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In my letter to you in our 1999
Annual Report, I predicted that within five years CB&I
would achieve $1.5 billion in revenue and a yearly
run rate of $75 million in operating income. At the
time, our revenue was about $675 million and income
from operations was about $30 million.
In 2004, we are pleased to report that CB&I significantly
exceeded both of these targets, posting revenue of
$1.9 billion and operating income of more than $100
million. How did we do it? Just like we said we would
five years ago: by building on our past successes and
finding new applications for our skills, knowledge
and services. We developed a growth strategy and marshaled
the people, the resources and the determination to
accomplish it.
We don’t intend to rest on our laurels. We have
refined our strategy to focus on growth prospects that
we believe play to our global EPC strengths. We aim
to expand our ability to engineer and execute complex
process and technology projects around the world. And,
as evidenced by last year’s new business taken,
we will continue to pursue near-term opportunities
in markets where we have demonstrated our leadership
and experience, including liquefied natural gas (LNG)
facilities, refinery clean fuels programs, and oil
and gas processing.
Before we continue our discussion of future strategy, let’s
briefly review last year’s results. In 2004, we set a record
in new business taken, which increased more than 50% to $2.6 billion,
compared with $1.7 billion in 2003. Awards for new LNG projects made
up about half of our new business, including further expansions of
two existing U.S. import terminals, tankage for
a grassroots export terminal in Equatorial Guinea and a peak shaving
plant for a northeastern U.S. public utility.
In addition, we were awarded full EPC responsibility for what will
be one of the largest projects in CB&I history: the South Hook
LNG terminal in Wales. With its recently added second phase, the
South Hook project is valued at more than $1 billion. We are managing
the project out of our London office and will be drawing upon resources
from across the company to engineer and build this landmark job.
Upon completion, this LNG import, or regasification, terminal will
have the largest throughput of any terminal in the world.
On the process side of the business, customers continue to rely on
CB&I to help them meet the challenges of producing transportation
fuels with lower sulfur content. Our comprehensive clean fuels solutions
include plants for the supply of high-purity hydrogen; hydrodesulfurization
units for the removal of sulfur from feedstocks; and sulfur recovery
and treating units that purify process and waste streams. Our skills
and technologies to process heavier crude oils will also be called
upon.
Also of note in 2004, we won a significant contract in the renewable
energy market. CB&I will produce 150 support towers for wind
turbines that will be erected in the western United States. We are
pleased to support the further development of this environmentally-friendly
energy source in the U.S. and other parts of the world.
In nearly all respects, CB&I had an excellent year in 2004. We
generated $1.9 billion in revenue, a company record. Income from
operations was $102.1 million, slightly lower than 2003. We encountered
problems with two projects early in 2004 and had to take provisions
for losses, which resulted in lower operating income. The problems
were isolated to these two jobs, which have been completed, and execution
on all other projects across the company was solid.
Our balance sheet remains strong. Our operations generated $133 million
of cash flow and we continued to hold capital expenditures to our
target of less than 1% of revenue. Our long-term debt stood at $50
million, and we finished 2004 with cash in excess of debt of more
than $150 million.
Our safety performance in 2004 was excellent. On two key metrics
we continue to exceed industry standards by a wide margin. Last year,
CB&I’s worldwide construction operations reported a Recordable
Cases Incidence Rate (RCIR) of 0.39 and a Lost Workday Cases Incidence
Rate (LWIR) of 0.06. These statistics translate into the number of
recordable injuries and lost workdays per 100 workers per year.
In comparison, the 2003 safety results from the U.S. Bureau of Labor
Statistics for the U.S. construction industry as a whole (the latest
data available) show an RCIR of 3.4 and an LWIR of 3.9. We are proud
that our consistently superior safety results not only reflect our
concern for the health and well-being of our employees, but also
afford us the opportunity to execute projects for which other contractors
do not qualify
Strengthening our ability to execute process and technology projects
anywhere in the world is one of CB&I’s key strategies.
In many locations outside the U.S., competition from local players
in our traditional storage business is increasing. Part of our strategy
going forward will be to focus on pursuing and winning larger process
and technology projects in these geographies, by using our differentiators — technical
competence, fixed-price contracting model and global self-perform
capabilities — to our competitive advantage.
We will continue our focus on cost control and systems integration
to manage our cost of doing business and to ensure we’re all
working with the same systems and reporting tools. The worldwide
implementation of — and associated training on — our
enterprise management and project reporting systems are vital in
accomplishing this strategy.
Of course, safety continues to be a top priority and a core value
at CB&I. Zero injuries to our employees and our subcontractors’ employees
is our constant goal. Our efforts to provide a healthier and safer
work environment are ongoing, as is our commitment to strict environmental
compliance at all CB&I facilities and jobsites.
One of our key challenges will be to maintain the necessary human
resources to sell, engineer and build our growing roster of projects — and
projects of increasing size and complexity. We’ve taken a number
of steps already, such as expanding the Engineering Training Program,
wherein we recruit and train graduates from some of the top engineering
schools. In addition, we established a Global Leadership Development
Program for high potential employees in conjunction with Rice University
in Houston. We have also recruited seasoned managers to fill immediate
needs. Ensuring an adequate number of skilled craft personnel is
equally as important, especially for a direct-hire company like CB&I.
The market for skilled crafts is becoming more competitive, so we
are taking the actions needed to make sure CB&I continues to
be viewed as one of the best companies to work for in the industry.
The ultimate aim of all these initiatives is to continue to deliver
the growth and profitable project execution that translates into
increased value for our shareholders, investors and employees.
CB&I stock trades on the New York Stock Exchange and the company
is governed by the regulations of the U.S. Securities and Exchange
Commission. We are complying with the requirements of the Sarbanes-Oxley
Act of 2002 and the NYSE’s standards
for listed companies. Elsewhere in this report, our auditors have
expressed their opinion as to the effectiveness of our internal controls
and management’s assessment of the effectiveness of
internal controls. Documents pertaining to corporate governance are
available on our Web site at www.CBI.com and
by written request to the company.
In addition, in December 2003 the Dutch Corporate Governance Committee
issued the Dutch Corporate Governance Code (the “Dutch Code”)
regarding principles of good corporate governance and best practice
provisions. The principles of the Dutch Code are similar to the requirements
of the Sarbanes-Oxley Act and the NYSE. CB&I generally endorses
the Dutch Code and has amended its corporate governance policies
in light of the provisions of the Dutch Code.
With record backlog going in, we believe 2005 is shaping up to be
a busy and profitable year for CB&I.
The prospects for organic growth in new business are good in just
about all of our markets and geographic segments. Stricter environmental
regulations and record oil and gas prices, combined with the need
to process heavier and more sour grades of crude oil, are triggering
capital spending by refiners for new process units, as well as retrofits
and revamps. Continuing strong worldwide demand for energy is driving
the market for natural gas, with producers seeking to bring gas to
market in the form of LNG. Gas distributors, in turn, are developing
import terminals to receive LNG, with particularly strong activity
in the U.S., Canada and the Caribbean. In addition, we continue to
see steady demand for new water storage facilities in North America.
Our global sales and operations infrastructure enables us to allocate
our resources to the regions and markets where we see the greatest
prospects. We are constantly evaluating opportunities to acquire
complementary businesses that meet our strict criteria for success.
And, we continue to fine tune our organization to do better the things
we do best. Thanks to the support of our employees, customers, business
partners and owners, we look forward to the future with confidence,
anticipation and pride.
Gerald M. Glenn
Chairman, President and Chief Executive Officer
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