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Today’s hydrocarbon industry, which represents approximately 90% of CB&I’s current revenue, is experiencing an unprecedented upturn in capital spending, driven by rapidly escalating energy demand around the world. Projects resulting from the need to boost energy supplies to meet this demand are increasing in every sector of the oil and gas industry globally.
In addition, market fundamentals for LNG remain strong as a result of the ongoing push for cleaner energy sources and the decline of natural gas production in many western nations. Refineries around the world continue to upgrade their facilities to meet environmental regulations for air quality. The market for various clean fuels solutions for diesel and, outside the United States, for gasoline remains strong. The emerging market for renewable energy sources for both power generation and transportation fuels is gaining strength, driven by sustained high oil and gas prices that have resulted from the supply/ demand disparity as demand continues to rise.
CB&I is extremely well positioned to benefit from the surge in capital spending in markets for both traditional and alternative fuels. The company’s longstanding experience in cryogenic facilities, coupled with our expertise in process control systems design, has helped us win a number of turnkey awards for complete LNG import terminals. On the supply side, we have been responsible for the mechanical erection of some of the world’s largest LNG production trains. LNG projects will be a major contributor to CB&I’s revenue stream and will provide new business opportunities for the foreseeable future.
The client relationships and track record of accomplishment we have established in clean fuels projects are paving the way for future refinery work. In addition to clean fuels projects, refineries are expanding their capacity so they can meet higher demand, and they are upgrading their facilities to process heavier grades of crude oil. CB&I, with specialized equipment and proven technical expertise in the design and construction of the heavy wall vessels needed for heavy crude conversion, is uniquely positioned to win many of these projects, such as hydrocrackers and coke drums. CB&I is also a leader in the design and supply of hydrogen production facilities. A reliable supply of hydrogen is important for many heavy crude conversion technologies. In addition, hydrogen can also serve as a potential component of clean energy well into the future.
Our capabilities across the entire hydrocarbon value chain — combined with our global footprint of engineering and construction resources — position us well in other expanding segments of the oil and gas industry worldwide. We see opportunities in offshore production that fit well with the specialized expertise of our London office. Natural gas processing is experiencing strong growth in regions where producers are seeking to develop unconventional reserves. As long as crude prices remain high, we expect continued growth in oil sands development in Canada, a market in which CB&I has been involved since its inception. The added technologies obtained from our recent acquisitions, integrated with our legacy capabilities, enable CB&I to capitalize on the strengths of the combined organization to pursue energy opportunities around the world.
Continuing evidence of this strategy in action can be seen in the company’s 2005 awards, including LNG terminals in China and Europe, hydrocrackers and hydrogen plants in the United States, gas processing facilities in Central and South America, and terminals in the Middle East. We plan to continue to implement this strategy, while also making sure that a long-term plan is in place to achieve sustained profitability regardless of conditions in our end markets.
Lost Workday Cases Worldwide
The Lost Workday Cases Incidence Rate measures the number of
cases per 100 employees resulting in days away from work and/or
days of restricted work activity. CB&I’s record is 80 times better
than the construction industry norm.
Safety
At CB&I, protecting the environment and the health of our employees, customers, subcontractors and the public in the areas where we work and live is a key component of our culture. Every employee across the organization is responsible for using safe work practices in their job every day, and it is their commitment to do so that has helped us achieve a record of exemplary safety performance year after year. As a company, we strive to do the right things for the right reasons, embracing all health, safety and environmental (HSE) regulations and educating our employees through extensive and ongoing training programs.
In 2005, our worldwide construction operations reported a lost workday case incidence rate of 0.04, more than 80 times better than the construction industry norm of 3.6 reported by the U.S. Bureau of Labor Statistics in 2004. Maintaining a leadership role in safety performance is an ongoing company priority, and working safely is an integral part of our corporate culture.
Financial Results
In October 2005, prior to release of the results for the third quarter of 2005, the Audit Committee of the Supervisory Board of CB&I received a memo from a senior member of its accounting department which raised concerns about certain accounting issues with respect to draft financial results for the quarter. These issues included questions associated with claim recognition on two projects and the assessment of costs to complete two projects. The Audit Committee of the Supervisory Board of CB&I, composed of independent outside directors, promptly initiated an independent inquiry with respect to these matters and engaged legal counsel and accounting advisors to assist in that inquiry.
The Audit Committee has completed its inquiry, which primarily focused on the circumstances surrounding the preparation of draft results for the third quarter of 2005 and also touched on certain matters related to prior periods. Concurrently, the Company undertook a review of various aspects of its financial reporting. As a result, the Company, working with its outside auditors, has implemented or will implement enhancements to the Company’s internal controls over financial reporting which are designed to address two material weaknesses and add additional rigor to internal controls.
Earnings performance in 2005 was disappointing and certainly below our expectations. Nonetheless, CB&I set records in 2005 in several key areas:
- Revenue approached $2.3 billion;
- New project awards totaled $3.3 billion, a 25% increase from the previous year; and
- The Company entered 2006 with a backlog of $3.2 billion, an increase of 37% from the beginning of 2005.
We generated strong cash flow from operations and ended 2005 with more than $330 million of cash on hand, with long-term debt of $25 million and a debt to equity ratio of about 0.10. |
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