operations in Bolivia, Ecuador and Nigeria. In May 2008, the Company reached final agreements with the DOJ and the SEC to settle their investigations. As previously disclosed, the agreements provided for an aggregate payment of $32,300 including $22,000 in fines to the DOJ related to the FCPA violations, consisting of $10,000 paid on signing and $4,000 annually for three years thereafter, with no interest due on unpaid amounts and $10,300 to the SEC, consisting of $8,900 of profit disgorgement and $1,400 of pre-judgment interest, payable in four equal installments of $2,575 with the first installment paid on signing and annually for three years thereafter. Post-judgment interest is payable on the outstanding $7,725.
During the twelve months ended December 31, 2008, $12,575 of the aggregate obligation was paid, which consisted of the initial $10,000 payment to the DOJ and the first installment of $2,575 to the SEC, inclusive of all pre-judgment interest. During the twelve months ended December 31, 2009 and 2010, $6,575 of the aggregate obligation was paid each year, which consisted of the $4,000 annual installment to the DOJ and the $2,575 annual installment to the SEC, inclusive of all pre-judgment interest.
The remaining aggregate obligation of $6,575 has been classified on the Consolidated Balance Sheets as “Current portion of government obligations.” This amount is based on payment terms that provide for one remaining installment of $2,575 and $4,000 to the SEC and DOJ, respectively, in 2011.
10. Long-term Debt
Long-term debt as of December 31, 2010 and 2009 was as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
2010 Credit Facility
The Company entered into a new credit agreement dated June 30, 2010 (the “2010 Credit Agreement”), among Willbros United States Holdings, Inc. (“WUSH”), a subsidiary of the Company (formerly known as Willbros USA, Inc.) as borrower, the Company and certain of its subsidiaries, as Guarantors, the lenders from time to time party thereto (the “Lenders”), Crédit Agricole Corporate and Investment Bank (“Crédit Agricole”), as Administrative Agent, Collateral Agent, Issuing Bank, Revolving Credit Facility Sole Lead Arranger, Sole Bookrunner and participating Lender, UBS Securities LLC (“UBS”), as Syndication Agent, Natixis, The Bank of Nova Scotia and Capital One, N.A., as Co-Documentation Agents, and Crédit Agricole and UBS as Term Loan Facility Joint Lead Arrangers and Joint Bookrunners. The new 2010 Credit Agreement consists of a four year, $300,000 term loan facility (“Term Loan”) maturing in July 2014 and a three year revolving credit facility of $175,000 maturing in July 2013 (the “2010 Credit Facility”) and replaced the Company’s existing three-year $150,000 senior secured credit facility, which was scheduled to expire in November 2010. The proceeds from the Term Loan were used to pay part of the cash portion of the merger consideration payable in connection with the Company’s acquisition of InfrastruX.
The initial aggregate amount of commitments for the revolving credit facility totaled $175,000, including an accordion feature enabling the Company to increase the size of the facility by an incremental $75,000 if it is in compliance with certain terms of the 2010 Credit Facility. The revolving credit facility is available for letters of credit and for revolving loans, which may be used for working capital and general corporate purposes. During an interim period ending on either September 30, 2010, if the Company is in compliance with end of 2010 leverage ratio requirements, or December 31, 2010 (the “Interim Period”), the revolving credit facility has a sublimit of $31,500 for revolving loans, with the proceeds thereof to be used only to pay the purchase price on the Company’s 6.5% Senior Convertible Notes (the “6.5% Notes”) due 2012, as a result of any holder thereof exercising its right to require the Company to purchase such notes. Thereafter, the revolving credit facility will have a sublimit of $150,000 for revolving loans.
The Company is able to utilize 100 percent of the revolving credit facility to obtain letters of credit, including during the Interim Period. As of December 31, 2010, the Company did not have any outstanding borrowings under the revolving credit facility.
Interest payable under the 2010 Credit Agreement is determined by the loan type. Base rate loans require annual interest payments equal to the adjusted base rate plus the applicable margin for base rate loans. The adjusted base rate is equal to the highest of (a) the Prime Rate in effect for such day, (b) the sum of the Federal Funds Effective Rate in effect for such day plus 1/2 of 1.0% per annum, (c) the sum of the Prime, London Inter-Bank Offered Rate (“LIBOR”) or Eurocurrency Rate in effect for such day with a maturity of one month plus 1.0% per annum and (d) with respect to Term Loans only is 3.0% per annum. The applicable margin for base rate loans is 6.50% per annum for Term Loans and 3.25% per annum for revolving advances during the Interim Period or following the Interim Period, a fixed margin based on the Company’s leverage ratio. Eurocurrency rate loans require annual interest payments equal to the Eurocurrency Rate plus the applicable margin for Eurocurrency rate loans. The Eurocurrency Rate is equal to the LIBOR rate in effect for such day, subject to a 2.0% floor for Term Loans only. The applicable margin for Eurocurrency rate loans is 7.50% per annum for Term Loans and 4.25% per annum for revolving advances during the Interim Period or following the Interim Period, a fixed margin based on the Company’s leverage ratio. As of December 31, 2010, the interest rate on the Term Loan (currently a Eurocurrency rate loan) was 9.5%. Interest payments on the Eurocurrency rate loans are payable in arrears on the last day of such interest period, and, in the case of interest periods of greater than three months, on each business day which occurs at three month intervals from the first day of such interest period. Interest payments on base rate loans are payable quarterly in arrears on the last business day of each calendar quarter. Additionally, the Company is required under the terms of the 2010 Credit Agreement to maintain in effect one or more hedging arrangements to fix or otherwise limit the interest cost with respect to at least 50 percent of the aggregate outstanding principal amount of the Term Loan.
The Term Loan was issued at a discount such that the funded portion was equal to 94 percent of the principal amount of the Term Loan. Accordingly, the Company recognized an $18,000 discount on the Term Loan that is being amortized over the four-year term of the Term Loan.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
The 2010 Credit Facility is secured by substantially all of the assets of WUSH, the Company and the other Guarantors. The 2010 Credit Agreement prohibits the Company from paying cash dividends on its common stock.
The 2010 Credit Agreement includes customary affirmative and negative covenants, including:
•
maintenance of a minimum interest coverage ratio;
•
maintenance of a maximum total leverage ratio;
•
maintenance of a minimum tangible net worth amount;
•
maintenance of a minimum consolidated EBITDA and a minimum cash balance during the Interim Period;
•
limitations on indebtedness;
•
limitations on certain asset sales and dispositions; and
•
limitations on certain acquisitions and asset purchases if certain liquidity levels are not maintained.
A default under the 2010 Credit Agreement may be triggered by events such as a failure to comply with financial covenants or other covenants under the 2010 Credit Agreement, a failure to make payments when due under the 2010 Credit Agreement, a failure to make payments when due in respect of, or a failure to perform obligations relating to, debt obligations in excess of $15,000, a change of control of the Company and certain insolvency proceedings. A default under the 2010 Credit Agreement would permit Crédit Agricole and the Lenders to terminate their commitment to make cash advances or issue letters of credit, require the immediate repayment of any outstanding cash advances with interest and require the cash collateralization of outstanding letter of credit obligations. As of December 31, 2010 the Company was in compliance with all covenants under this agreement.
Incurred unamortized debt issue costs associated with the creation of the 2010 Credit Agreement are $16,213. These debt issue costs are included in “Other assets” at December 31, 2010. These costs will be amortized to interest expense over the three and four-year terms of the revolving credit facility and Term Loan, respectively.
On March 4, 2011, the Company amended its 2010 Credit Agreement (the “Amendment”). The Amendment allows the Company to make certain dispositions of equipment, real estate and business units. In most cases, proceeds from these dispositions would be required to pay down the existing Term Loan made pursuant to the 2010 Credit Agreement. Financial covenants and associated definitions, such as Consolidated EBITDA, were also amended to permit the Company to carry out its business plan and to clarify the treatment of certain items. The Company agreed to limit its revolver borrowings under the 2010 Credit Agreement to $25,000, with the exception of proceeds from revolving borrowings used to make any payments in respect of the Convertible Senior Notes until the Company’s total leverage ratio is 3.0 to 1.0 or less. However, the Amendment does not change the limit on obtaining letters of credit. The Amendment also modifies the definition of Excess Cash Flow to include proceeds from the TransCanada Pipeline Arbitration (see Note 16 - Contingencies, Commitments and Other Circumstances - Facility Construction Project Termination), which would require the Company to use all or a portion of such proceeds to further pay down the Term Loan in the following fiscal year of receipt. For prepayments made with Net Debt Proceeds or Equity Issuance Proceeds (as those terms are defined in the 2010 Credit Agreement), the Amendment requires a prepayment premium of 4% of the principal amount of the Term Loans prepaid before December 31, 2011 and 1% of the principal amount of the Term Loans prepaid on and after December 31, 2011 but before December 31, 2012. Premiums for prepayments made with proceeds other than Net Debt Proceeds or Equity Issuance Proceeds remain the same as set forth under the 2010 Credit Agreement.
In connection with the Amendment, the Company incurred fees of $4,743 and $376 related to lender fees and third party legal costs, respectively, in the first quarter of 2011. Based on the FASB’s accounting standard on debt modifications, the Company has capitalized lender fees and will amortize them over the three and four-year terms of the revolving credit facility and Term Loan, respectively. Based on the same standard, the third party legal fees were expensed as incurred during the first quarter of 2011.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
2007 Credit Facility
On November 20, 2007, the Company entered into a credit agreement (the “Credit Agreement”), among WUSH as borrower, the Company and certain of its subsidiaries as guarantors (collectively, the “Loan Parties”), and a group of lenders (the “Lenders”) led by Calyon New York Branch (“Calyon”). The Credit Agreement provided for a three-year senior secured $150,000 revolving credit facility maturing in November 2010 (the “2007 Credit Facility”). The Company was able to utilize 100 percent of the 2007 Credit Facility to obtain performance letters of credit and 33.3 percent (or $50,000) of the facility for cash advances for general corporate purposes and financial letters of credit. The 2007 Credit Facility was secured by substantially all of the assets of the Company, including those of the Loan Parties, as well as a pledge of 100 percent of the equity interests of WUSH and each of the Company’s other material U.S. subsidiaries and 65.0 percent of the equity interests of Willbros Global Holdings, Inc. On July 1, 2010, the 2007 Credit Facility was terminated in connection with the acquisition of InfrastruX and replaced with the new 2010 Credit Agreement.
6.5% Senior Convertible Notes
In December 2005, the Company completed a private placement of $65,000 aggregate principal amount of its 6.5% Notes, pursuant to a purchase agreement (the “Purchase Agreement”). During the first quarter of 2006, the initial purchasers of the 6.5% Notes exercised their options to purchase an additional $19,500 aggregate principal amount of the 6.5% Notes. The primary offering and the purchase option of the 6.5% Notes totaled $84,500.
The 6.5% Notes are governed by an indenture by and among the Company, as issuer, WUSH, as guarantor, and Bank of Texas, N.A. (as successor to the original trustee), as Trustee (the “Indenture”), and were issued under the Purchase Agreement by and among the Company and the initial purchasers of the 6.5% Notes (the “Purchasers”), in a transaction exempt from the registration requirements of the Securities Act. The 6.5% Notes are convertible into shares of the Company’s common stock at a conversion rate of 56.9606 shares of common stock per $1,000 principal amount of notes representing a conversion price of approximately $17.56 per share. If all notes had been converted to common stock at December 31, 2010, 1,825,587 shares would have been issuable based on the principal amount of the 6.5% Notes which remain outstanding, subject to adjustment in certain circumstances. The 6.5% Notes are general senior unsecured obligations. Interest is due semi-annually on June 15 and December 15, and began on June 15, 2006.
The 6.5% Notes mature on December 15, 2012 unless the notes are repurchased or converted earlier. The Company does not have the right to redeem the 6.5% Notes prior to maturity. Upon maturity, the principal amount plus the accrued interest through the day prior to the maturity date is payable only in cash. The holders of the 6.5% Notes had the right to require the Company to purchase the 6.5% Notes for cash, including unpaid interest, on December 15, 2010. None of the 6.5% Notes were surrendered for purchase pursuant to the put option. Accordingly, the 6.5% Notes remain outstanding as of December 31, 2010 and continue to be subject to the terms and conditions of the Indenture governing the 6.5% Notes. Following the expiration of this put option, an aggregate principal amount of $32,050 remains outstanding (net of $0 discount) and has been classified as long-term and included within “Long-term debt” on the Consolidated Balance Sheet at December 31, 2010. The holders of the 6.5% Notes also have the right to require the Company to purchase the 6.5% Notes for cash upon the occurrence of a fundamental change, as defined in the Indenture. In addition to the amounts described above, the Company will be required to pay a “make-whole premium” to the holders of the 6.5% Notes who elect to convert their notes into the Company’s common stock in connection with a fundamental change. The make-whole premium is payable in additional shares of common stock and is calculated based on a formula with the premium ranging from 0.0 percent to 28.0 percent depending on when the fundamental change occurs and the price of the Company’s stock at the time the fundamental change occurs.
Upon conversion of the 6.5% Notes, the Company has the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock. Under the Indenture, the Company is required to notify holders of the 6.5% Notes of its method for settling the principal amount of the 6.5% Notes upon conversion. This notification, once provided, is irrevocable and legally binding upon the Company with regard to any conversion of the 6.5% Notes. On March 21, 2006, the Company notified holders of the 6.5% Notes of its election to satisfy its conversion obligation with respect to the principal amount of any 6.5% Notes surrendered for conversion by paying the holders of such surrendered 6.5% Notes 100 percent of the principal conversion obligation in the form of common stock of the Company. Until the 6.5% Notes are surrendered for conversion, the Company will not be required to notify holders of its method for settling the excess amount of the conversion obligation relating to the amount of the conversion value above the principal amount, if any. In the event of a default of $10,000 or more on any credit agreement, including the 2010 Credit Facility and the 2.75% Notes, a corresponding event of default would result under the 6.5% Notes.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
A covenant in the indenture for the 6.5% Notes prohibits the Company from incurring any additional indebtedness if its consolidated leverage ratio exceeds 4.00 to 1.00. As of December 31, 2010, this covenant would not have precluded the Company from borrowing under the 2010 Credit Facility.
On March 10, 2010, the Company entered into Consent Agreements (the “Consent Agreements”) with Highbridge International LLC, Whitebox Combined Partners, LP, Whitebox Convertible Arbitrage Partners, LP, IAM Mini-Fund 14 Limited, HFR Combined Master Trust and Wolverine Convertible Arbitrage Trading Limited (the “Consenting Holders”), who collectively held a majority of the $32,050 in aggregate principal amount outstanding of the 6.5% Notes. Pursuant to the Consent Agreements, the Consenting Holders consented to modifications and amendments to the Indenture substantially in the form and substance set forth in a third supplemental indenture (the “Third Supplemental Indenture”) to the indenture for the 6.5% Notes. The Third Supplemental Indenture initially provided, among other things, for an amendment to Section 6.13 of the Indenture so that certain restrictions on the Company’s ability to incur indebtedness would not be applicable to the borrowing by the Company of an amount not to exceed $300,000 under a new credit facility to be entered into in connection with the acquisition of InfrastruX.
On May 10, 2010, the Company entered into an Amendment to Consent Agreement (the “Amendment”) with the Consenting Holders. Pursuant to the Amendment, the Consenting Holders consented to modifications to the Third Supplemental Indenture to clarify that certain restrictions on the Company’s ability to incur indebtedness would not be applicable to certain borrowings by the Company to acquire InfrastruX regardless of whether the borrowing consisted of a term loan under a new credit agreement, a new series of notes or bonds or a combination thereof.
The Company is required to separately account for the debt and equity components of the 6.5% Notes in a manner that reflects its nonconvertible debt borrowing rate at the time of issuance. The difference between the fair value and the principal amount was recorded as a debt discount and as a component of equity. The debt and equity components recognized for the Company’s 6.5% Notes were as follows:
The amount of interest expense recognized and effective interest rate related to this debt for the years ended December 31, 2010, 2009 and 2008 were as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
2.75% Convertible Senior Notes
In 2004, the Company completed a primary offering of $60,000 of 2.75% Convertible Senior Notes (the “2.75% Notes”). Also, in 2004, the initial purchasers of the 2.75% Notes exercised their option to purchase an additional $10,000 aggregate principal amount of the 2.75% Notes. The primary offering and purchase option of the 2.75% Notes totaled $70,000. The 2.75% Notes are general senior unsecured obligations. Interest is paid semi-annually on March 15 and September 15, and began on September 15, 2004. The 2.75% Notes mature on March 15, 2024 unless the notes are repurchased, redeemed or converted earlier. Upon maturity, the principal amount plus the accrued interest through the day prior to the maturity date is payable only in cash. The indenture for the 2.75% Notes originally provided that the Company could redeem the 2.75% Notes for cash on or after March 15, 2011, at 100 percent of the principal amount of the notes plus accrued interest. The holders of the 2.75% Notes have the right to require the Company to purchase the 2.75% Notes, including unpaid interest, on March 15, 2011, 2014, and 2019 or upon a change of control related event. On March 15, 2014 and 2019, the Company has the option of providing its common stock in lieu of cash, or a combination of common stock and cash to fund purchases. Based on the uncertainty surrounding the future economic conditions, the Company is unable to estimate the probability of future repurchases of the 2.75% Notes on March 15, 2011. Accordingly, all $58,675 (net of $682 discount) has been classified as short-term and included within “Notes payable and current portion of other long-term debt” on the Consolidated Balance Sheet at December 31, 2010.
Accrued interest on the notes on all three put dates can only be paid in cash. Upon the occurrence of a fundamental change, as defined by the Indenture, the holders of the 2.75% Notes have the right to require the Company to purchase the 2.75% Notes for cash, in addition to a “make-whole premium” that is payable in cash or in additional shares of common stock. The holders of the 2.75% Notes may, under certain circumstances, convert the notes into shares of the Company’s common stock at an initial conversion ratio of 51.3611 shares of common stock per $1,000.00 principal amount of notes representing a conversion price of approximately $19.47 per share and resulting in 3,048,642 shares at December 31, 2010 based on the principal amount of the 2.75% Notes which remain outstanding, subject to adjustment in certain circumstances. The notes will be convertible only upon the occurrence of certain specified events including, but not limited to, if, at certain times, the closing sale price of the Company’s common stock exceeds 120.0 percent of the then current conversion price, or $23.36 per share, based on the initial conversion price. In the event of a default under any Company credit agreement other than the indenture covering the 2.75% Notes, (1) in which the Company fails to pay principal or interest on indebtedness with an aggregate principal balance of $10,000 or more; or (2) in which indebtedness with a principal balance of $10,000 or more is accelerated, an event of default would result under the 2.75% Notes.
An indenture amendment extended the initial date on or after which the 2.75% Notes may be redeemed by the Company to March 15, 2013 from March 15, 2011 for cash at 100 percent of the principal amount of the notes plus accrued interest. In addition, a new provision was added to the indenture which requires the Company, in the event of a “fundamental change” which is a change of control event in which 10.0 percent or more of the consideration in the transaction consists of cash to make a coupon make-whole payment equal to the present value (discounted at the U.S. treasury rate) of the lesser of (a) two years of scheduled payments of interest on the 2.75% Notes or (b) all scheduled interest on the 2.75% Notes from the date of the transaction through March 15, 2013.
On November 29, 2007, a holder exercised its right to convert, converting $1,832 in aggregate principal amount of the 2.75% Notes into 102,720 shares of the Company’s common stock. In connection with the conversion, the Company expensed a proportionate amount of its debt issue costs resulting in additional period interest expense of $47. On March 20, 2008, a holder exercised its right to convert, converting $7,980 in aggregate principal amount of the 2.75% Notes into 443,913 shares of the Company’s common stock. In connection with the conversion, the Company expensed a proportionate amount of its debt issuance costs resulting in additional period interest expense of $187.
The Company is required to separately account for the debt and equity components of the 2.75% Notes in a manner that reflects its nonconvertible debt borrowing rate at the time of issuance. The difference between the fair value and the principal amount was recorded as a debt discount and as a component of equity.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
The debt and equity components recognized for the Company’s 2.75% Notes were as follows:
At December 31, 2010, the unamortized discount had a remaining recognition period of approximately 3 months.
The amount of interest expense recognized and effective interest rate related to this debt for the years ended December 31, 2010, 2009 and 2008 were as follows:
Based on information received from BOKF, NA dba Bank of Texas, as paying agent for the 2.75% Notes, the Company announced on March 14, 2011, that all of the 2.75% Notes, with an aggregate principal amount of $59,357, were validly surrendered and not withdrawn pursuant to the option of the holders of the 2.75% Notes to require the Company to purchase on March 15, 2011, all or a portion of such holders’ 2.75% Notes. The Company will draw down under its revolving credit facility to fund the purchase of the 2.75% Notes. All remaining unamortized discount will be expensed during the first quarter of 2011.
Capital Leases
The Company has entered into multiple capital lease agreements to acquire various construction equipment which have a weighted average of interest paid of 5.9 percent. Assets held under capital leases at December 31, 2010 and 2009 are summarized below:
The following are the minimum lease payments for assets financed under capital lease arrangements as of December 31, 2010:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
10. Long-term Debt (continued)
Maturities
The maturities of long-term debt obligations as of December 31, 2010 are as follows:
Other Obligations
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 $6,541 at December 31, 2010. There were no outstanding borrowings made under these facilities at December 31, 2010 or 2009.
11. Retirement Benefits
The Company has defined contribution plans that are funded by participating employee contributions and the Company. The Company matches employee contributions, up to a maximum of four percent of salary, in the form of cash. The Company match was suspended in May 2009 through December 2009 for all U.S. based plans. Company contributions for the plans were $2,949, $1,435 and $3,069 in 2010, 2009 and 2008, respectively.
After the Company’s acquisition of InfrastruX, the Company is subject to collective bargaining agreements with various unions. As a result, the Company participates with other companies in the unions’ multi-employer pension and other postretirement benefit plans. These plans cover all employees who are members of such unions. The Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors to a multi-employer plan in the event of the employer’s withdrawal from, or upon termination of, such plan. The Company has no intention to withdraw from these plans. The plans do not maintain information on the net assets and actuarial present value of the plans’ unfunded vested benefits allocable to the Company. As such, the amount, if any, for which the Company may be contingently liable, is not ascertainable at this time. Contributions to all union multi-employer pension and other postretirement plans by the Company were $26,972, $6,367 and $7,333 as of December 31, 2010, 2009 and 2008.
12. Income Taxes
The Company is domiciled in the United States and operates primarily in the U.S., Canada, and Oman. These countries have different tax regimes and tax rates which affect the consolidated income tax provision of the Company and its effective tax rate. Moreover, losses from one country generally cannot be used to offset taxable income from another country and some expenses incurred in certain tax jurisdictions receive no tax benefit thereby affecting the effective tax rate.
Income (loss) before income taxes consists of:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
12. Income Taxes (continued)
Provision for income taxes by country consist of:
The provision for income taxes has been determined based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The Company and its subsidiaries operating in the United States are subject to federal income tax rates up to 35 percent and varying state income tax rates and methods of computing tax liabilities. The Company’s principal international operations are in Canada and Oman. The Company’s subsidiaries in Canada and Oman are subject to corporate income tax rates of 28 percent and 12 percent, respectively. The Company did not have any non-taxable foreign earnings from tax holidays for taxable years 2008 through 2010.
As required by the FASB’s standard on income taxes-special areas, the Company has analyzed its operations in the U.S., Canada, and Oman. The Company’s current operating strategy is to reinvest any earnings of its operations internationally rather than to distribute dividends to the U.S. parent or its U.S. affiliates. No dividends were paid from foreign operations to Willbros Group, Inc. or its domestic subsidiaries during 2010.
However, if the Company does repatriate cash from foreign operations to the United States, then current earnings and profits of approximately $52,153 could be construed as a taxable dividend, subject to federal income tax rates up to 35 percent. This would be a current tax expense.
In addition, although we have no intention of selling our primary international holding company, a deferred tax liability of approximately $34,125 would be required to be recorded in the event such sale were to take place.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
12. Income Taxes (continued)
A reconciliation of the differences between the provision for income tax computed at the appropriate statutory rates and the reported provision for income taxes is as follows. For 2008, the Company was domiciled in Panama, which has no corporate income tax. For 2009 and 2010, the Company was domiciled in the U.S., which has a 35.0 percent statutory tax rate.
Upon adoption of the FASB’s standard on the recognition of tax benefits in 2007, the Company recorded a $6,369 charge to beginning stockholders’ equity for unrecognized tax positions. During 2010, the Company recognized $1,552 of previously recorded unrecognized tax benefits due to the expiration of the statute of limitations for purposes of assessment and the resolution of certain audits. The Company accrued new uncertain tax positions in the amount of $34. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The $4,866 of unrecognized tax benefits will impact the Company’s effective tax rate if ultimately recognized. The amount of unrecognized tax benefits reasonably possible to be recognized during 2011 is approximately $0. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the twelve months ended December 31, 2010, the Company has recognized $223 in interest expense. Interest and penalties are included in the table above, in addition to the effects of the changes in foreign currency that are included in other comprehensive income.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
12. Income Taxes (continued)
The Company has a total net tax liability equal to $24,615 (excluding uncertain tax positions). The increase in the Company’s deferred tax liability resulted primarily from the acquisition of InfrastruX, and the associated difference between the fair market value of the acquired assets and the carryover basis that is recorded for tax purposes in a stock acquisition. The net tax liability of $24,615 is comprised of prepaid taxes or tax refunds in the amount of $29,341 recorded in the Company’s prepaid expenses, accrued income taxes of $2,356 currently owed to various federal and state/provincial tax authorities, and a deferred income tax liability of $51,600 which represents the difference in book and tax basis of property, goodwill, and intangible assets. The Company has recorded a $9,864 payable to the seller of InfrastruX for tax refunds incurred prior to the change of ownership on July 1, 2010, and this amount is included in the aggregate amount of $29,341 expected tax refunds.
The principal components of the Company’s net deferred tax assets (liabilities) are:
The net deferred tax assets (liabilities) by geographical location are as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
12. Income Taxes (continued)
The ultimate realization of deferred tax assets related to net operating loss carry forwards (including state net operating loss carry forwards) is dependent upon the generation of future taxable income in a particular tax jurisdiction during the periods in which the use of such net operating losses are allowed. The Company considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment.
At December 31, 2010, the Company has remaining U.S. federal net operating loss carry forwards of $70,915 and state net operating loss carry forwards of $143,292. The Company inherited $32,732 of the U.S. federal net operating loss carry forwards and $140,649 of the state net operating loss carry forwards from the acquisition of InfrastruX under the attribution rules of Internal Revenue Code Section 381. Due to the change in ownership of InfrastruX at July 1, 2010, the inherited federal loss carry forwards are limited by Section 382 of the Internal Revenue Code to the value of the stock of InfrastruX immediately prior to the ownership change multiplied by the highest of the adjusted federal long-term rates in effect for July 2010 and the prior two months. The Company does not believe that the annual Section 382 limitation of $19,480 will impact the utilization of the inherited federal net operating loss carry forwards due to the projected utilization of the federal loss carry forwards in future years.
The Company’s U.S. federal net operating losses expire beginning in 2013. A state net operating loss generally expires 20 years after the period in which the net operating loss was incurred. Based upon carrybacks available to the Company, tax planning strategies, reversals of existing temporary differences, and projections for future taxable income over the periods in which the net operating losses can be utilized to offset taxable income, the Company believes that it will realize a tax benefit of $12,600 in 2011 from the carryback of approximately $36,130 of these losses to 2008.
InfrastruX has state net operating loss carry forwards of $140,649 on which a deferred tax asset of $7,170 is offset by a valuation allowance of $7,170. There was a change to the valuation allowance of $16 for the year ended December 31, 2010 owing to the continued losses of one of the InfrastruX subsidiaries in a state jurisdiction.
13. Stockholders’ Equity
The information contained in this note pertains to continuing and discontinued operations.
Stock Ownership Plans
In 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 4,825,000 and 225,000, respectively, by stockholder approval. The Director Plan expired August 16, 2006. In 2006, the Company established the 2006 Director Restricted Stock Plan (the “2006 Director Plan”) with 50,000 shares authorized for issuance to grant shares of restricted stock and restricted stock rights to non-employee directors. The number of shares authorized for issuance under the 2006 Director Plan was increased in 2008 to 250,000 by stockholder approval.
On May 26, 2010, the Company established the Willbros Group, Inc. 2010 Stock and Incentive Compensation Plan (“2010 Plan”) with 2,100,000 shares of common stock authorized for issuance to provide for awards to key employees of the Company. All future grants of stock awards to key employees will be made through the 2010 Plan. On May 26, 2010, the 1996 Plan was frozen, with the exception of normal vesting, forfeiture and other activity associated with awards previously granted under the 1996 Plan. At December 31, 2010, the 2010 plan had 1,883,073 shares available for grant.
RSU’s and options granted to employees vest generally over a three to four year period. Options granted under the 2010 Plan expire ten years subsequent to the grant date. Upon stock option exercise, common shares are issued from treasury stock. Options granted under the Director Plan are fully vested. Restricted stock and restricted stock rights granted under the 2006 Director Plan vest one year after the date of grant. At December 31, 2010, the 2006 Director Plan had 121,711 shares available for grant. For RSU’s granted prior to March of 2009, certain provisions allow for accelerated vesting upon eligible retirement. Additionally, certain provisions allow for accelerated vesting in the event of involuntary termination not for cause or a change of control of the Company. During the years ended December 31, 2010, 2009 and 2008, $669, $3,683 and $1,001, respectively, of compensation expense was recognized due to accelerated vesting of RSU’s due to retirements and separation from the Company.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
13. Stockholders’ Equity (continued)
Share-based compensation related to RSU’s is recorded based on the Company’s stock price as of the grant date. Expense from both stock options and RSU’s totaled $8,404, $13,231 and $11,652, respectively, for the years ended December 31, 2010, 2009 and 2008.
The Company determines fair value of stock options as of its grant date using the Black-Scholes valuation method. No options were granted during the years ended December 31, 2010, 2009 or 2008.
The Company’s stock option activity and related information consist of:
As of December 31, 2010, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $128 and $128, respectively. The weighted average remaining contractual term of outstanding options is 4.29 years and the weighted average remaining contractual term of the exercisable options is 4.21 years at December 31, 2010. The total intrinsic value of options exercised was $0, $81 and $1,284 during the years ended December 31, 2010, 2009 and 2008, respectively. There was no material tax benefit realized related to those exercises. The total fair value of options vested during the years ended December 31, 2010, 2009 and 2008 was $87, $247 and $322, respectively.
The Company’s nonvested options at December 31, 2010 and the changes in nonvested options during the year ended December 31, 2010 are as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
13. Stockholders’ Equity (continued)
The Company’s RSU activity and related information consist of:
The total fair value of RSU’s vested during the years ended December 31, 2010, 2009 and 2008 was $13,911, $12,791 and $5,367, respectively.
As of December 31, 2010, there was a total of $8,257 of unrecognized compensation cost, net of estimated forfeitures, related to all nonvested share-based compensation arrangements granted under the Company’s stock ownership plans. That cost is expected to be recognized over a weighted-average period of 2.14 years.
Warrants to Purchase Common Stock
In 2006, the Company completed a private placement of equity to certain accredited investors pursuant to which the Company issued and sold 3,722,360 shares of the Company’s common stock resulting in net proceeds of $48,748. In conjunction with the private placement, the Company also issued warrants to purchase an additional 558,354 shares of the Company’s common stock. Each warrant is exercisable, in whole or in part, until 60 months from the date of issuance. A warrant holder may elect to exercise the warrant by delivery of payment to the Company at the exercise price of $19.03 per share, or pursuant to a cashless exercise as provided in the warrant agreement. The fair value of the warrants was $3,423 on the date of the grant, as calculated using the Black-Scholes option-pricing model. There were 536,925 warrants outstanding at December 31, 2010 and 2009.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
14. Income (Loss) Per Common Share
Basic and diluted income (loss) per common share is computed as follows:
The Company has excluded shares potentially issuable under the terms of use of the securities listed below from the number of potentially dilutive shares outstanding as the effect would be anti-dilutive:
In accordance with the FASB’s standard on earnings per share - contingently convertible instruments, the shares issuable upon conversion of the convertible notes would have been included in diluted income (loss) per share, if those securities were dilutive, regardless of whether the Company’s stock price was greater than or equal to the conversion prices of $17.56 and $19.47, respectively. However, these securities are only dilutive to the extent that interest per weighted average convertible share does not exceed basic earnings per share. For the year ended December 31, 2010, the related interest per convertible share associated with the 2.75% Convertible Senior Notes and the 6.5% Senior Convertible Notes exceeded basic earnings per share for the current period. As such, those shares have not been included in the computation of diluted earnings per share. During 2008, there were 443,913 shares issued upon conversion of the convertible notes.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. Segment Information
The Company’s segments are strategic business units that are defined by the industry segments served and are managed separately as each has different operational requirements and strategies. Prior to the InfrastruX acquisition, the Company operated through two business segments: Upstream Oil & Gas and Downstream Oil & Gas. These segments operate primarily in the United States, Canada, and Oman. On July 1, 2010, the Company closed on the acquisition of InfrastruX. InfrastruX is a provider of electric power and natural gas transmission and distribution maintenance and construction solutions to customers from their regional operating centers in the South Central, Midwest and East Coast regions of the United States. This acquisition significantly diversifies the Company’s capabilities and end markets. InfrastruX has been designated as a newly established segment: Utility T&D. Management evaluates the performance of each operating segment based on operating income. Corporate operations include the executive management, general, administrative, and financing functions of the organization. The costs to provide these services are allocated, as are certain other corporate assets, among the three operating segments. There were no material inter-segment revenues in the periods presented.
At the beginning of the third quarter of 2009, the Company acquired the engineering business of Wink. In anticipation of this acquisition, in the second quarter of 2009, the Company redefined its business segments from Engineering, Upstream Oil & Gas and Downstream Oil & Gas to two segments by integrating the existing Engineering segment into the Upstream Oil & Gas segment and Wink into the Downstream Oil & Gas segment. The Company believes the inclusion of engineering services within each segment improves internal connectivity by providing dedicated, specialized engineering services to both the upstream and downstream markets. Additionally, in the third quarter of 2009, the Company’s compressor/pump station construction business that was previously included in the Downstream Oil & Gas segment was moved to the Upstream Oil & Gas segment. The financial results for this business have been reclassified for all periods presented here into the Upstream Oil & Gas segment.
The tables below reflect the Company’s operations by reportable segment for the years ended December 31, 2010, 2009 and 2008:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. Segment Information (continued)
Depreciation and amortization expense by segment are presented below:
Amounts above include corporate allocated depreciation of $3,442, $4,637 and $5,465 for the years ended December 31, 2010, 2009 and 2008, respectively.
Capital expenditures by segment are presented below:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
15. Segment Information (continued)
Total assets by segment as of December 31, 2010 and 2009 are presented below:
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 10 percent or more of total contract revenue are as follows:
All of the above are customers of the Upstream Oil & Gas segment.
Information about the Company’s operations in its work countries is shown below:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. Contingencies, Commitments and Other Circumstances
Contingencies
Resolution of criminal and regulatory matters
In May 2008, the United States Department of Justice filed an Information and Deferred Prosecution Agreement (“DPA”) in the United States District Court in Houston concluding its investigation into violations of the Foreign Corrupt Practices Act of 1977, as amended, by Willbros Group, Inc. and its subsidiary Willbros International, Inc. (“WII”). Also in May 2008, WGI reached a final settlement with the SEC to resolve its previously disclosed investigation of possible violations of the FCPA and possible violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. These investigations stemmed primarily from the Company’s former operations in Bolivia, Ecuador and Nigeria. The settlements together require the Company to pay, over approximately three years, a total of $32,300 in penalties and disgorgement, plus post-judgment interest on $7,725 of that amount. As part of its agreement with the SEC, the Company will be subject to a permanent injunction barring future violations of certain provisions of the federal securities laws. As to its agreement with the DOJ, both WGI and WII for a period of three years from May 2008, are subject to the DPA, which among its terms provides that, in exchange for WGI’s and WII’s full compliance with the DPA, the DOJ will not continue a criminal prosecution of WGI and WII and with the successful completion of the DPA’s terms, the DOJ will move to dismiss the criminal information.
For the term of the DPA, WGI and WII will fully cooperate with the government and comply with all federal criminal laws - including but not limited to the FCPA. As provided for in the DPA, with the approval of the DOJ and effective September 25, 2009, the Company retained a government approved independent monitor, at the Company’s expense, for a two and one-half year period, who is reporting to the DOJ on the Company’s compliance with the DPA.
Since the appointment of the monitor, the Company has cooperated and provided the monitor with access to information, documents, records, facilities and employees. On March 1, 2010, the monitor filed with the DOJ the first of three required reports under the DPA. In the report, the monitor made numerous findings and recommendations to the Company with respect to the improvement of its internal controls, policies and procedures for detecting and preventing violations of applicable anti-corruption laws.
The Company is obligated, pursuant to the terms of the DPA, to adopt the recommendations in the monitor’s report unless the Company advises the monitor and the DOJ that it considers the recommendations unduly burdensome, impractical, costly or otherwise inadvisable. The Company has advised the DOJ that it intends to implement all of the recommendations. The Company will require increased resources, costs and management oversight in order to effectively implement the recommendations.
Failure by the Company to comply with the terms and conditions of either settlement could result in resumed prosecution and other regulatory sanctions.
Facility Construction Project Termination
In September 2008, TransCanada Pipelines, Ltd. (“TCPL”) awarded the Company a cost reimbursable plus fixed fee construction contract for seven pump stations in Nebraska and Kansas. On January 13, 2010, TCPL notified the Company that it was in breach of the contract and was being terminated for cause immediately. At the time of termination, the Company had completed approximately 96.0 percent of its scope of work.
The Company has disputed the validity of the termination for cause and has challenged the contractual procedure followed by TCPL for termination for cause, which allows for a 30 day notification period during which time the Company is granted the opportunity to remedy the alleged default. Despite not being granted this time, the Company agreed in good faith to cooperate with TCPL in an orderly demobilization and handover of the remaining work. As of December 31, 2010, the Company has outstanding receivables related to this project of $71,159 and unapproved change orders for additional work of $4,222 which have not been billed. Additionally, there are claims for additional fees totaling $16,442. It is the Company’s policy not to recognize revenue or income on unapproved change orders or claims until they have been approved. Accordingly, the $4,222 in pending change orders and the $16,442 of claims have been excluded from the Company’s revenue recognition. The preceding balances are partially offset by an unissued billing credit of $2,000 related to a TCPL mobilization prepayment.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. Contingencies, Commitments and Other Circumstances (continued)
If the termination for cause is determined to be valid and enforceable, the Company could be held liable for any damages resulting from the alleged breach of contract, including but not limited to costs incurred by TCPL to hire a replacement contractor to complete the remainder of the work less the cost that the Company would have incurred to perform the same scope of work.
In May and June of 2010, the Company filed liens on the constructed facilities. On June 16, 2010, the Company notified TCPL that the Company intended to exercise its rights to conflict resolution under the contract, and on July 6, 2010, the International Chamber of Commerce received the Company’s request for arbitration. On September 15, 2010, the Company received TCPL’s response to the Notice of Arbitration, which included a counterclaim for damages of $23,100 for the alleged breach of contract, inclusive of the unissued billing credit of $2,000 for mobilization prepayment. In addition, TCPL has disclaimed its responsibility for payment of the current receivable balance, the unapproved change orders for additional work, and claims for additional fee.
At this point, the Company cannot estimate the probable outcome of the arbitration, but believes it is not in breach of contract and will defend its contractual rights. No allowance for collection has been established for the outstanding accounts receivable. The Company estimates that arbitration process will conclude during 2011.
TransCanada has removed the Company from TransCanada’s bid list.
Pipeline Construction Project Issues
In July 2007, the Company announced the award of an installation contract (“42-inch Contract”) for the construction of three segments of the Midcontinent Express Pipeline Project (“MEP Project”) by Midcontinent Express Pipeline LLC (“MEP”). The contract was structured as a cost reimbursable contract with a fixed fee for the Company. In September 2008, the Company and MEP signed an amendment which finalized the scope of work under the 42-inch Contract and also included the award to the Company of an additional installation contract (“36-inch Contract”) for the construction of 136 miles of 36-inch pipeline which at the time was anticipated to start in March 2009.
In its Form 10-K for the year ended December 31, 2008, the Company referenced an ongoing dispute between MEP and the Company in which a portion of the scope of work on the 42-inch Contract was terminated for cause and the 36-inch Contract was terminated for convenience. This issue was subsequently resolved and MEP paid a termination fee for the cancellation of the 36-inch Contract in the first quarter of 2009.
Furthermore, the Company achieved mechanical completion of the 179 miles on the 42-inch pipeline in April 2009 and completed close out efforts in the first quarter of 2010.
Project claims and audit disputes
Post-contract completion audits and reviews are periodically conducted by clients and/or government entities on certain contracts. As of December 31, 2010, the Company has been notified of claims and audit assertions totaling $6,000. The claims are associated with a single gross maximum price contract. It is the Company’s position that the claims are without merit. Further, the Company will continue to pursue all avenues for collecting the remaining receivable. There can be no assurance as to the resolution of these claims and assertions, nor the collection of the outstanding balance.
Pre-acquisition contingencies
The Company has evaluated and continues to evaluate contingencies relating to the acquisition of InfrastruX that existed as of the acquisition date. The Company has preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, has recorded its best estimates for these contingencies as a part of the purchase price allocation for InfrastruX. The Company continues to gather information for and evaluate substantially all pre-acquisition contingencies that it has assumed from InfrastruX. If the Company makes changes to the amounts recorded or identifies additional pre-acquisition contingencies during the remainder of the measurement period, such amounts recorded will be included in the purchase price allocation during the measurement period and, subsequently, in the results of operations, assuming the information existed at the acquisition date.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. Contingencies, Commitments and Other Circumstances (continued)
Other
In addition to the matters discussed above, the Company is 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. See Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement for additional information pertaining to legal proceedings.
Commitments
From time to time, the Company enters into commercial commitments, usually in the form of commercial and standby letters of credit, surety bonds and financial guarantees. Contracts with the Company’s customers may require the Company to secure letters of credit or surety 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 surety bonds in lieu of contract retention provisions, where 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, 2010, the Company had approximately $25,678 of outstanding letters of credit, all of which related to continuing operations. This amount represents the maximum amount of payments the Company could be required to make if these letters of credit are drawn upon. Additionally, the Company issues surety bonds customarily required by commercial terms on construction projects. At December 31, 2010, the Company had bonds outstanding, primarily performance bonds, with a face value at $530,152 related to continuing operations. This amount represents the bond penalty amount of future payments the Company could be required to make if the Company fails to perform its obligations under such contracts. The performance bonds do not have a stated expiration date; rather, each is released when the contract is accepted by the owner. The Company’s maximum exposure as it relates to the value of the bonds outstanding is lowered on each bonded project as the cost to complete is reduced. As of December 31, 2010, no liability has been recognized for letters of credit or surety bonds. See Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement for further discussion related to letters of credit.
Operating Leases
The Company has certain operating leases for office and camp facilities. Rental expense for continuing operations, excluding daily rentals and reimbursable rentals under cost plus contracts, was $16,527 in 2010, $11,473 in 2009 and $8,720 in 2008. Minimum lease commitments under operating leases as of December 31, 2010, totaled $99,627 and are payable as follows: 2011, $26,493; 2012, $20,244; 2013, $16,429; 2014, $9,486; 2015, $5,613; and thereafter, $21,362.
Other Circumstances
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.
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 follows the current practices in those countries and as applicable under the FCPA. 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.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
16. Contingencies, Commitments and Other Circumstances (continued)
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 20.0 percent 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. In addition, the Company acts as prime contractor on a majority of the projects it undertakes and is normally responsible for the performance of the entire project, including subcontract work. Management is not aware of any material exposure related thereto which has not been provided for in the accompanying consolidated financial statements.
The Company attempts to manage contract risk by implementing a standard contracting philosophy to minimize liabilities assumed in the agreements with the Company’s clients. With the acquisitions the Company has made in the last few years, however, there may be contracts or master service agreements in place that do not meet the Company’s current contracting standards. While the Company has made efforts to improve its contractual terms with its clients, this process takes time to implement. The Company has attempted to mitigate the risk by requesting amendments with its clients and by maintaining primary and excess insurance, of certain specified limits, in the event a loss was to ensue.
See Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement for discussion of commitments and contingencies associated with Discontinued Operations.
17. Fair Value Measurements
The FASB’s standard on fair value measurements defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
Fair Value Hierarchy
The FASB’s standard on fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This standard establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. Fair Value Measurements (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company measures its financial assets and financial liabilities, specifically its hedging arrangements and contingent earnout liability, at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs as of December 31, 2010:
Contingent earnout liability
In connection with the acquisition of InfrastruX on July 1, 2010, InfrastruX shareholders are eligible to receive earnout payments of up to $125,000 if certain EBITDA targets are met. The earnout payments begin when EBITDA, adjusted for certain items specifically identified within the merger agreement, for the InfrastruX business equals or exceeds:
The Company estimated the fair value of the contingent earnout liability based on its probability assessment of InfrastruX’s EBITDA achievements during the earnout period. In developing these estimates, the Company considered its revenue and EBITDA projections, its historical results, and general macro-economic environment and industry trends. This fair value measurement is based on significant revenue and EBITDA inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The Company’s fair value estimate of this liability was $55,340 at the date of acquisition. Changes in the fair value of the contingent earnout liability subsequent to the acquisition date, including changes arising from events that occurred after the acquisition date, such as changes in the Company’s estimate of revenue achievements, are recognized in earnings in the periods when the estimated fair value changes.
The following table represents a reconciliation of the change in the fair value measurement of the contingent earnout liability for the period ended December 31, 2010 and 2009:
In accordance with the FASB’s standard on business combinations, the Company reviews the contingent earnout liability on a quarterly basis in order to determine its fair value. Changes in the fair value of the liability are recorded within operating expenses in the period in which the change is made and the liability may increase or decrease on a quarterly basis until the earnout period has concluded.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. Fair Value Measurements (continued)
During the third quarter of 2010, the Company recorded a $45,340 adjustment to the estimated fair value of the contingent earnout liability. This change in estimated contingent earnout liability to the former InfrastruX shareholders was due to a third quarter decrease in the probability-weighted estimated achievement of EBITDA targets as set forth in the merger agreement. This reduction was driven primarily by the following:
•
Expectations for lower margins on major transmission projects due to (i) a shift in the mix of projects in Texas towards lower margin projects than previously anticipated and (ii) ongoing competition in other regions, particularly the northeast, as the pace of bid activity has been slower than expected in returning to pre-2009 levels;
•
A slower than anticipated rebound in key housing markets continues to pressure work volumes under existing Master Service Agreements (“MSA”) and the budgets of many of our utility customers, while increasing the competitive pricing on bids for new awards;
•
Reduced expectations for significant storm work, which typically carries a higher margin than our standard MSA work.
Under GAAP, a Company has up to one year subsequent to closing an acquisition to perform its annual testing for goodwill impairment, unless indicators of an impairment exist. The Company determined that no indicators of impairment, including the events that led to the reduction in the contingent earnout liability as mentioned above, were identified during the fourth quarter of 2010.
During the fourth quarter of 2010, the amount recognized for the contingent earnout, the range of outcomes, and the assumptions used to develop the estimates did not materially change from those used in determining the balance as of September 30, 2010. Accordingly, no adjustment to the contingent earnout liability was made at December 31, 2010.
Hedging Arrangements
The Company attempts to negotiate contracts that provide for payment in U.S. dollars, but it 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, the Company seeks to match anticipated non-U.S. currency revenue with expenses in the same currency whenever possible. To the extent it is unable to match non-U.S. currency revenue with expenses in the same currency, the Company may use forward contracts, options or other common hedging techniques in the same non-U.S. currencies. The Company had no derivative financial instruments to hedge currency risk at December 31, 2010 or December 31, 2009.
Interest Rate Swap
In conjunction with the new credit agreement the Company entered into as of June 30, 2010, the Company is subject to hedging arrangements to fix or otherwise limit the interest cost of the term loans. The Company is subject to interest rate risk on its debt and investment of cash and cash equivalents arising in the normal course of business, as the Company does not engage in speculative trading strategies.
In September 2010, the Company entered into two 18-month forward interest rate swap agreements for a total notional amount of $150,000 in order to hedge changes in the variable rate interest expense of half of the $300,000 Term Loan maturing on June 30, 2014. Under the swap agreement, the Company receives interest at a floating rate of three-month Libor, conditional on three-month Libor exceeding 2 percent (to mirror variable rate interest provisions of the underlying hedged debt), and pays interest at a fixed rate of 2.685 percent, effective March 28, 2012 through June 30, 2014. The swap agreement is designated and qualifies as a cash flow hedging instrument, with the effective portion of the swap’s change in fair value recorded in Other Comprehensive Income (“OCI”). The swap of the variable rate interest is deemed to be a highly effective hedge, and resulted in no gain or loss recorded for hedge ineffectiveness in the Consolidated Statement of Operations. Amounts in OCI are reported in interest expense when the hedged interest payments on the underlying debt are recognized. The fair value of the swap agreement was determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.
Interest Rate Caps
In September 2010, the Company entered into two interest rate cap agreements for notional amounts of $75,000 each in order to limit its exposure to an increase of the interest rate above 3 percent, effective
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
17. Fair Value Measurements (continued)
September 28, 2010 through March 28, 2012. Total premiums of $98 were paid for the interest rate caps. The cap agreements are designated and qualify as cash flow hedging instruments, with the effective portion of the caps’ change in fair value recorded in OCI. Amounts in OCI and the premiums paid for the caps are reported in interest expense as the hedged interest payments on the underlying debt are recognized. The interest rate caps are deemed to be highly effective, resulting in an immaterial amount of hedge ineffectiveness recorded in the Consolidated Statement of Operations. The fair value of the interest rate cap agreements was determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates. An immaterial amount of OCI relating to the interest rate swap and caps is expected to be recognized in earnings in the coming 12 months.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
18. Quarterly Financial Data
Selected unaudited quarterly financial data for the years ended December 31, 2010 and 2009 is presented below. The total of the quarterly income (loss) per share amounts may not equal the per share amounts for the full year due to the manner in which earnings (loss) per share is calculated.
Additional Notes:
•
During the quarter ended December 31, 2010, the Company classified its Libyan operations as discontinued operations. Accordingly, the Libyan results of operations have been reclassified to discontinued operations for all periods presented. See Note 21 - Discontinuance of Operations, Asset Disposals and Transition Services Agreement for further discussion of discontinued operations.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
18. Quarterly Financial Data (continued)
19. Other Charges
In December 2010, the Company announced that, in continuing to implement its initiative to fully integrate InfrastruX, acquired in July 2010, into its Utility T&D segment, it had identified cost and management synergies that could be realized by closing the Seattle administrative offices of InfrastruX. As a result, certain elements of the Seattle office were transitioned into other Utility T&D business units and the segment management activities will be integrated into the Hawkeye corporate offices located in Hauppauge, New York. The transition was completed on February 28, 2011. In connection with this office closure, the Company incurred $2,473 and $165 of charges related to severance and accelerated vesting of stock awards, respectively.
Fourth quarter of 2010 charges include a change in estimate of $417 associated with one leased facility, which was abandoned in 2009.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
19. Other Charges (continued)
The table below summarizes all charges included in “Other charges” in the Consolidated Statements of Operations:
Other charges by segment are as follows:
Other charges incurred during 2010 and 2009 include $0 and $7,217 related to corporate operations and have been allocated to the Company’s business segments based on a percentage of total revenue.
The accrual at December 31, 2010, for carrying costs of the abandoned lease space totaled $989 which consists of $935 in “Other current liabilities” and $54 in “Other long-term liabilities” on the Consolidated Balance Sheets. The estimated carrying costs of the abandoned lease space was determined with the assistance of the Company’s third party real estate advisors and were based on an assessment of applicable commercial real estate markets. There may be a significant fluctuation in the estimated costs to the extent the evaluation of the facts, circumstances and expectations change. The principal variables in estimating the carrying costs are the length of time required to sublease the space, the sublease rate and expense for inducements (e.g., rent abatement and tenant improvement allowance) that may be offered to a prospective sublease tenant. While the Company believes this accrual is adequate, it is subject to adjustment as conditions change. The Company will continue to evaluate the adequacy of the accrual and will make the necessary changes to the accrual as conditions warrant. Activity in the accrual related to other charges for the year ended December 31, 2010 is as follows:
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
20. Related Party Transaction
Two of the Company’s board members function in a similar role for a current customer of the Upstream Oil & Gas U.S. construction business unit. During 2010, the Company performed midstream natural gas construction for this customer generating approximately $12,500 in revenue and accounts receivable of approximately $8,000 as of December 31, 2010.
21. Discontinuance of Operations, Asset Disposals and Transition Services Agreement
Strategic Decisions
During the fourth quarter of 2010, the Company chose to exit the Libyan market and accordingly, these operations were classified as part of Discontinued Operations. The Company’s investment in establishing a presence in Libya, while resulting in contract awards, had not yielded any notice to proceed on subject awards, and the Company therefore exited this market due to the delays and identification of other more attractive opportunities.
Additionally, in 2006, the Company announced that it intended to sell its assets and operations in Venezuela and Nigeria and classified these operations as Discontinued Operations. The net assets and net liabilities related to the Discontinued Operations are shown on the Consolidated Balance Sheets as “Liabilities of discontinued operations”. The results of the Discontinued Operations are shown on the Consolidated Statements of Operations as “Income (loss) from discontinued operations net of provisions for income taxes” for all periods presented.
Nigeria Assets and Nigeria-Based Operations
Share Purchase Agreement
On February 7, 2007, Willbros Global Holdings, Inc., formerly known as Willbros Group, Inc., a Panama corporation (“WGHI”), which is now a subsidiary of the Company and holds a portion of the Company’s non-U.S. operations, sold its Nigeria assets and Nigeria-based operations in West Africa to Ascot Offshore Nigeria Limited (“Ascot”), a Nigerian oilfield services company, for total consideration of $155,250 (later adjusted to $130,250). The sale was pursuant to a Share Purchase Agreement by and between WGHI and Ascot dated as of February 7, 2007 (the “Agreement”), providing for the purchase by Ascot of all of the share capital of WG Nigeria Holdings Limited (“WGNHL”), the holding company for Willbros West Africa, Inc. (“WWAI”), Willbros (Nigeria) Limited, Willbros (Offshore) Nigeria Limited and WG Nigeria Equipment Limited.
In connection with the sale of its Nigeria assets and operations, WGHI and WII, another subsidiary of the Company, entered into an indemnity agreement with Ascot and Berkeley Group plc (“Berkeley”), the parent company of Ascot (the “Indemnity Agreement”), pursuant to which Ascot and Berkeley agreed to indemnify WGHI and WII for any obligations incurred by WGHI or WII in connection with the parent company guarantees (the “Guarantees”) that WGHI and WII previously issued and maintained on behalf of certain former subsidiaries now owned by Ascot under certain working contracts between the subsidiaries and their customers. Either WGHI, WII or both may be contractually obligated, in varying degrees, under the Guarantees with respect to the performance of work related to several ongoing projects. Among the Guarantees covered by the Indemnity Agreement are five contracts under which the Company estimates that, at February 7, 2007, there was aggregate remaining contract revenue, excluding any additional claim revenue, of $352,107 and aggregate estimated cost to complete of $293,562. At the February 7, 2007 sale date, one of the contracts covered by the Guarantees was estimated to be in a loss position with an accrual for such loss of $33,157. The associated liability was included in the liabilities acquired by Ascot and Berkeley.
Approximately one year after the sale of the Nigeria assets and operations, WGHI received its first notification asserting various rights under one of the outstanding parent guarantees. On February 1, 2008, WWAI, the Ascot company performing the West African Gas Pipeline (“WAGP”) contract, received a letter from West African Gas Pipeline Company Limited (“WAPCo”), the owner of WAGP, wherein WAPCo gave written notice alleging that WWAI was in default under the WAGP contract, as amended, and giving WWAI a brief cure period to remedy the alleged default. The Company understands that WWAI responded by denying being in breach of its WAGP contract obligations, and apparently also advised WAPCo that WWAI “requires a further $55 million, without which it will not be able to complete the work which it had previously undertaken to perform.” The Company understands that, on February 27, 2008, WAPCo terminated the WAGP contract for the alleged continuing non-performance of WWAI.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
21. Discontinuance of Operations, Asset Disposals and Transition Services Agreement (continued)
Also, in February 2008, WGHI received a letter from WAPCo reminding WGHI of its parent guarantee on the WAGP contract and requesting that WGHI remedy WWAI’s default under that contract, as amended. WGHI responded to WAPCo, consistent with its earlier communications, that, for a variety of legal, contractual, and other reasons, it did not consider the prior WAGP contract parent guarantee to have continued application. In February 2009, WGHI received another letter from WAPCo formally demanding that WGHI pay all sums payable in consequence of the non-performance by WWAI with WAPCo and stating that quantification of that amount would be provided sometime in the future when the work was completed. In spite of this letter, the Company continued to believe that the parent guarantee was not valid. WAPCo disputed WGHI’s position that it is no longer bound by the terms of WGHI’s prior parent guarantee of the WAGP contract and has reserved all its rights in that regard.
On February 15, 2010, WGHI received a letter from attorneys representing WAPCo seeking to recover from WGHI under its prior WAGP contract parent company guarantee for losses and damages allegedly incurred by WAPCo in connection with the alleged non-performance of WWAI under the WAGP contract. The letter purports to be a formal notice of a claim for purposes of the Pre-Action Protocol for Construction and Engineering Disputes under the rules of the High Court in London, England. The letter claims damages in the amount of $264,834. At February 7, 2007, when WGHI sold its Nigeria assets and operations to Ascot, the total WAGP contract value was $165,300 and the WAGP project was estimated to be approximately 82.0 percent complete. The remaining costs to complete the project at that time were estimated at slightly under $30,000. The Company is seeking to understand the magnitude of the WAPCo claim relative to the WAGP project’s financial status three years earlier.
On August 2, 2010, the Company received notice that WAPCo had filed suit against WGHI under English law in the London High Court on July 30, 2010, for the sum of $273,386. WGHI has several possible defenses to this suit and intends to contest the matter vigorously, but the Company cannot provide any assurance as to the outcome. The Company expects the litigation process to be lengthy; trial of the matter is scheduled to commence in June of 2012.
The Company currently has no employees working in Nigeria and has no intention of returning to Nigeria. If ultimately it is determined by an English Court that WGHI is liable, in whole or in part, for damages that WAPCo may establish against WWAI for WWAI’s alleged non-performance of the WAGP contract, or if WAPCo is able to establish liability against WGHI directly under the parent company guarantee, and, in either case, WGHI is unable to enforce rights under the indemnity agreement entered into with Ascot and Berkeley in connection with the WAGP contract, WGHI may experience substantial losses. However, at this time, the Company cannot predict the outcome of the London High Court litigation, or be certain of the degree to which the indemnity agreement given in WGHI’s favor by Ascot and Berkeley will protect WGHI.
Letters of Credit
At the time of the February 7, 2007 sale of its Nigeria assets and operations, the Company had four letters of credit outstanding totaling $20,322 associated with Discontinued Operations (the “Discontinued LC’s”). In accordance with FASB’s standard on guarantees, a liability was recognized for $1,575 related to the letters of credit. This liability was released as each of the Discontinued LC’s was released or expired and the Company was relieved of its risk related to the Discontinued LC’s. During the twelve months ended December 31, 2008, two Discontinued LC’s in the aggregate amount of $19,759 expired resulting in the release of the associated liability and recognition of $1,543 of additional cumulative gain on the sale of Nigeria assets and operations. The remaining Discontinued LC in the amount of $123 expired on February 28, 2009. As of December 31, 2009 and 2010, none of the Discontinued LC’s remained issued and outstanding.
Transition Services Agreement
Concurrent with the Nigeria sale, the Company entered into a two-year Transition Services Agreement (“TSA”) with Ascot. Under the agreement, the Company was primarily providing labor in the form of seconded employees to work under the direction of Ascot along with specifically defined work orders for services generally covered in the TSA. Ascot agreed to reimburse the Company for these services. For the years ended December 31, 2010 and 2009, these reimbursable contract costs totaled approximately $0 and $0, respectively.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
21. Discontinuance of Operations, Asset Disposals and Transition Services Agreement (continued)
On February 7, 2009, the TSA expired according to its terms, which ended the Company’s obligation to provide any further support or other services to Ascot in West Africa or otherwise. The Company has recognized all known costs associated with concluding the TSA including the write-off of all residual accounts receivable and equipment in West Africa. The total expense recognized in accordance with the conclusion of the TSA is $357.
Residual Equipment in Nigeria
In conjunction with the TSA, the Company made available certain equipment to Ascot for use in Nigeria and at times, in Benin, Togo and Ghana. This equipment was not sold to Ascot under the Agreement. The Company’s net book value for the equipment in West Africa at December 31, 2010 and 2009 was $0 and $0, respectively. The majority of this equipment, which is comprised primarily of construction equipment, rolling stock and generator sets, was redeployed to the Company’s operations in Oman. The remainder was used in exchange for equipment owned by Ascot and needed by the Company’s North American operations.
On February 7, 2009, the Company reached a final settlement with Ascot on the equipment exchange and the Company no longer owns any equipment in West Africa.
Insurance Recovery
During the twelve months ended December 31, 2008, income from Discontinued Operations consisted of two pre-Nigeria sale insurance claim recoveries of $3,004 for events of loss the Company suffered prior to the sale of its Nigeria operations.
Venezuela
Business Disposal
On November 28, 2006, the Company completed the sale of its assets and operations in Venezuela. The Company received total compensation of $7,000 in cash and $3,300 in the form of a commitment from the buyer, to be paid on or before December 4, 2013. The repayment commitment is secured by a 10 percent interest in a Venezuelan financing joint venture. During the second quarter of 2009, the nationalization of several oil-field service contractors in Venezuela made the collection of the outstanding commitment highly unlikely. Accordingly, the Company wrote off the net book value of the note, resulting in a charge of $1,750 to discontinued operations, net of tax.
Asset Disposal
Sale of Canada Fabrication Facility
During the fourth quarter of 2008, the Company decided to sell one of its fabrication facilities located in Edmonton, Alberta, Canada, which was comprised of manufacturing and office space of approximately 130,000 square feet. The Company determined that the capital employed in this facility would be more efficiently applied to another fabrication location as well as to support the Company’s cross-country pipeline business in Canada. The facility and various other related assets at the time of sale had a net book value of $11,899. The Company received $19,593 in net proceeds which resulted in a gain on sale of $7,694 which is included in other, net.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
21. Discontinuance of Operations, Asset Disposals and Transition Services Agreement (continued)
Results of Discontinued Operations
Condensed Statements of Operations of the Discontinued Operations for the years ended December 31, 2010, 2009 and 2008 are as follows:
(1)
Costs represent legal fees incurred in connection with the defense of WAPCo parent company guarantee assertions.
WILLBROS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
21. Discontinuance of Operations, Asset Disposals and Transition Services Agreement (continued)
Financial Position of Discontinued Operations
Condensed Balance Sheets of the Discontinued Operations are as follows:
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K for the year ended December 31, 2010, we have carried out an evaluation under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance (1) of achieving their control objectives, (2) that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (3) that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation and the identification of a material weakness in our internal control over financial reporting described in paragraph (b) below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2010 due to this material weakness.
(b) Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management (with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and concluding on this evaluation. The Utility T&D segment, acquired July 1, 2010, has been excluded from our 2010 assessment due to the relatively short implementation period. This segment represents 26.6% of total revenue for fiscal year 2010 and 54.4% of total assets at December 31, 2010.
Based on this evaluation and the identification of the material weakness discussed below, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2010.
A material weakness (as defined in Exchange Act Rule 12b-2) is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weakness:
Management identified a material weakness related to compliance with the established estimation process at the Company’s subsidiary in Canada. Management determined that project cost estimations were not prepared in sufficient detail to properly analyze job margin and management review was not thorough and did not include follow through on issues from prior month estimates. These operating deficiencies resulted in a failure to identify four loss contracts in a timely manner as of December 31, 2010. This oversight was subsequently identified by the Canadian management team during the monthly review process for January 2011 and February 2011. The full amount of the $19,221 of estimated project operating losses is reflected in our financial statements for the year ended December 31, 2010 included in this Annual Report on Form 10-K. Management assessed the potential impact of this error on prior quarters and noted that work on these loss contracts did not have substantial progress until the fourth quarter of 2010. Management also reviewed the estimated costs at completion (“EAC”) calculations for other significant contracts and determined that this deficiency was confined to these loss contracts.
Management has determined that this control deficiency could contribute to there being a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis and, therefore, constitutes a material weakness.
Grant Thornton LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting, which is included in this Annual Report on Form 10-K.
(c) Remediation of Material Weakness in Internal Control Over Financial Reporting
In the fourth quarter of 2010, EAC calculations were not performed in sufficient detail for four fixed price contracts in Canada and management failed to follow through to ensure action items previously identified during bi-monthly management review meetings were fully resolved. In response to this material weakness, management implemented and will implement additional monitoring controls over the established control environment that is already in place.
(d) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item with respect to the Company’s directors and corporate governance is incorporated herein by reference to the sections entitled “PROPOSAL ONE - ELECTION OF DIRECTORS” and “CORPORATE GOVERNANCE” in the Company’s definitive Proxy Statement for 2011 Annual Meeting of Stockholders (“Proxy Statement”). The information required by this item with respect to the Company’s executive officers is included in Item 4A of Part I of this Form 10-K. The information required by this item with respect to the Section 16 ownership reports is incorporated herein by reference to the section entitled “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement.
Code of Conduct
The Board of Directors has adopted both a code of business conduct and ethics for our directors, officers and employees and an additional separate code of ethics for our Chief Executive Officer and senior financial officers. This information is available on our website at http://www.willbros.com under the “Governance” caption 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 to: Secretary, Willbros Group, Inc., 4400 Post Oak Parkway, Suite 1000, Houston, Texas 77027.
The information required by this item is incorporated herein by reference to the sections entitled “EXECUTIVE COMPENSATION” and “DIRECTOR COMPENSATION” in the Proxy Statement.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the sections entitled “EQUITY COMPENSATION PLAN INFORMATION” and “PRINCIPAL STOCKHOLDERS AND SECURITY ONWERSHIP OF MANAGEMENT” in the Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “CORPORATE GOVERNANCE” in the Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the sections entitled “Fees of Independent Registered Public Accounting Firm” and “Audit Committee Pre-Approval Policy” in the Proxy Statement.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a) (1) Financial Statements:
Our financial statements and those of our subsidiaries and independent registered public accounting firm’s reports are listed in Item 8 of this Form 10-K.
(2) Financial Statement Schedule:
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.
*
Management contract or compensatory plan or arrangement.
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.
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:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Willbros Group, Inc.
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Willbros Group, Inc. and Subsidiaries referred to in our report dated March 14, 2011, which is included in the Annual Report on Form 10-K. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2), which is the responsibility of the Company’s management. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Houston, Texas
March 14, 2011
WILLBROS GROUP, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
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.
*
Management contract or compensatory plan or arrangement.