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CHICAGO BRIDGE & IRON CO N V - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Financial Statements and the related notes thereto. OVERVIEW General-We provide a wide range of services including conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management and environmental services to customers in the energy infrastructure market throughout the world, and are a provider of diversified government services. In conjunction with the Shaw Acquisition on February 13, 2013, beginning in the first quarter of 2013, our reporting segments were comprised of our four operating groups: Engineering, Construction and Maintenance; Fabrication Services; Technology; and Environmental Solutions (formerly Government Solutions). The three months ended March 31, 2013 includes the impact of the acquired Shaw operations from the Acquisition Closing Date, while the three months ended March 31, 2014 includes a full quarter of associated results (hereafter referred to as the "full quarter impact of the acquired Shaw operations"). Additionally, revenue and income from operations of $69,641 and $3,321, respectively, for the three months ended March 31, 2013 for a large EPC project in the U.S. that was previously reported within our Environmental Solutions operating group has been reclassified to our Engineering, Construction and Maintenance operating group to conform to its classification in 2014, reflecting the present management oversight for the project. We continue to be broadly diversified across the global energy infrastructure market. Our geographic diversity is illustrated by approximately 50% of our 2014 revenue coming from projects outside the U.S. and approximately 25% of our March 31, 2014 backlog being comprised of projects outside the U.S. The geographic mix of our revenue will evolve consistent with changes in our backlog mix, as well as shifts in future global energy demand. Our diversity in energy infrastructure end-markets ranges from upstream activities such as offshore oil and gas and onshore oil sands projects, to downstream activities such as gas processing, LNG, refining, and petrochemicals, to fossil and nuclear-based power plants. Planned investments across the natural gas value chain, including LNG and petrochemicals, remain strong, and we anticipate additional benefits from continued investments in U.S. shale gas. Global investments in power, offshore and petrochemical facilities are expected to continue at robust levels, as are investments in various types of facilities which require storage structures and pre-fabricated pipe. Our long-term contracts are awarded on a competitive bid and negotiated basis using a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Under cost-reimbursable contracts, we generally perform our services in exchange for a price that consists of reimbursement of all customer-approved costs and a profit component, which is typically a fixed rate per hour, an overall fixed fee or a percentage of total reimbursable costs. Under fixed-price contracts, we perform our services and execute our projects at an established price. The timing of our revenue recognition may be impacted by the contracting structure of our contracts. Cost-reimbursable contracts, and hybrid contracts with a more significant cost-reimbursable component, generally provide our customers with greater influence over the timing of when we perform our work, and accordingly, such contracts often result in less predictability with respect to the timing of our revenue. Fixed-price contracts, and hybrid contracts with a more significant fixed-price component, tend to provide us with greater control over project schedule and the timing of when work is performed and costs are incurred, and accordingly, when revenue is recognized. Our shorter-term contracts and services are generally provided on a cost-reimbursable, fixed-price or unit price basis. Our March 31, 2014 backlog distribution by contracting type is described below within our operating group discussion. Backlog for each of our operating groups generally consists of several hundred contracts, which are being executed globally. These contracts vary in size from less than one hundred thousand dollars in contract value to several billion dollars, with varying durations that can exceed five years. The differing types, sizes, and durations of our contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in our quarterly operating group results as a percentage of operating group revenue. In addition, the relative contribution of each of our operating groups, and selling and administrative expense fluctuations, will impact our quarterly consolidated results as a percentage of consolidated revenue. Selling and administrative expense fluctuations are primarily impacted by our stock-based compensation costs, which are recognized predominantly in the first quarter of each year due to the timing of stock awards and the immediate expensing of awards for participants that are eligible to retire. Although quarterly variability is not unusual in our business, we are currently not aware of any fundamental change in our backlog or business that would give rise to future operating results that would be significantly different from our recent historical norms. Engineering, Construction and Maintenance-Our Engineering, Construction and Maintenance operating group provides engineering, procurement, and construction for major energy infrastructure facilities, as well as comprehensive and integrated maintenance services. 26-------------------------------------------------------------------------------- Table of Contents Our Engineering, Construction and Maintenance operating group comprised approximately $25.1 billion (82%) of our consolidated March 31, 2014 backlog. The Engineering, Construction and Maintenance operating group backlog composition at March 31, 2014 was approximately 45% power, 35% LNG, 5% refining, 5% gas processing, and 10% oil sands, petrochemical and other end markets. Our power backlog was primarily concentrated in the U.S., however, we anticipate that our significant future opportunities will be derived from China and other regions. Our LNG backlog was primarily concentrated in the Asia Pacific and North American regions and we anticipate significant opportunities will continue to be derived from these regions in addition to Africa. The majority of our refining-related backlog was derived from South America and we anticipate that our future opportunities will be derived from the Middle East, South America, Russia, and the Asia Pacific region. Our gas processing projects were primarily concentrated in the U.S. and the Asia Pacific region, where we anticipate continued strength. Our oil sands backlog was derived from Canada and we anticipate opportunities will continue from this region. Our March 31, 2014 backlog distribution for this operating group by contracting type was approximately 80% fixed-price and hybrid and 20% cost-reimbursable. Fabrication Services-Our Fabrication Services operating group provides fabrication of piping systems, process and nuclear modules, and fabrication and erection of steel plate storage tanks and pressure vessels for the oil and gas, water and wastewater, mining, mineral processing and power generation industries. Our Fabrication Services operating group comprised approximately $3.0 billion (10%) of our consolidated March 31, 2014 backlog. The Fabrication Services backlog composition by end market at March 31, 2014 was approximately 30% LNG (including low temp and cryogenic), 30% petrochemical, 25% power, 5% gas processing and 10% other end markets. Our March 31, 2014 backlog distribution for this operating group by contracting type was approximately 95% fixed-price, hybrid, or unit based, with the remainder being cost-reimbursable. Technology-Our Technology operating group provides licensed process technologies, catalysts, specialized equipment and engineered products for use in petrochemical facilities, oil refineries and gas processing plants and offers process planning and project development services, and a comprehensive program of aftermarket support. Our Technology operating group comprised approximately $839.9 million (3%) of our consolidated March 31, 2014 backlog and was primarily comprised of fixed-price contracts. Technology's backlog excludes contracts related to our 50% owned CLG joint venture, which we do not consolidate. CLG income is recognized as equity earnings and is generated from technology licenses, engineering services and catalysts, primarily for the refining industry. Environmental Solutions-Our Environmental Solutions operating group provides full-scale environmental services for government and private sector customers, including remediation and restoration of contaminated sites, emergency response, and disaster recovery and leads large, high-profile programs and projects, including design-build infrastructure projects, for federal, state and local governments. Our Environmental Solutions operating group comprised approximately $1.7 billion (5%) of our consolidated March 31, 2014 backlog. The composition of the backlog by end market at March 31, 2014 was approximately 40% remediation and restoration, 25% EPC, 20% program and project management and 15% environmental consulting and engineering, and was primarily concentrated in the U.S. Our March 31, 2014 backlog for this operating group was approximately 60% fixed-price and 40% cost-reimbursable. 27-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Our new awards, revenue and income from operations by reporting segment were as follows: Three Months Ended March 31, (In thousands) % of % of 2014 Total 2013 Total New Awards Engineering, Construction and Maintenance $ 4,924,319 85% $ 1,000,450 52% Fabrication Services 493,974 8% 707,706 36% Technology 100,201 2% 152,748 8% Environmental Solutions 278,995 5% 85,045 4% Total new awards $ 5,797,489 $ 1,945,949 % of % of 2014 Total 2013 Total Revenue Engineering, Construction and Maintenance $ 1,968,711 67% $ 1,499,776 66% Fabrication Services 630,408 22% 495,048 22% Technology 144,076 5% 151,482 7% Environmental Solutions 184,937 6% 105,123 5% Total revenue $ 2,928,132 $ 2,251,429 % of % of 2014 Revenue 2013 Revenue Income From Operations Engineering, Construction and Maintenance $ 88,778 4.5% $ 66,533 4.4% Fabrication Services 40,413 6.4% 45,024 9.1% Technology 41,171 28.6% 35,542 23.5% Environmental Solutions 188 0.1% 671 0.6% Total operating groups 170,550 5.8% 147,770 6.6% Acquisition and integration related costs (8,067 ) (61,256 ) Total income from operations $ 162,483 5.5% $ 86,514 3.8% Consolidated Results New Awards/Backlog-New awards represent the value of new contract commitments received during a given period and are included in backlog until work is performed and revenue is recognized, or until cancellation. Our new awards may vary significantly each reporting period based upon the timing of our major new contract commitments. New awards were $5.8 billion for the first quarter 2014, compared with $1.9 billion for the corresponding 2013 period. The increase compared to the prior year quarter was primarily due to the current period including our proportionate share of a $6.2 billion LNG export facility award in the U.S. (approximately $3.1 billion), a structural, mechanical and piping construction award for an LNG project in the Asia Pacific region (approximately $625.0 million), and engineering and procurement for a clean fuels project in the Middle East (approximately $370.0 million), all within our Engineering, Construction and Maintenance operating group and a pipe fabrication award for a propane dehydrogenation unit in the U.S. (approximately $100.0 million) within our Fabrication Services operating group. See Operating Group Results below for further discussion. Backlog at March 31, 2014 was approximately $30.7 billion, compared to $27.8 billion at December 31, 2013, with the increase primarily reflecting the impact of new awards exceeding revenue by $2.9 billion. While currency fluctuations can cause significant variations in our reported backlog, these fluctuations have not resulted in significant variances in our backlog for the first quarter 2014, and generally do not have a significant impact on our operating results. Certain contracts within our Environmental Solutions and Engineering, Construction and Maintenance operating groups are dependent upon funding from the U.S. government where legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year. Approximately $800.0 million of our backlog at March 31, 2014 for these operating groups was for contractual commitments that are subject to future funding decisions. 28-------------------------------------------------------------------------------- Table of Contents Revenue-Revenue was $2.9 billion for the first quarter 2014, representing a $676.7 million increase (30%) from the corresponding 2013 period. The increase was primarily due to increased construction activities on our large cost reimbursable projects in the Asia Pacific region and Colombia, within our Engineering, Construction and Maintenance operating group and the full quarter impact of the acquired Shaw operations. See Operating Group Results below for further discussion. Gross Profit-Our gross profit was $301.4 million (10.3% of revenue) for the first quarter 2014, compared with $246.1 million (10.9% of revenue) for the corresponding 2013 period. The absolute dollar increase was primarily attributable to our higher revenue volume. The decrease as a percentage of revenue was primarily due to the full quarter impact of the acquired Shaw operations and a temporary underutilization of fabrication capacity within our Fabrication Services operating group. Selling and Administrative Expense-Selling and administrative expense was $119.2 million (4.1% of revenue) for the first quarter 2014, compared with $94.0 million (4.2% of revenue) for the corresponding 2013 period. The absolute dollar increase was primarily attributable to increases in our incentive plan costs (approximately $7.4 million), the full quarter impact of the acquired Shaw operations and inflationary increases. Our stock-based compensation costs, which are predominantly in selling and administrative expense, are higher in the first quarter of each year, due to the immediate expensing of awards for those participants that are eligible to retire. First quarter stock-based compensation expense totaled $43.1 million and $32.5 million for 2014 and 2013, respectively, or 63% and 50% of estimated annual expense for each of the respective periods. Intangibles Amortization-Intangibles amortization was $16.2 million for the first quarter 2014, compared with $9.2 million for the corresponding 2013 period. The increase over the prior year period was primarily due to the full quarter impact of the acquired Shaw operations. Equity Earnings-Equity earnings were $4.2 million for the first quarter 2014, compared with $4.5 million for the corresponding 2013 period. Acquisition and Integration Related Costs-Integration-related costs were $8.1 million for the first quarter 2014 and primarily related to facility consolidations, including the associated accrued future lease costs for vacated facilities and unutilized capacity, personnel relocation and severance-related costs, and systems integration and other integration-related costs. Acquisition and integration related costs for the corresponding 2013 period were $61.3 million and primarily included transaction costs, professional fees, and change-in-control and severance-related costs. Income from Operations-Income from operations was $162.5 million (5.5% of revenue) for the first quarter 2014, versus $86.5 million (3.8% of revenue) for the corresponding 2013 period. The increase in absolute dollars and increase as a percentage of revenue was primarily attributable to the reasons noted above. See Operating Group Results below for further discussion. Interest Expense and Interest Income-Interest expense was $18.9 million for the first quarter 2014, compared with $22.7 million for the corresponding 2013 period. Our first quarter 2014 and 2013 periods both included a full quarter of financing costs associated with the 2013 Shaw Acquisition due to the timing of obtaining our initial funding commitments. The decrease over the prior year period was primarily attributable to the first quarter 2013 including interest related to one-time commitments satisfied during the quarter associated with the Shaw Acquisition (approximately $2.0 million) and the impact of our lower outstanding debt balance in 2014, partly offset by the impact of an increase in average revolving credit facility borrowings. Interest income was $2.1 million for the first quarter 2014, compared with $1.9 million for the corresponding 2013 period. Income Tax Expense-Income tax expense for the first quarter 2014 was $42.9 million (29.5% of pre-tax income), compared with $22.8 million (34.7% of pre-tax income) for the corresponding 2013 period. Our 2014 tax rate benefited from increases in our estimated available tax credits (approximately 2.5%). Our 2013 tax rate was impacted by approximately 3.0% due to the non-deductible nature of certain Shaw Acquisition-related costs. Our tax rate may continue to experience fluctuations due primarily to changes in the geographic distribution of our pre-tax income. Net Income Attributable to Noncontrolling Interests-Noncontrolling interests are primarily associated with our large LNG mechanical erection and gas processing projects in the Asia Pacific region and certain operations in the U.S. and Middle East. Net income attributable to noncontrolling interests was $13.8 million for the first quarter 2014, compared to $9.3 million for the corresponding 2013 period. The change compared to the 2013 period was commensurate with the level of applicable operating results for the aforementioned projects and operations. Operating Group Results Engineering, Construction and Maintenance New Awards-New awards were $4.9 billion for the first quarter 2014, compared with $1.0 billion for the corresponding 2013 period. Significant new awards for the first quarter 2014 included our proportionate share of a $6.2 billion LNG export facility award in the U.S. (approximately $3.1 billion), a structural, mechanical and piping construction award for an LNG project in the Asia Pacific Region (approximately $625.0 million), engineering and procurement for a clean fuels project in the Middle East (approximately $370.0 million), nuclear facility modification work in the U.S. (approximately $120.0 million), 29-------------------------------------------------------------------------------- Table of Contents engineering and project management services for a pipeline expansion project in the Middle East (approximately $85.0 million), a front-end engineering award for a plastics project in the Middle East (approximately $40.0 million) and scope increases on existing backlog. Significant new awards for the first quarter 2013 included an extended commitment on an existing nuclear maintenance contract (approximately $445.0 million), engineering services for an offshore LNG platform in the Norwegian Sea (approximately $180.0 million) and scope increases on our refinery project in Colombia (approximately $175.0 million). Revenue-Revenue was $2.0 billion for the first quarter 2014, representing an increase of $468.9 million (31%), compared with the corresponding 2013 period. Our 2014 results primarily benefited from net increased revenue on our large cost reimbursable LNG mechanical erection and gas processing projects in the Asia Pacific region and refinery project in Colombia (approximately $150.0 million combined) and the full quarter impact of the acquired Shaw operations (approximately $345.0 million). Approximately $700.0 million of the operating group's first quarter 2014 revenue was from our large cost reimbursable projects, compared with $550.0 million for the corresponding 2013 period. Approximately $320.0 million of the operating group's first quarter 2014 revenue was attributable to our nuclear projects in Georgia and South Carolina, compared with $122.0 million for the corresponding 2013 period. Income from Operations-Income from operations for the first quarter 2014 was $88.8 million (4.5% of revenue), compared with $66.5 million (4.4% of revenue) for the corresponding 2013 period. Our 2014 results benefited from our higher revenue volume and leverage of operating costs, offset partially by the full quarter impact of the acquired Shaw operations at relatively lower margin levels. Fabrication Services New Awards-New awards were $494.0 million for the first quarter 2014, compared with $707.7 million for the corresponding 2013 period. Significant new awards for the first quarter 2014 included a pipe fabrication award for a propane dehydrogenation unit in the U.S. (approximately $100.0 million) and various other storage tank and fabrication awards for new and existing projects throughout the world. Significant new awards during the first quarter 2013 included LNG storage tanks and facilities for two projects in the Asia Pacific region (approximately $180.0 million and $80.0 million) and ethane storage tanks in the U.S. (approximately $110.0 million). Revenue-Revenue was $630.4 million for the first quarter 2014, representing an increase of $135.4 million (27%), compared with the corresponding 2013 period. The increase over the prior year period was primarily attributable to the full quarter impact of the acquired Shaw operations (approximately $85.0 million). Income from Operations-Income from operations for the first quarter 2014 was $40.4 million (6.4% of revenue), compared with $45.0 million (9.1% of revenue) for the corresponding 2013 period. Our first quarter 2014 results benefited from our higher revenue volume, but were impacted by a temporary underutilization of our pipe fabrication capacity due to customer delays (approximately $17.0 million). The first quarter 2013 period benefited from savings on storage tank projects in the Caribbean and South America (approximately $9.0 million). Technology New Awards-New awards were $100.2 million for the first quarter 2014, compared with $152.7 million for the corresponding 2013 period. The decrease was primarily due to higher heat transfer awards in the prior year period. Revenue-Revenue was $144.1 million for the first quarter 2014, representing a decrease of $7.4 million (5%), compared with the corresponding 2013 period. The decrease was primarily due to a higher volume of heat transfer activity in the prior year period, partly offset by increased catalyst activity in the current quarter. Income from Operations-Income from operations for the first quarter 2014 was $41.2 million (28.6% of revenue), versus $35.5 million (23.5% of revenue) for the corresponding 2013 period. The increase in absolute dollars and increase as a percentage of revenue was primarily due to a higher margin mix of work in the 2014 quarter for each of our licensing, heat transfer and catalyst activities, as compared to the corresponding 2013 period. Environmental Solutions New Awards-New awards were $279.0 million for the first quarter 2014, compared with $85.0 million for the corresponding 2013 period. Significant new awards for the first quarter 2014 included an environmental monitoring award in the U.S. (approximately $60.0 million) and a nuclear decommissioning and dismantlement award in the U.S. (approximately $35.0 million). Revenue-Revenue was $184.9 million for the first quarter 2014, representing an increase of $79.8 million (76%), compared with the corresponding 2013 period. The increase over the prior year period was primarily attributable to the current period having a full quarter of operations. 30-------------------------------------------------------------------------------- Table of Contents Income from Operations-Income from operations for the first quarter 2014 was $0.2 million (0.1% of revenue), versus $0.7 million (0.6% of revenue) for the corresponding 2013 period. Our 2014 quarter results benefited from our higher revenue volume, but was offset by a lower margin mix of work. Our results continue to be impacted by ongoing uncertainty with respect to Federal government funding and prioritization. LIQUIDITY AND CAPITAL RESOURCES Cash and Cash Equivalents-At March 31, 2014, our cash and cash equivalents were $420.2 million, and were maintained in local accounts throughout the world, substantially all of which was maintained outside The Netherlands, our country of domicile. With the exception of $170.5 million of cash and cash equivalents within our variable interest entities ("VIEs") associated with our partnering arrangements, which is generally only available for use in our operating activities when distributed to the partners, we are not aware of any material restrictions on our cash and cash equivalents. With respect to tax consequences of repatriating our foreign earnings, distributions from our European Union subsidiaries to their Netherlands parent companies are not subject to taxation. Further, for our non-European Union companies and their subsidiaries and our U.S. companies, to the extent taxes apply, the amount of permanently reinvested earnings becomes taxable upon repatriation of assets from the subsidiary or liquidation of the subsidiary. We have accrued taxes on undistributed earnings that we intend to repatriate and we intend to permanently reinvest the remaining undistributed earnings in their respective businesses and, accordingly, have accrued no taxes on such amounts. Operating Activities-During the first three months of 2014, net cash used in operating activities was $145.8 million, primarily resulting from cash generated from earnings, offset by the net change in our accounts receivable, inventory, accounts payable and net contracts in progress account balances (collectively "Contract Capital") ($300.5 million combined). Our Contract Capital balances fluctuate based on the size of our projects and changing mix of cost-reimbursable versus fixed-price backlog. Our cost-reimbursable projects tend to have a greater working capital requirement, while our fixed-price projects are generally structured to be cash flow positive, creating negative net contracts in progress balances that are subject to fluctuation and which are particularly impacted by the timing of new awards and related up-front payments, and achievement of subsequent billing milestones. Our Contract Capital balances are also impacted at period-end by the timing of accounts receivable billings and collections and accounts payable payments for our large projects. The $300.5 million net change in our Contract Capital balances was due primarily to progress on our two large nuclear power projects (approximately $295.0 million). While we experienced negative operating cash flows during the first three months of 2014, variable operating cash flows due to fluctuations in our Contract Capital balances is not unusual in our business. We often have periods in which our operating cash flows exceed our operating income, and accordingly, we will have fluctuations in our operating cash flows between periods. We anticipate net Contract Capital improvement on our existing large projects and up-front payments on recent and future awards that will benefit our future operating cash flows. While our recent operating cash flows have been impacted by the items discussed above, we believe our anticipated future operating cash flows and capacity under our revolving and other credit facilities will be sufficient to finance our capital expenditures, settle our commitments and contingencies and address our working capital needs for the foreseeable future. Investing Activities-During the first three months of 2014, net cash used in investing activities was $22.0 million, as capital expenditures of $26.5 million were partly offset by proceeds from the sale of property and equipment of $4.5 million. We will continue to evaluate and selectively pursue other opportunities for additional expansion of our business through the acquisition of complementary businesses and technologies. These acquisitions may involve the use of cash or may require further debt or equity financing. Financing Activities-During the first three months of 2014, net cash provided by financing activities was $152.3 million, primarily related to net revolver borrowings of $219.8 million, tax benefits associated with tax deductions in excess of recognized stock-based compensation costs of $12.9 million and cash proceeds from the issuance of shares associated with our stock plans of $11.6 million. These cash inflows were partly offset by share repurchases totaling $54.9 million (0.7 million shares at an average price of $76.74 per share), including $30.7 million to purchase 0.4 million shares of our outstanding common stock and $24.2 million to repurchase 0.3 million shares associated with stock-based compensation-related withholding taxes on taxable share distributions. Additional cash outflows included a repayment on our Term Loan of $25.0 million, dividends paid to our shareholders of $7.6 million, and distributions to our noncontrolling interest partners of $4.5 million. Effect of Exchange Rate Changes on Cash and Cash Equivalents-During the first three months of 2014, our cash and cash equivalents balance increased by $15.2 million due to the impact of changes in functional currency exchange rates against 31-------------------------------------------------------------------------------- Table of Contents the U.S. dollar for non-U.S. dollar cash balances, primarily the change in the Australian Dollar exchange rate. The net unrealized gain on our cash and cash equivalents resulting from these exchange rate movements is reflected in the cumulative translation adjustment component of OCI. Our cash and cash equivalents held in non-U.S. dollar currencies are used primarily for project-related and other operating expenditures in those currencies, and therefore, our exposure to realized exchange gains and losses is not anticipated to be material. Letters of Credit/Bank Guarantees/Debt/Surety Bonds-Our primary internal source of liquidity is cash flow generated from operations. Capacity under the revolving credit facilities discussed below is also available, if necessary, to fund operating or investing activities. We have a five-year, $1.35 billion, committed and unsecured revolving facility (the "Revolving Facility") with BofA, as administrative agent, and BNP Paribas Securities Corp., BBVA Compass, Credit Agricole, and The Royal Bank of Scotland plc, each as syndication agents, which expires in October 2018. The Revolving Facility has a borrowing sublimit of $675.0 million (with financial letters of credit not to exceed $270.0 million) and certain financial covenants, including a maximum leverage ratio of 3.00, a minimum fixed charge coverage ratio of 1.75, and a minimum net worth level calculated as $1.8 billion at March 31, 2014. The Revolving Facility also includes customary restrictions regarding subsidiary indebtedness, sales of assets, liens, investments, type of business conducted, and mergers and acquisitions, and includes a trailing twelve-month limitation of $250.0 million for dividend payments and share repurchases if our leverage ratio exceeds 1.50 (unlimited if our leverage ratio is equal to or below 1.50), among other restrictions. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unutilized portion of the facility as well as letter of credit fees on outstanding instruments. The interest, letter of credit fee, and commitment fee percentages are based upon our quarterly leverage ratio. In the event that we borrow funds under the facility, interest is assessed at either prime plus an applicable floating margin (0.5% at March 31, 2014), or LIBOR plus an applicable floating margin (1.5% at March 31, 2014). At March 31, 2014, we had no outstanding borrowings under the facility, but had $237.6 million of outstanding letters of credit, providing $1.1 billion of available capacity. Such letters of credit are generally issued to customers in the ordinary course of business to support advance payments and performance guarantees, in lieu of retention on our contracts, or in certain cases, are issued in support of our insurance program. We also have a five-year, $650.0 million, committed and unsecured revolving credit facility (the "Second Revolving Facility") with BofA, as administrative agent, and Credit Agricole, as syndication agent, which expires in February 2018. The Second Revolving Facility supplements our Revolving Facility, has a $487.5 million borrowing sublimit and includes financial and restrictive covenants similar to those noted above for the Revolving Facility. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unutilized portion of the facility as well as letter of credit fees on outstanding instruments. The interest, letter of credit fee, and commitment fee percentages are based upon our quarterly leverage ratio. In the event we borrow funds under the facility, interest is assessed at either prime plus an applicable floating margin (0.5% at March 31, 2014), or LIBOR plus an applicable floating margin (1.5% at March 31, 2014). At March 31, 2014, we had $331.0 million of outstanding borrowings and $74.7 million of outstanding letters of credit under the facility, providing $244.3 million of available capacity. During 2014, our maximum outstanding borrowings under our revolving credit facilities were approximately $458.0 million. At March 31, 2014, we had $900.0 million remaining on our four-year, $1.0 billion unsecured Term Loan with BofA as administrative agent, which was used to fund a portion of the 2013 Shaw Acquisition. Interest and principal under the Term Loan is payable quarterly in arrears and bears interest at LIBOR plus an applicable floating margin (1.5% at March 31, 2014). However, we continue to utilize an interest rate swap to hedge against $454.5 million of the remaining $900.0 million Term Loan, which resulted in a weighted average interest rate of approximately 1.97% during the three months ended March 31, 2014, inclusive of the applicable floating margin. Future annual maturities for the Term Loan are $75.0 million, $100.0 million, $150.0 million and $575.0 million for the remainder of 2014, 2015, 2016 and 2017, respectively. The Term Loan includes financial and restrictive covenants similar to those noted above for the Revolving Facility. We have a series of Senior Notes totaling $800.0 million in the aggregate, with Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Credit Agricole, as administrative agents, which were used to fund a portion of the 2013 Shaw Acquisition. The Senior Notes have financial and restrictive covenants similar to those noted above for the Revolving Facility. The Senior Notes include Series A through D, which contain the following terms: • Series A-Interest due semi-annually at a fixed rate of 4.15%, with principal of $150.0 million due in December 2017 • Series B-Interest due semi-annually at a fixed rate of 4.57%, with principal of $225.0 million due in December 2019 • Series C-Interest due semi-annually at a fixed rate of 5.15%, with principal of $275.0 million due in December 2022 • Series D-Interest due semi-annually at a fixed rate of 5.30%, with principal of $150.0 million due in December 2024 32-------------------------------------------------------------------------------- Table of Contents Uncommitted Facilities-We also have various short-term, uncommitted revolving credit facilities (the "Uncommitted Facilities") across several geographic regions of approximately $2.0 billion. These facilities are generally used to provide letters of credit or bank guarantees to customers in the ordinary course of business to support advance payments and performance guarantees, in lieu of retention on our contracts. At March 31, 2014, we had $3.8 million of outstanding borrowings and $733.5 million of outstanding letters of credit under these facilities, providing $1.3 billion of available capacity. In addition to providing letters of credit or bank guarantees, we also issue surety bonds in the ordinary course of business to support our contract performance. At March 31, 2014, we had $667.0 million of outstanding surety bonds. Compliance and Other-At March 31, 2014, we were in compliance with all of our restrictive and financial covenants associated with our debt and revolving credit facilities, with a leverage ratio of 2.08, a fixed charge coverage ratio of 4.61, and net worth of $2.4 billion. Our ability to remain in compliance with our lending facilities could be impacted by circumstances or conditions beyond our control, including, but not limited to, the delay or cancellation of projects, changes in foreign currency exchange or interest rates, performance of pension plan assets, or changes in actuarial assumptions. Further, we could be impacted if our customers experience a material change in their ability to pay us, if the banks associated with our lending facilities were to cease or reduce operations, or if there is a full or partial break-up of the European Union or its currency, the Euro. Shelf Registration Statement-We have a shelf registration statement with the SEC that expires on June 18, 2015. The shelf registration statement enables us to offer and sell shares of our common stock and issue debt securities (collectively, the "Securities") from time to time subsequent to the filing of a prospectus supplement which, among other things, identifies the sales agent, specifies the number and value of Securities that may be sold, and provides the time frame over which Securities may be offered. Other-We believe our cash on hand, cash generated from operations, amounts available under our Revolving Facility, Second Revolving Facility and Uncommitted Facilities, and other external sources of liquidity, such as the issuance of debt and equity instruments, will be sufficient to finance our capital expenditures, settle our commitments and contingencies (as more fully described in Note 12 to our Financial Statements) and address our working capital needs for the foreseeable future. However, there can be no assurance that such funding will continue to be available, as our ability to generate cash flow from operations and our ability to access funding under our Revolving Facility, Second Revolving Facility and Uncommitted Facilities at reasonable terms, may be impacted by a variety of business, economic, legislative, financial and other factors, which may be outside of our control. Additionally, while we currently have significant uncommitted bonding facilities, primarily to support various commercial provisions in our contracts, a termination or reduction of these bonding facilities could result in the utilization of letters of credit in lieu of performance bonds, thereby reducing the available capacity under the Revolving Facility and Second Revolving Facility. Although we do not anticipate a reduction or termination of the bonding facilities, there can be no assurance that such facilities will continue to be available at reasonable terms to service our ordinary course obligations. A portion of our pension plans assets are invested in European Union government securities, which could be impacted by economic turmoil in Europe or a full or partial break-up of the European Union or its currency, the Euro. However, given the long-term nature of pension funding requirements, in the event any of our pension plans (including those with investments in European Union government securities) become materially underfunded from a decline in value of our plan assets, we believe our cash on hand and amounts available under our existing revolving and uncommitted facilities would be sufficient to fund any increases in future contribution requirements. We are a defendant in a number of lawsuits arising in the normal course of business and we have in place appropriate insurance coverage for the type of work that we perform. As a matter of standard policy, we review our litigation accrual quarterly and as further information is known on pending cases, increases or decreases, as appropriate, may be recorded. See Note 12 to our Financial Statements for a discussion of pending litigation, including lawsuits wherein plaintiffs allege exposure to asbestos due to work we may have performed. OFF-BALANCE SHEET ARRANGEMENTS We use operating leases for facilities and equipment when they make economic sense, including sale-leaseback arrangements. Our sale-leaseback arrangements are not material to our Financial Statements, and we have no other significant off-balance sheet arrangements. 33-------------------------------------------------------------------------------- Table of Contents NEW ACCOUNTING STANDARDS See the applicable section of Note 2 to our Financial Statements for a discussion of new accounting standards. 2013 QUARTERLY SEGMENT INFORMATION As discussed in Note 16 to our Financial Statements, beginning in the first quarter of 2014, the results for a large EPC project in the U.S. that was previously reported within our Environmental Solutions operating group has been reclassified to our Engineering, Construction and Maintenance operating group to conform to its classification in 2014, reflecting the present management oversight for the project. The following represents our 2013 quarterly new awards, revenue and income from operations adjusted to reflect the reclassification of amounts related to this project to align with our current reporting structure: Three Months Ended September 30, March 31, 2013 June 30, 2013 2013 December 31, 2013 Full Year 2013 New Awards Engineering, Construction and Maintenance $ 1,000,450 $ 1,722,966 $ 1,371,797 $ 4,035,993 $ 8,131,206 Fabrication Services 707,706 493,431 681,068 799,681 2,681,886 Technology 152,748 107,394 139,764 233,784 633,690 Environmental Solutions 85,045 189,996 305,557 225,590 806,188 Total new awards $ 1,945,949 $ 2,513,787 $ 2,498,186 $ 5,295,048 $ 12,252,970 Revenue Engineering, Construction and Maintenance $ 1,499,776 $ 1,796,804 $ 1,907,799 $ 1,961,360 $ 7,165,739 Fabrication Services 495,048 675,471 707,026 698,052 2,575,597 Technology 151,482 161,300 155,941 130,472 599,195 Environmental Solutions 105,123 217,216 221,284 210,373 753,996 Total revenue $ 2,251,429 $ 2,850,791 $ 2,992,050 $ 3,000,257 $ 11,094,527 Income From Operations Engineering, Construction and Maintenance $ 66,533 $ 86,725 $ 86,382 $ 110,885 $ 350,525 Fabrication Services 45,024 66,895 72,184 75,647 259,750 Technology 35,542 36,364 44,804 40,125 156,835 Environmental Solutions 671 5,412 4,023 3,029 13,135 Total operating groups 147,770 195,396 207,393 229,686 780,245 Acquisition and integration related costs (61,256 ) (9,964 ) (5,257 ) (19,260 ) (95,737 ) Total income from operations $ 86,514 $ 185,432 $ 202,136 $ 210,426 $ 684,508 CRITICAL ACCOUNTING ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We continually evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Supervisory Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Financial Statements. 34-------------------------------------------------------------------------------- Table of Contents Revenue Recognition-Our revenue is primarily derived from long-term contracts and is generally recognized using the POC method, primarily based on the percentage that actual costs-to-date bear to total estimated costs to complete each contract. We follow the guidance of FASB ASC Revenue Recognition Topic 605-35 for accounting policies relating to our use of the POC method, estimating costs, and revenue recognition, including the recognition of incentive fees, unapproved change orders and claims, and combining and segmenting contracts. We primarily utilize the cost-to-cost approach to estimate POC as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract are costs of engineering, materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontract and supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates. Backlog for each of our operating groups generally consists of several hundred contracts, and although our results are impacted by changes in estimated project margins, in the current period and for the past several years, such aggregate variations have not resulted in a material net impact to our income from operations. For the three months ended March 31, 2014, we had no individual projects with significant changes in estimated margins and for the three months ended March 31, 2013, individual projects with significant changes in estimated margins did not have a material net impact on our income from operations. Our long-term contracts are awarded on a competitive bid and negotiated basis and the timing of revenue recognition may be impacted by the terms of such contracts. We use a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Fixed-price contracts, and hybrid contracts with a more significant fixed-price component, tend to provide us with greater control over project schedule and the timing of when work is performed and costs are incurred, and accordingly, when revenue is recognized. Cost-reimbursable contracts, and hybrid contracts with a more significant cost-reimbursable component, generally provide our customers with greater influence over the timing of when we perform our work, and accordingly, such contracts often result in less predictability with respect to the timing of revenue recognition. Contract revenue for our long-term contracts recognized under the POC method reflects the original contract price adjusted for approved change orders and estimated recoveries for incentive fees, unapproved change orders and claims. We recognize revenue associated with incentive fees when the value can be reliably estimated and recovery is probable. We recognize revenue associated with unapproved change orders and claims to the extent the related costs have been incurred, the value can be reliably estimated and recovery is probable. Our recorded incentive fees, unapproved change orders and claims reflect our best estimate of recovery amounts; however, the ultimate resolution and amounts received could differ from these estimates. See Note 15 to our Financial Statements for additional discussion of our recorded unapproved change orders, claims, incentives and other contract recoveries. With respect to our EPC services, our contracts are not segmented between types of services, such as engineering and construction, if each of the EPC components is negotiated concurrently or if the pricing of any such services is subject to the ultimate negotiation and agreement of the entire EPC contract. However, we segment an EPC contract if it includes technology or fabrication services and the technology or fabrication scope is independently negotiated and priced. In addition, an EPC contract including technology or fabrication services may be segmented if we satisfy the segmenting criteria in ASC 605-35. Revenue recorded in these situations is based on our prices and terms for similar services to third party customers. Segmenting a contract may result in different interim rates of profitability for each scope of service than if we had recognized revenue without segmenting. In some instances, we may combine contracts that are entered into in multiple phases, but are interdependent and include pricing considerations by us and the customer that are impacted by all phases of the project. Otherwise, if each phase is independent of the other and pricing considerations do not give effect to another phase, the contracts will not be combined. Cost of revenue for our long-term contracts includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The timing of when we bill our customers is generally dependent upon advance billing terms, completion of certain phases of the work, or when services are provided. Cumulative costs and estimated earnings recognized to-date in excess of cumulative billings is reported on the Balance Sheet as costs and estimated earnings in excess of billings. Cumulative billings in excess of cumulative costs and estimated earnings recognized to-date is reported on the Balance Sheet as billings in excess of costs and estimated earnings. At March 31, 2014 and December 31, 2013, we had billings to customers on our long-term contracts of $19.0 billion and $16.1 billion, respectively, netted within costs and estimated earnings in excess of billings and billings to customers of $23.1 billion and $25.4 billion, respectively, netted within billings in excess of costs and estimated earnings. Any uncollected billed revenue, including contract retentions, is reported as accounts receivable. At March 31, 2014 and December 31, 2013, accounts receivable included contract retentions of approximately 35-------------------------------------------------------------------------------- Table of Contents $72.4 million and $68.6 million, respectively. Contract retentions due beyond one year were not material at March 31, 2014 or December 31, 2013. Revenue for our service contracts that do not satisfy the criteria for revenue recognition under the POC method is recorded at the time services are performed. Revenue associated with incentive fees for these contracts is recognized when earned. Unbilled receivables for our service contracts are recorded within accounts receivable and were approximately $86.0 million and $80.0 million at March 31, 2014 and December 31, 2013, respectively. Revenue for our pipe and steel fabrication and catalyst manufacturing contracts that are independent of an EPC contract, or for which we satisfy the segmentation criteria discussed above, is recognized upon shipment of the fabricated or manufactured units. During the fabrication or manufacturing process, all related direct and allocable indirect costs are capitalized as work in process inventory and such costs are recorded as cost of revenue at the time of shipment. Recoverability of Goodwill and Long-Lived Assets-At March 31, 2014, our goodwill balance was $4.2 billion, including $3.3 billion associated with the 2013 Shaw Acquisition. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually at our reporting unit level, absent any indicators of impairment. Our Engineering, Construction and Maintenance operating group includes three reporting units, our Fabrication Services operating group includes two reporting units, and our Technology and Environmental Solutions operating groups each represent a reporting unit. We perform our annual impairment assessment during the fourth quarter of each year based upon balances as of the beginning of that year's fourth quarter. As part of our annual impairment assessment, in the fourth quarter of 2013, we performed a quantitative assessment of goodwill for each of our reporting units. We utilized an income approach (discounted cash flow method) to value our reporting units and test for impairment as we believe this is the most direct approach to incorporate the specific economic attributes and risk profiles of our reporting units into our valuation model. This is consistent with the methodology used for our annual impairment assessment in previous years. We generally do not utilize a market approach given the difficulty in identifying relevant market transactions and the volatility of markets from which transactions are derived. The discounted cash flow methodology, which compares an estimate of a reporting unit's discounted future cash flows to its net book value, is based, to a large extent, on assumptions about future events, which may or may not occur as anticipated, and such deviations could have a significant impact on the calculated estimated fair values of our reporting units. These assumptions include, but are not limited to, estimates of future growth rates, discount rates and terminal values for each reporting unit. Based upon this quantitative assessment, no impairment charge was necessary during 2013, as the fair value of each of the reporting units acquired in 2013 exceeded their respective net book value and the fair value of all other reporting units significantly exceeded their respective net book values. During the three months ended March 31, 2014, no indicators of goodwill impairment were identified. If, based on future assessments, our goodwill is deemed to be impaired, the impairment would result in a charge to earnings in the year of impairment. We amortize our finite-lived intangible assets on a straight-line basis with lives ranging from 2 to 20 years, absent any indicators of impairment. We review tangible assets and finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, the estimated future cash flow associated with the asset or asset group will be compared to the asset's carrying amount to determine if impairment exists. During the three months ended March 31, 2014, we noted no indicators of impairment. See Note 6 to our Financial Statements for further discussion regarding goodwill and other intangible assets. Income Taxes-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 basis using currently enacted income tax rates for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net DTAs if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized. The final realization of DTAs depends upon our ability to generate sufficient future taxable income of the appropriate character and in the appropriate jurisdictions. On a periodic and ongoing basis we evaluate our DTAs and assess the appropriateness of our valuation allowances. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the DTAs. If, based on the weight of available evidence, our assessment indicates that it is more likely than not that a DTA will not be realized, we record a valuation allowance. Our assessments include, among other things, the value and quality of our backlog, evaluations of existing and anticipated market conditions, analysis of recent and historical operating results and projections of future results, strategic plans and alternatives for associated operations, as well as asset expiration dates, where applicable. We provide income tax and associated interest reserves, where applicable, in situations where we have and have not received tax assessments. Tax and associated interest reserves are provided in those instances where we consider it more likely than not that additional tax will be due in excess of amounts reflected in income tax returns filed worldwide. At March 31, 2014 36-------------------------------------------------------------------------------- Table of Contents and December 31, 2013, our reserves totaled approximately $14.3 million. If these income tax reserves are ultimately unnecessary, approximately $11.1 million would impact the effective tax rate as we are contractually indemnified for the remaining balances. We continually review our exposure to additional income tax obligations and, as further information is known or events occur, changes in our tax and interest reserves may be recorded within income tax expense and interest expense, respectively. Insurance-We maintain insurance coverage for various aspects of our business and operations. However, we retain a portion of anticipated losses through the use of deductibles and self-insured retentions for our exposures related to third-party liability and workers' compensation. We regularly review estimates of reported and unreported claims through analysis of historical and projected trends, in conjunction with actuaries and other consultants, and provide for losses through insurance reserves. As claims develop and additional information becomes available, adjustments to loss reserves may be required. If actual results are not consistent with our assumptions, we may be exposed to gains or losses that could be material. Partnering Arrangements-In the ordinary course of business, we execute specific projects and conduct certain operations through joint venture, consortium and other collaborative arrangements (collectively referred to as "venture(s)"). We have various ownership interests in these ventures, with such ownership typically being proportionate to our decision-making and distribution rights. The ventures generally contract directly with the third party customer; however, services may be performed directly by the ventures, or may be performed by us or our partners, or a combination thereof. Venture net assets consist primarily of cash, working capital and property and equipment, and assets may be restricted from being used to fund obligations outside of the venture. These ventures typically have limited third-party debt or have debt that is non-recourse in nature; however, they may provide for capital calls to fund operations or require participants in the venture to provide additional financial support, including advance payment or retention letters of credit. Each venture is assessed at inception and on an ongoing basis as to whether it qualifies as a VIE under the consolidations guidance in ASC 810. A venture generally qualifies as a VIE when it (1) meets the definition of a legal entity, (2) absorbs the operational risk of the projects being executed, creating a variable interest, and (3) lacks sufficient capital investment from the partners, potentially resulting in the venture requiring additional subordinated financial support, if necessary, to finance its future activities. If at any time a venture qualifies as a VIE, we perform a qualitative assessment to determine whether we are the primary beneficiary of the VIE and, therefore, need to consolidate the VIE. We are the primary beneficiary if we have (1) the power to direct the economically significant activities of the VIE and (2) the right to receive benefits from, and obligation to absorb losses of, the VIE. If the venture is a VIE and we are the primary beneficiary, or we otherwise have the ability to control the venture, we consolidate the venture. If we are not determined to be the primary beneficiary of the VIE, or only have the ability to significantly influence, rather than control the venture, we do not consolidate the venture. We account for unconsolidated ventures using proportionate consolidation when we meet the applicable accounting criteria to do so and utilize the equity method otherwise. At March 31, 2014 and December 31, 2013, and for the three months ended March 31, 2014 and 2013, the results of our proportionately consolidated ventures were not material. See Note 7 to our Financial Statements for additional discussion of our material partnering arrangements. Financial Instruments-We utilize derivative instruments in certain circumstances to mitigate the effects of changes in foreign currency exchange rates and interest rates, as described below: • Foreign Currency Exchange Rate Derivatives-We do not engage in currency speculation; however, we do utilize foreign currency exchange rate derivatives on an on-going basis to hedge against certain foreign currency-related operating exposures. We generally seek hedge accounting treatment for contracts used to hedge operating exposures and designate them as cash flow hedges. Therefore, gains and losses, exclusive of credit risk and forward points (which represent the time-value component of the fair value of our derivative positions), are included in AOCI until the associated underlying operating exposure impacts our earnings. Changes in the fair value of (1) credit risk and forward points, (2) instruments deemed ineffective during the period, and (3) instruments that we do not designate as cash flow hedges are recognized within cost of revenue. • Interest Rate Derivatives-During the three months ended March 31, 2014, we continued to utilize a swap arrangement to hedge against interest rate variability associated with $454.5 million of our remaining $900.0 million Term Loan. The swap arrangement has been designated as a cash flow hedge as its critical terms matched those of the Term Loan at inception and through March 31, 2014. Accordingly, changes in the fair value of the swap arrangement are included in AOCI until the associated underlying exposure impacts our earnings. 37-------------------------------------------------------------------------------- Table of Contents FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding CB&I and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. When considering any statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as "achieve," "forecast," "plan," "propose," "strategy," "envision," "hope," "will," "continue," "potential," "expect," "believe," "anticipate," "project," "estimate," "predict," "intend," "should," "could," "may," "might," or similar forward-looking statements, we refer you to the cautionary statements concerning risk factors and "Forward-Looking Statements" described under "Risk Factors" in Item 1A of our 2013 Annual Report and any updates to those risk factors or "Forward-Looking Statements" included in our subsequent quarterly reports on Form 10-Q filed with the SEC, which cautionary statements are incorporated herein by reference. |