Document 15KpGVQKajZbjmQbx7v8Oxg0m

Accounting: Date Printed: Time printed: Subject Name: Exchange: Ticker Symbol: Subject #: Document Type: Document Date: Amendment: Document #: Printed: Pages Printed: Laser D Document Print Summary Disabled 04/08/98 10:11 A.M. COMBUSTION ENGINEERING INC N CSP C504000000 ARS 12/31/88 N/A 00521069 Document 51 DISCLOSURE INCORPORATED (DALLAS INFO CENTER) Combustion Engineering is a leading provider of engineered products, systems and services to the worldwide power, process and public sector markets. The cover illustrates C-E's concept for helping clients link management and communications sys tems with automation products to create a framework for multiple levels of information exchange. Internally, C-E is following a similar approach. By merging information networks, management and control systems and engineer ing automation software, the Company is strengthening its traditional capabilities and cre ating new ones. As a result Combustion Engineering can create value for its clients that no other company can duplicate. Financial Highlights (Dollars in thousands, except per share amounts} Net sales Income (loss) from continuing operations (2) Per share (1) Net income (loss) (2) Per share (1) Dividends declared Per share Backlog 1988 1987 $3,483,928 $3,042,074 ($ 245,173} ($ 6.40} $ 56,560 $ 1.54 ($ 245,173) ($ 6.40) $ 38,409 $ 1.00 $ 56,560 $ 1.54 $ 37,996 $ 1.00 $3,704,502 $3,620,517 1986 $2,551,469 $ 56,329 $ 1.69 $ 50,866 $ 1.53 $ 33,264 $ 1.00 $2,766,512 ID Based on an average number of common shares outstanding of approximately 38.3 million in 1988,36.6million in 1987 and 33.2 - million in 1986. : (2| Includes third and fourth quarter 1988 pretax provisions of approximately $272,800 for adjustments to contracts and restructuring (refer io Note 6 of Notes to Consolidated Financial Statements). Contents: 2 Shareholder Letter 5 Business Segments 6 Power Generation 9 PowerServices Businesses: Revenues are approaching $1 billion--double the amount of just five years ago. 10 Fossil Systems: The keys to success are improving cost-effectiveness, maintaining technology leadership and expanding global access. 12 Process Industries 15 Industrial Businesses: Well-established, with excellent market positions, they are strong contributors to C-E's operating profitability. 16 Process Control Business: C-E is now one of the leading suppliers of process control and automation products in the world. 19 Process Engineering: lummus Crest bookings for 1988 increased by 80 percent over 1987. CuiTent backlog represents projects in 30 countries. . 20 Public Sector&Environmental 24 Financial Section 49 Shareholder Information 1 Charles E.Hugel, Chairman and Chief Executive Officer George S.Kimmel, President and ChiefOperating Officer tepasr^rnasbeenoneornwrkeacantrasts Mjchof&eC&npa^ '' " good pefta^^^was^rshadowed : however. by substantial kisses op cfcrtarcrrr tF3^pnne^i^^N^{rf^lvle^jne^W83te^a^^and pamrftetBKNfiiDgteL ' ^ rajses^wldbedearVwKte-staod By the nMH9BG% lndQ>qQdsnetpo^^|939^^ ^^ ^ tefsandwunidpiti^bamlr^tTA "* Tf^n^^owef^nBramr^r^tecbra^^i * ' thesecmilatinglmdbi systemsto ^^ ^ humfowtfade&efscleansm$aprocess&8lcom?eF&'v,;' ' gd^e^iafuBl^rJKtrntE^gji%n^t^a^]ki(ar ,-, *mfcs!rialiefs. Most efthe fosseson t' - , represscosts associated wnh development rntroductiw liav^tak^lorf^'msfl^^faFrB&mc^skylfiarusl^tnal^ '' ":: andetpated \ ' '' /'\ ^ ' 'v nowha^fiveoJthe teltiedpower ^f5ts}\ . : Goe^tron and performing wel- On our firstresource recov ery plant we ftavewerked txirwaythrough Initial operating; problemsandhave processedandtoedsome4O0$Q0 - tonsc^trssh.Aset3Kjrfpfanti^^qpected^s dal operotroolaterlhrs^ear, , , ^" 1908 Results J^anlyaieseM|st^ !; ^ cctt3<^^KJr0stru<3unngos^:^idthet3estdtif^^^^' V; y mWmor&40pershare,versosaprofittd|56#8aBftor " $WpershafemWSaissmtWw^$35biiiJti' '/ " ' C8nparedwithl2,0hillomt9S7. ' ' \i Both the Power Generation and Public Sector and Envi ronmental segments operated at losses, largely due to the provisions for increased contract costs. Power Generation results were also reduced from 1987 by a significantly lower level of long-term contract closeouts. The services business for existing fossil and industrial power plants continued to turn in a strong performance. In addition, sales of control and automation products to the power generation industry doubled. Operating income in the Process Industries segment increased as a result of strong product positions, higher worldwide demand and improved operating efficiencies. Sales of the TaylorTM Mod 300 distributed control system, introduced in 1985, nearly doubled last year, while orders for AccuRay measurement and actuator systems increased by 34 percent over 1987. The control and automation products business reported an improvement in operating results of $29 million. Other Process industry businesses also performed well. Process engineering bookings in 1988 were some 80 per cent higher than in 1987, and the backlog in this business now stands at approximately $570 million. Operating profits in our industrial mineral businesses increased by more than 30 percent. Strategic Actions C-E's operations compete in global business environments. In 1988, international sales were up by more than one-third and now account for 40 percent of the Company's total revenues. In the past twelve months, we have taken several steps that should further improve our ability to compete effectively in global markets. In January of this year, C-E and Alsthom S.A. of Pahs announced a proposal to form a joint venture combining both companies' businesses supplying fossil boilers and related maintenance parts to electric utilities and industrial users worldwide. We expect the partners to own approxi mately equal shares in the new venture. Alsthom has been a licensee of C-E's steam generating technology for 40 years. By combining our respective strengths in technology, manufacturing and marketing, we will be able to better serve fossil boiler clients in the European Economic Community, North America and other important world markets. We are making good progress on our initiatives within the Soviet Union. Our process control joint enterprise there is already providing systems and services for the moderni zation of refineries at Moscow and Omsk and for the Nijnekamsk ethylene facility. The feasibility study for the development of two petrochemical complexes in Western Siberia has been accepted by the Soviet Oil Ministry, and a western consortium led by C-E expects to begin initial work on the projects soon. In the past three years, we've built a substantial business providing control and automation products to the power generation industry. This power automation business is performing well, has excellent long-term prospects, and we are continuing to expand our capability. In November 1988, C-E completed the acquisition of Systems Control Inc/s Energy Systems Group, a leading worldwide supplier of systems that help electric power producers improve power generation efficiency and coordinate distribution. Power automation sales are expected to approach $100 million in 1989. We also have exited businesses that do not fit our strategy or serve our principal end-use markets. In the third quarter of 1988, we sold Jamesbury, a high-performance valve manufacturer, for $136 million, realizing a pretax gain of $36.8 million. We expect to complete soon the sale of our Tyler and Refractories industrial products businesses and our remaining oil and gas services operations for about $125 million, which is approximately book value 3 Outlook We expect Combustion Engineering to return to profitability this year. Operating rates in the process industries are continuing at high levels. Power services and environmen tal markets remain strong, and the outlook for power sys tems is beginning to improve. We have excellent product positions in all of our major businesses. We have completed a realignment of our operations and are continuing to integrate C-E's product offerings and improve operating effectiveness. The Process Industries segment should be the largest contributor to operating income this year. The Power Gener ation segment is expected to return to profitability-- though not at the record levels of 1986 and 1987, since there will be significantly fewer closeouts of long-term contracts. The Public Sector and Environmental segment should improve as waste-to-energy losses are eliminated. three principal ways. First we are acquiring, developing and retaining the very best people Second, as our cover illustra tion suggests, we are making effective use of information technology to create advantages for C-E in the marketplace. Third, we are making sure that we understand our clients' changing requirements and are continuing to acquire and develop relevant technologies to meet those needs. We believe this operating approach will serve our shareholders, clients and employees well. t. Charles E. Hugel Chairman and Chief Executive Officer Financial Performance Last year's financial performance was unsatisfactory, and we certainly share your disappointment in these results. We remain committed to providing returns on capital suffi cient to properly reward your support of the Company and to permit reinvestment in the business. Despite our 1988 financial results. Combustion Engineer ing has entered 1989 with many strengths. The completion of the joint venture with Alsthom will add significantly to our established position as one of the leading suppliers of power boilers and related maintenance parts throughout the world -- at a time when global demand for new equipment is expected to increase. In addition. Combustion Engineering will continue to build on its strong capabilities to improve the operating performance of its clients in the process and power industries. Our commitment to our clients is to be the best value producer -- offering products and services that optimize quality, cost and "functionality." We are achieving this in President and Chief Operating Officer February 17,1989 4 Business Segments Power Generation Process Industries Public Sector and Environmental Dollars in Millions 198B 1987 1986 Net Sales Operating Income (Loss) Backlog SI.663.8 $1.4980 $1,273.8 ($ 89.9) S 179.3 $ 149.9 $1,951.2 $2,161.1 $1,537.4 Principal Markets: Electric utilities Independentpowerprojects Processand other industries Principal Services, Products and Equipment: Engineering and management services Maintenance and spare parts Construction and project management Power-plant control systems and operating software Fossil steam systems Nuclear steam systems, fuel and services Complete power generation plants Fluid bed combustors Power plant emission control equipment Heat recovery equipment and services Work and maintenance management software Dollars in Millions 1988 1987 1986 Net Sales Operating Income Backlog $1,546.5 $1,283.2 $1,079.9 $ 55.1 $ 48.1 $ 8.8 $ 976.1 $ 624.0 $ 452.4 Principal Markets: Pulp and paper Refining, petrochemical, chemical and pharmaceutical Food and beverage Primary metals Minerals and mining Textiles Principal Services, Products and Equipment: Measurement and control systems and services Operating software and management services Instrumentation and valves Engineering, construction and project management services Petrochemical and refinery technology Pulping equipment Specialty minerals and refractories Screening, grinding and milling equipment Engineering design and information management software Dollars in Millions 1988 1987 1986 Net Sales Operating Income (Loss) Backlog $273.6 $ 2608 $ 197.8 l$113.6){$ 188)$ 4.1 $777.2 $ 835.5 $ 776.7 Principal Markets: Municipalities Government agencies Processand powerindustries Principal Services, Products and Equipment: Municipal waste-to-energy systems Hazardous waste site cleanup Environmental consulting, assessment and monitoring Hazardous waste systems Operation, maintenance and training services Mass transit engineering and construction services 5 Power Generation As utilities seek to increase plant efficiencies, systems that optimize electrical generation within a control systems and performance software rep power plant to meet demand from the grid and super resent a growing opportunity. C-E's sales of visory control and data acquisition systems that bal these services doubled in 1988, and order rates ance electrical demand with power generation supply. continued to be strong. C-E also introduced an advanced control system he power generation market for C-E con (Nuplex 80 + TM) for nuclear power plants, and impel! provided engineering services for a plant computer Tsists principally of two businesses: services replacement at a Philadelphia Electric unit. A1987 to maintain or improve the performance or contract exceeding $200 million for two nuclear units extend the life of existing plants and supply in Korea is proceeding on schedule, and the Korean of new steam generator systems. Services to C-E'eslectric utility has made C-E's System 80TM technology utility and industrial clients now include engineeritnhge, standard for future nuclear units. Other major management and construction services, control sys nuclear awards in 1988 include a $23 million contract tems and software, and maintenance parts. In recent extension from Baltimore Gas & Electric for reload fuel years, the market for new boilers has broadened to and two awards under a Department of Energy pro include independent power generators as well as tra gram to develop a gas-cooled nuclear reactor for elec ditional domestic and international electric utilities. trical generation. ; . Power Services New products and services for utility and industrial plant modernization were important factors in our 1988 fossil services performance. For example, in an $11 million contract, Gulf Power Company ordered C-E's new generation of pulverizers to replace those of a competitor at its Crist Electric Generating Plant in Florida. At a James River paper mil!, C-E's new propri etary chromizing process was used in the redesign of a furnace bottom with enhanced corrosion resistance. After early completion of the initial contract, C-E was awarded an $11 million contract to upgrade the entire boiler (see photo, page 8). In another major services award, from Electric Energy Inc., C-E is removing and upgrading the boiler insulation on five units in Illinois. As utilities seek to increase plant efficiencies, con trol systems and performance software represent a growing opportunity (see photo, page 10). C-E's sales of these services doubled in 1988, and order rates continued to be strong. Shanghai United Electric, for example, ordered a $7.5 million integrated control sys tem for a power plant in the People's Republic of China The system incorporates an OTISTM (On-Line Thermal Information System) package and a C-E fuel supervi sory safety system that provides automatic burner control. With the acquisition of Systems Control's Energy Systems Group in November 1988, C-E's offer ing for this market now includes energy management Fossil Systems C-E is continuing to develop processes that reduce emissions from coal-fired power plants. These technol- ogies include equipment that can be retrofitted to existing facilities, such as low nitrogen oxide burners and systems that inject sulfur dioxide-absorbing com pounds into the boiler. They also include "repowering" technologies, such as waste heat recovery boilers that boost generating capacity. Combustion Engineering is a leader in circulating fluid bed combustion (FBC) systems, another important clean coal technology. Texas-New Mexico Power Com pany, for example, contracted with C-E for its second 150 megawatt (MW) FBC unit (see photo, page 11). Pulp and paper producers were also major clients as they expanded capacity and modernized their plants. C-E received two large orders for chemical recovery units and related equipment and services with a total value of $64 million. Outside the United States, a consortium of C-E Canada, Inc. and Marubeni Corporation of Japan received an $82 million award to build two 300 MW lignite-fired steam generators for the Mae Moh Sta tion in northeastern Thailand--the seventh and eighth units supplied by the consortium since 1980. 6 : Paperproductionat James :...; River Corp.'s Camas, Washington mill was threatened when a recoveryboilerloriginaliysup: plied by a competitor) was shutdownduetointemal tube wall cracks. Using 3-D computer drafting.HankArenstam (right) and ten Bergeron evaluated structural ; optionsandcreateda solution based on relocat ing major components to speed rebuilding of the facility, OE earned a performance bonusfor completing the repairs aheadofscheduleandhas been awarded a second contractto redesign and upgrade the balance of the recovery unit. RayA, Fortney PoewwerSseernvdicees Businesses ywnm Mprimary stoss fat&im c$& anddo^iis-Ee{ts^itJ^i3]&i&felP K,*tv<^m*v t**w *<iy^fyy*-y< v M<Mwmw#>wv4iyiil tft jthft/vrAJijini-rT ritnh.\ iaaL ....... goodp&kmm& emission t& ffics^T^sjilfifp^pos^f^ amromrnm 5(fee| parts ^rvkae5:m afeinerB^nsV^^totsonfe^^dy capabfey^te^^ durir^ts n^O^ef , Richard W DeVane, Jr fossil Systems he fossil boiler business is now serving new customerswith rtewteehrtologies in e global marketplace vvithnewcompetitorsiiAittough demand for 1osstl systems remainsiow mNorth America, increasing electrical usage continues to lower Internationally, major power equipment suppliers have begun forming new business relationships ift anticipation of: a uriilied'European market^ The keys to our success in fneei^^es6;i|afcges:affi> improving . To controi.costsand providea more focused strategy, we have simplified our organizational structure and consoli dated our North American and international operations in product designs and cwhmjir^iQ m^easeiQphusa of design and engineering automation. / :: V : The technologyleadership that thought C*|;to thefore^ front of this business will:be rraintami&a^ ; : help electricity generators bum fossil fuels nipre cleanly, for example, we are ctevelpplngte^npj^ia^ ^ bed combustion^ low nitrogert OKide b^e^^ inject sulfur dioxide-absomingcom^ ;: :. In our global business develo^ftt^tv V^-^^ teemirtg vvitH others and developing str^^re alliari^s t^^^^^e i&adjngV : technologies on a cost-effective ba^i^to the market - In line withthis,.w8T8C8nt^^^^^^br^^: venture with.Alsfhom SA, a Wii|jiuippeit ator supplier. 10 At Mississippi Power& Light Company's BaxterWilson powerplant, a 20-year-old control system was driving up mainte nance costs andthreaten ing plant efficiency. Scott Damesek (left) and Scott Andersen of C-E's Power Automation unit mapped the {dent's complex network of sensors, actuators and cables and supervised the installation of aTaylorTM MOD 300 control system. In addition to monitoring real-time performance, C-E's OTIS " package wiR achieve a quick payback through a significantly improved heat rate. C-E's fluid bed combustion (FBC) technology will help Texas-New Mexico Power Company generate power from burning Texas lignite, a difficult fuel with a combined ash and moisture content of more than 40 percent. Removal ofsulfur dioxide is achieved by mixing limestone with fuel in the combustor, and low nitrogen oxide emissions are maintained dueto low combustion temperatures and the careful handling of combustion air. The plant is scheduled for commercial operation in mid-1990, with a second unit now in fabrication, 11 Process Industries The TaylorTM MOD 300 distributed control system Process Engineering continued to gain broad client acceptance as Lummus Crest's performance benefited from strong an open architecture platform for process automa markets, its proprietary technologies, and its proven tion: The total number of systems sold nearly project engineering and management expertise. doubled in 1988, while installations tripled. New technologies developed by Lummus Crest, he process industries are major markets for often in collaboration with clients, have been well received (see photo, page 18). For example, a new TC-Es process control and automation prod facility in Japan will use a process developed by ucts. process technologies and engineering Lummus Crest and Unocal Corporation for producing services, and industrial products. Sales ethylbenzene. The new technology uses a mild chemi have increased more than 40 percent over the pasctatwl roeaction that does not require corrosion-resistant years as a result of strong worldwide market demasntede, l vessels, resulting in significant capital savings. excellent product position and improved operational On global projects, Lummus is able to combine ; effectiveness. technology transfer with cost-effective, on-schedule Process Control New orders for the Process Automation and Process Analytics businesses exceeded $465 million, a 24 per cent increase over 1987. The TaylorTM MOD 300 dis tributed control system continued to gain broad acceptance as an open architecture platform for pro cess control and automation: The total number of systems sold nearly doubled in 1988, while installa tions tripled. The performance of the Taylor MOD 300 platform resulted in three important system orders from Imperial Chemical Industries PLCfor installations in Australia and the United Kingdom. To further improve control system cost-effectiveness for clients, C-E developed the Taylor Remote Input/Output (TRIO) sub system with 6E Fanuc Automation Corporation. This breakthrough product reduces control system installa tion costs by up to 30 percent, while improving overall system availability. During the year, AccuRay measurement and actua project execution. For example, the Company won a $160 million orderfor two new petrochemical plants in the People's Republic of China. Lummus Crest also continued to enjoy success pro viding construction management to pulp and paper clients, in 1988 four major awards were won with a total value of more than $130 million, including Lum mus s first mil! construction project in Europe. In addition, Lummus Crest continues to broaden its role as a supplier of turnkey engineering services on C-E projects, with a recent award for managing the installation of an automated process control system for a Norton Company coated abrasives facility. C-E is also providing advanced automation systems to hydrocarbon process plants through its Simeon unit. Installation of a Simeon system for optimization of plant operations is underway at a world-scale styrene plant in Korea. Simeon is also leading the planning and implementation of computer integrated manufacturing ICIM) systems at several petrochemical complexes. tor products were integrated with the Taylor MOD 300 control system to produce the new AccuRay 1180 MicroPlus TM System for paper and other web process ing industries. This system provides true "single window" insight into both product and process control factors. Strong customer acceptance of this product helped boost AccuRay measurement and actuator sys tem (see photo, page 14) orders to over $130 million, an increase of 34 percent over 1987. Further enhance ments have been made to the 1180 MicroPlus System and introduced to the market in 1989. Industrial Products The performance of C-E's industrial units was led by the mineral businesses -- Georgia Kaolin and C-E Minerals--which had record sales. Georgia Kaolin (see photo, page 15) has enhanced its position as a leading low-cost producer of paper coating and filler clays through modernization programs that help achieve a maximum percentage of refined product from raw clays. C-E Minerals is a leading supplier of alumina- and silica-based minerals used in refractory, precision casting and semiconductor manufacturing. 12 To improve the overall quality oftheirfine print ing grades, Simpson Paper Company is using an AccuRay MICROSCAN TM OptiPaksensorat their Pasadena, Texas mill. The OptiPak sensor, mounted in a MICROSCAN Measurement Platform (pictured), provides on line measurement offor* mation, opacity and brightness. These three important paper charac teristics are measured by simulating human 'lookthrough" perception. Thesensortakes 50,000 to 100,000measurements each second duringthe production ofpapers such asthe Simpson Sundance sheet used forthis report's financial section. 14 Mm tadifstiiatBasiiwsses ,:Ks;.9iMSt^:i:sLIin911S-HSLLU8iItSU' -91r-e"_1.. w*_* vgHR^tac^tS-f***^*:`'wL'liSinit ** excellent-n^rteipositicsjs. They also #e strong. comnuusss tsi>-c$operating prontaDiiny. _ Thekeystosuoessvayby&usl^ss-though eachisritwtentinue to takeadvantageof shared i^^orc^i&nen^^Mio)o9ie& Georgia Kao&wft fee bringingon rowdayopacity1989. which should ^ccsrtn^etoincreas^tev^iuesinaca^tHWjgstrong market C^MineraiswIt^inprateionGfaf^r^iue pxxm.tor rmctory applicationsanc conuoue todevelop ; alumina- andsilica-basedprate fornew uses. The incjeasiog demandforinfects toimprove wiron- nrntal^alhyisenir^^ntsect^f^^insMfeefof; ourequipmentbusinesses. Jntheafesence ofnew clean air ; tegisladonfeithe United States, tbs majoropportunities for ; etfftov^mnjT^wro/stenis^tstiue gas scnffloersand precipitatorsereinternational. AirPreheateris continuing to develop a meatfly introduced regenerative oxidizer tocon* troigaseoasmissions trowprinting, osatingandpanting operations. And, weexpect growing demand inhazardous waste inmeratiOB,whereC-E Raymond feasan established nesHion At our larsestOfoeesseoteatt bu&ness. Sprout-Sauec inpsvedmawfacturing processes and oraiect execution v^ien^te^totekeadvantaoe of strona.;,wi,vwy/wWMtWv> tT.y4ii>.y,5yiyw.iia/,;,w,l!i4wV\f,wMyw>.<**WHy,W.*y^V^'7M'.' . spirasttKj^Bnfl, especial in me pulp awpaper market Ourmineraibusmessest^beBniBftiia^successfui : because theyare low-eastproducers of thehighestquality products withexcellent customerservice,Amajor objective ; faribe 1990s is toextend and strengthen this operating ! approach, particularismtheequipmern businesses. 15 i lalllllfl pracesscoto^amommionprod^sin iflMH the wdfH^lthBpr^^sfefttekisiness WmWm lo^very^^'OurgiDb^cWsmystrmd* ern)tobecompet^a^vwa&hsl^gJh8ma^jetfe this goal vvjthasfgnfamiyhrosrf^ed product tine. This , offering includes Tayionnsttnmsn&and disfr&tited control systems, Accuftsymeasuf^nentaidsc^atorsystems and Atoptantwide automation systems Ciioms are taking atf^ntagOofdiithesecap^iiliesii^ngthsProeQSsAutO' ; 8y increasing the integation ofour products, we are able; to offer our treats die mostcost-effectivecdei&o] and automation systems avaliBbte, in atsheaap$ications-- for example, paper, plas&cs, and n&bar--weare lifting some of the control functions from the Acct&ay product line mtoihelBylOFN^OD^(istEi3atdc^trQf^tem.^a result the reran^yif#o<fcce4 nffire advancedAecul^ay 11SO MtcmRus pravides-ei&anced rMummentand We aredeveiopingotherprotesthatm^e automation omcost-effec&R Our Ta^TUlDjemste^iot/autptit capability improves system pertatancewhiis reducing : installationcosts. Tfrenew Taylorturbohlsde-, part of the MOD 300, incorporates the fetestfrimiaod^te^noiogy to achieve a fourfold in^Kovsm^tm^ooeseingspeed. : VtfeknowteiMc^iJi^dsucfisssd^dsonpn^id- ing total automation forcfeena notjustindiv^ual control solutions. We are now intagratingoar broad technical capa bilities to develop trueplantevide automation. 16 Sustained high quality is at Polaroid, uses theTay* mandatoryatPofaroid lor" MOO 300distributed Corporation's Diversified control system to increase Technical Coating Divi- production efficiency, sion in Waltham, Massachu* improve quality and study setts. David Reitsma critical trends that [standing), senior engineer develop during long production runs. Dan Nagle (seated), Com bustion Engineering's account representative, has helped Polaroid install similarsystems on eight coating lines. i 17 Two recently completed styrene plants in the Peo ple's Republic of China are demonstrating the cost saving benefits of a new technology developed by C*E's Lummus Crestsub sidiary.The proprietary heat exchanger design shown recovers low-level waste heat reducing the heat input required by about 25 percent and giv ing clients a distinct oper ating cost advantage. In addition, the system is easiertooperate, pro vides better reliability, and requires less maintenance than con ventional technologies. ummusCrest booisrplor1988 increased by80 - I represents projectsla30 county incfocfi'ng'^^veawards , for ethytaplsnts,wm#which for nm facfffc Expansion alsoCorcirttiedIn theSowing pulpand papermarket withawardstotal^gover$132intei ' Oursuccess wiroatinuetodependon pmv&mgcost- effective, on-schedule projectruanagementservices, the increasinguseof engineering automaton,andfoyostment in l^va^pfocesstfi^nDl^ies, We proj ect execution cap^iifehy moGtpGratiog thelatest advances in fast^ackschettfand by broedenmgouf ctHpsof highly atso^e contimiii^ta in^stm^gineeHng automation toif^ioasepfodaivitY, shortsnrespc^^fttesarrfMrcocmte.' * Severalrecent ventures have expamfedcurinventoryof high-valuetechn&logtes: We corsetedmexclusivelicens ing agrwient with Huntsman O^nicglCaqxa^afe-fbrits polystyreneprocess, in addition. Catalytic DistillationTech- oologies, our recentlyfom^^v^turewtba^fistanoi Paiys3f$asicfetfochemaals, has aimadytrasetectedby six $em$toimpmvepmducta such asMTSt a gasoline octanefeooster. Another key to long-term success lies inextending our manag^nentsystsns; fingineenngandpn^managem^ cap^ltemtoaddi^ons! marketsamitechnologieswhere - already has anesiabtishedpresence. Wahavesuccessfollyaccompiishedthts in pulp and papermills end arenow extending our reachmto otherprocess markets Public Sector and Environmental During the year, C-E Environmental significantly expanded its scope of work and client base in the growing market for environmental services, with sales increasing by 51 percent over 1987. --; :vr-! o help fulfill a national mandate for ; improved environmental quality and to ' . serve a growing government market for __ ; technical expertise, C-E provides environ mental engineering and hazardous waste cleanup services, waste-to-energy systems, and operations, maintenance and management services for govern ment facilities. Environmental Services During the year, C-E Environmental significantly expanded its scope of work and client base in the growing market for environmental services, with sales increasing by 51 percent over 1987 (see top photo, page 23}. The state of Florida, for example, awarded the Company a three-year, $6 million contract to pro vide testing, monitoring and cleanup of leaking under ground petroleum storage tanks. And the U.S. military awarded the Company multi-year contracts for reme dial investigations and cleanups at sites throughout the United States. One of the largest environmental markets, remedial construction, involves the application of on-site treat ment technologies to reduce hazardous materials to acceptable levels. C-E successfully expanded into the remedial construction business, receiving a $5 million contract to design, construct and start up a ground water treatment plant at a site in Kansas City, Missouri. In addition, C-E Environmental, teaming with other C-E units, is offering investigation and assess ment services for sites containing "mixed wastes," that is. industrial wastes with low-level radioactive content. Resource Recovery Systems In 1988, Combustion Engineering completed the first of three major waste-to-energy plants using C-E's pre pared fuel method, in which municipal waste is pre sorted and shredded to create a consistent fuel source and to allow recycling of certain materials. The facility in Hartford is now in commercial opera tion and has met or exceeded some of the most stringent air compliance standards in the country (see bottom photo, page 23). A 4000 ton-per-day plant in Detroit is undergoing start-up and trial operation. After permitting delays, construction on a 2000 ton-per-day Honolulu plant has resumed and is scheduled for com mercial operation in 1990. Last year. Combustion Engineering was awarded a J90 million contract by the Dakota County, Minnesota Board of Commissioners for a mass-bum waste-toenergy plant there. When permitting is completed, C-E will construct the 800 ton-per-day. 23 megawatt pub-; licly owned facility and operate it under a 20-year contract. C-E is also nearing the final stages of permit ting and financing for a mass-bum plant and materials recycling center for the Town of Huntington, New York. . Operations and Maintenance Services C-E has extended its specialized technical services and broad experience with process technologies into the * public sector market. In particular, the need to reduce costs and improve operating efficiencies at govern ment installations has created a growing demand for management, operations and maintenance services. In 1988, C-Es Operations & Maintenance Services unit was awarded contract extensions by the U.S. military totaling more than $35 million for administra tion and engineering services, including work at the Electromagnetic Environmental Test Facility and the Instrumented Test Range at Fort Huachuca, Arizona (see photo, page 22). On both contracts C-E is using a new internally developed computerized program man agement system that can be integrated with the Gov ernment's vendor cost accounting, inventory control procurement and other key reporting systems. The Company also received contracts totaling $95 million for the design, construction and operation of a chemical plant and added a new contract with the U.S. Army Intelligence and Security Board to develop, oper ate and maintain automated intelligence systems. 20 High performance aircraft. missiles and even the NASA space shuttles are tracked and evaluated by C*E'$ Operations and Maintenance Services, Inc. under contractto the Department of Defense. Located at Fort Huachuca, Arizona, the Instrumented Test Range electronically checks out the surveillance, navigation and communications systems of aircraftand missiles under simulated operating conditions. C-E personnel maintain radar, telemetry and photographic equipment atthe main control room (shown) and remote systems located elsewhere on the range, 22 The Mid-Connecticut waste-to-energy plant built by Combustion Engi neering in Hartford has processed over400,000 tons of refuse and produced 360million kilo watt hours of electricity since operating trials began in September 1987. The plant is proving to be one ofthe cleanest run ning such facilities in the country. In several cate gories, including acid gases, emissions from the plant are the lowest recorded for a waste-toenergy plant in Connecti cut--where stateair quality regulations are among the most stringent in the nation. C-E Environmental, Inc. is helping both government and industry dean up hazardous waste sites as a part ofthe United States Environmental Protection Agency (EPA) Superfund program. Atan abandoned dump she in New Jersey, C-E Environmental success fully removed about 1,500 cubic yards of soil contaminated with PCBs and other organic chemicals. Contaminated soil was removed to an average depth of eight feet and property disposed ofat an EPAapprovedsite. 23 Financial Section Combustion Engineering. Inc. and Subsidiary Companies 25 Managements Discussion and Analysis 31 Consolidated Balance Sheet 32 Consolidated Statement of Income 33 Consolidated Statement of Changes in Shareholders' Equity 34 Consolidated Statement of Cash Flows 35 Notes to Consolidated Financial Statements 44 Report of Independent Public Accountants 45 Quarterly Financial Data 46 Summary of Operations 47 Financial Position and Other Data 24 Management's Discussion and Analysis {Dollars in thousands) Results of Operations 1988 Compared to 1987 Power Generation Net Sales Operating Income (Loss) Backlog Percentage 19881987Change $1,663,843 ($ 89,946) $1,951,177 $1,498,031 $ 179,282 $2,161,050 11.1% -- ( 9.7%) The Power Generation segment's major lines of business are: maintenance, engineering, management and material services and steam generator design, equipment and technology. As a result of continued demand for smaller, non-utility power plants, the Company and its competitors have had to develop and rely on new, first-time technologies and continue to reassess their organizations in meeting present market demands. Although sales were up for this segment in 1988, primarily as a result of increased activity on certain non-utility power contracts, a substantial operating loss was recognized. The recognition of an operating loss was caused by an increase in estimated costs to complete circulating fluid bed power plants involving new, first-time technologies, a reduction in steam supply systems contract close outs, cost overruns on other fossil fuel systems contracts administered in the United States and Canada and a provision for further restructuring of the Power Generation businesses. The Company and Alsthom SA, headquartered in Paris, jointly announced in January 1989 that they intend to form a jointventure to combine their respective businesses supplying fossil-fueled steam supply systems and related maintenance parts to electric utilities and industrial users on a worldwide basis. The venture will combine each partners respective strengths in technology, manufacturing and , marketing to supply steam systems to better save customers in-North America, the European Economic Community and other global markets. Upon approval by each company's board of directors and required government regulatory agencies, it is expected that the Company and Alsthom would own equal shares in the new venture. In addition, the Company looks toward the benefits of restructuring of this segment maturing of newly developed technologies and a return to profitability with an organization that should be wellpositioned to meet a strengthening aftermarket services and products market and continued demand for new boilers. Backlog decreased in 1988 from the record level of 1987 as work progressed on the nuclear plants in Korea, circulating fluid bed plants in the United States and other fossil plants in the United States, Canada and the People's Republic of China. However, in 1988. TexasNew Mexico Power company contracted with the Company for its second 150 megawatt, circulating fluid bed unit and outside the United States, a consortium of C-E Canada, Inc. and Marubeni Corporation of Japan received an $82,000 award to build two 300 megawatt lignitefired steam generators for the Mae Moh Station in northeastern Thailand. Process Industries Net Sales Operating Income Backlog - Process Industries includes process controls and automation products, industrial minerals and equipment. This segment also includes the process engineering and construction business which primarily provides design, engineering and construction management services and process technology for chemical process plants, petroleum refineries, pulp and paper mills and other industrial facilities. A strong market demand and product position and improved operational effectiveness for process controls, kaolin paper coating and filler clays and alumina- and silica-based minerals resulted in improved performance for this segment in 1988. The Company's process control business revenues were up 25% and its minerals businesses revenues were up 21% over 1987. Sales also increased 1988 $1,546,455 $ 55,068 $ 976,080 1987 $1,283,218 $ 48,131 $ 623,998 Percentage Change 20.5% 14.4% 56.4% significantly for the process engineering and construction business in 1988 as this repositioned business continues to capitalize on providing advanced, proprietary, process technologies and continues to benefit from strong international markets. Operating income was up in 1988 due to improved performance of the Process Automation Business unit which resulted from the combination of AccuRay measurement and control systems and TaylorT" process control systems in 1987 and continued strong demand for the Company's minerals products. This was partially offset by costs associated with acquired contracts and implementation of new manufacturing technologies at Sprout-Bauer. Operating income of the ptocess engineering and construction 25 business, exclusive of the recognition of a provision to close out an ethanol plant contract, was up significantly over 1987, reflecting the strengthening position of this business. Backlog increased more than two-fold for the process engineering and construction business, reflecting a strong pulp and paper market, with four major awards won in 1988 with a total contract value of over $130,000 and a strong international market exemplified by a $160,000 order for two, new, petrochemical plants in the People's Republic of China, also won in 1988. , The Company's industrial businesses are expected to perform well in 1989 as they continue to take advantage of strong pulp and paper markets and internal development programs. The performance of the process controls and process engineering and construction businesses should continue to improve as a result of continued strong markets, new product introductions and continued improvements in operational effectiveness. Public Sector and Environmental Net Sales Operating Loss Backlog The Public Sector and Environmental segment includes resource recovery systems, environmental cleanup and consulting services and operations and maintenance services for governmental agencies and industrial facilities. The operating results of this segment reflect charges recognized for the estimated cost to complete the waste-to-energy plants at MidConnecticut. Detroit and Honolulu, all of which involve new. first-time technologies. This cost included the cost to repair the boilers in the Mid-Connecticut plant which, on October 27,1988, experienced tube failures due to corrosion and the cost of related modifications required on the two other plants under construction. The Mid-Connecticut plant is now in commercial operation and has processed over 400,000 tons of refuse. After permitting delays, construction has resumed on the 1988 $273,630 ($113,634) $777,245 1987 $260,825 1$ 18,786) $835,469 Percentage Change 4.9% -- 1.7.0%) Honolulu plant which is scheduled for completion in 1990. The Detroit plant is undergoing acceptance testing in preparation for a mid-1989 commercial start-up. The Company's Environmental and Operations & Maintenance j Services units had significant increases in revenue in 1988 due to -' ` internal growth and the recognition of a full year of revenues from E.C. Jordan which was acquired in May 1987. This increase reflects the expanded scope of work and client base in the growing market for environmental services and the Company's growing business in providing management, operations and maintenance services. Equity income (loss) improved in 1988 due to the absence of a $32,000 pretax charge recorded in 1987 to reduce to estimated realizable value the carrying value of the Company's investment in and advances to an ethanol joint venture. Interest expense, net of interest earned on securities, increased in 1988 due to higher borrowings primarily as a result of operating losses. The effective income tax rate for continuing operations was 2.5% in 1988 and 43.7% in 1987. Income tax expense in 1988 primarily reflects the Company's inability to currently recognize tax benefits resulting from 1988 losses and a provision for the recapture of investment tax credits. The effective tax rate was lower than the statutory rate of 34% due to taxes on foreign operations, state income taxes and losses without income tax benefit. The effective rate in 1988 was lower than in 1987 due primarily to losses without income tax benefit. Results of Operations 1987 Compared to 1986 Power Generation Net Sales Operating Income Backlog Net sales were at record levels in 1987. The growth in sales was a result of increased revenues from aftermarket products and services, non-utility power projects and close outs on certain long-term 1987 $1,498,031 $ 179,282 $2,161,050 1986 $1,273,811 $ 149,857 $1,537,415 Percentage Change 17.8% 19.6% 40.6% contracts. These results reflected the benefit of the Company's repositioning to take advantage of customers' demand for products 26 and services for maintenance, renovation and facilities upgrade to improve plant performance. Operating income was favorably affected by increased revenues, close outs on long-term contracts and strong performance in providing aftermarket services. A gain was also realized from the sale of the Company's investment in Northern Engineering Industries PIC offset by a charge for restructuring costs within this segment Record bookings were realized in this segment including contract awards for two 1.000 MW nuclear steam supply systems and associated technology for Korea Electric Power Company's plants at Vbngkwang and two 600 MW coal-fired steam generators in Shanghai for the People's Republic of China. Process Industries Net Sales Operating Income Backlog The increase in net sales for 1987 was a result of the acquisition of AccuRay, Afora. the full year effect of the Sprout-Waldron acquisition in August 1986 and increased revenues from pulp and paper and instrumentation and controfs products and services. The process engineering and construction business returned to profitability despite lower sales due to the successful repositioning as a supplier of technology-based engineering services, significant reduction in costs of certain long-term contracts and the absence of a 1987 $1,283,218 $ 48,131 $ 623,998 1986 $1,079,858 $ 8.743 $ 452,395 Percentage Change 18.8% 450.5% 37.9% provision for rework on an ethanol plant Also, profitability due to strong performance from the industrial minerals lines was more than offset by recognition of costs associated with the introduction of new products and services. Strengthening chemical, petrochemical, refining and pulp and paper markets resulted in the highest level of backlog for the process ' engineering and construction business since 1984. Public Sector and Environmental Net Sales Operating Income (loss) Backlog In expanding its environmental engineering, cleanup and consulting services business, the Company acquired Bell Technical Operations Corporation in April 1987. and E.C. Jordan in May 1987. which was the primary reason for increased sales in that period. 1987 $260,825 {$ 18.786) $835,469 1986 $197,800 $ 4,083 $776,702 Percentage Change 31.9% -- 7.6% Recognition of additional costs on the Mid-Connecticut waste-toenergy project and delays on the Honolulu project resulted in the reported operating loss for this segment in 1987. Equity income (loss) in 1987 included a $32,000 pretax charge to reduce to estimated realizable value the canying value of the Company's investment in and advances to an ethanol joint ventura Interest expense, net of interest earned on securities, increased in 1987 due to higher borrowings primarily as a result of the funding of acquisitions. The effective income tax rate for continuing operations was 43.7% in 1987 and 42.8% in 1986. Income tax expense in 1987 was higher than the 40% statutory rate due principally to taxes on foreign operations and state income taxes, which were partially offset by depletion. The effective tax rate for 1987 was higher than in 1986 due primarily to higher goodwill amortization and taxes on foreign operations. 27 Liquidity and Working Capital Pursuant to the Company's strategy to strengthen its position as a leading provider of engineered products, systems and services to the power, process and public sector markets, a number of acquisitions were made in the last several years and substantial investment has been made in product development and in restructuring the business. Over recent >ears, availability of advance and progress payments has lessened due to a decline in sales of products and services where such payments are common. Other sources of funds include sales of prop erty, interest income, dividend income and. in 1988, the sale of Jamesbury Corp. In the first quarter of 1989, the Company is scheduled to consummate the sale of its Premier Refractories and Chemicals (formerly C-E Refractories), C-E Tyler, C-E Natco and Vetco Services businesses for proceeds of approximately $125,000. Long-term debt increased from December 31,1987. as a result of the reclassification of an additional $30,000 of short-term bank notes, bringing the total of such reclassification to approximately $75,000. The refinancing of these short-term bank notes is expected for an uninterrupted period extending beyond one year through renewing, extending or replacing them with other short-term bank notes or by refinancing them through other long-term financing arrangements. At December 31,1988, the Company had long-term debt of $316.046 which was equal to 34% of long-term capitalization (deferred income taxes, long-term debt and shareholders' equity). Short-term borrowings at December 31.1988 of $120,717, includ ing the current portion of long-term debt increased as a result of funding costs to complete certain contracts and restructuring proyams. The Company has two revolving credit agreements for $300,000 and $200,000 established in 1987 and 1988, respectively, with a number of large, money-center banks. There were no borrow ings under these two similar agreements. On March 25,1988, the Company entered into a five-year agree ment whereby it can sell up to $100,000 of undivided interests in a designated pool of accounts receivable, principally of the Power Generation and Process Industries segments. At December 31,1988, approximately $100,000 of receivables were sold for cash under this agreement. The undivided interest in the designated pool of receiv ables was sold with limited recourse. On December 31,1987, the Company sold net receivables amounting to approximately $100,000. In April 1987. the Company completed the public offering of 4,600,000 shares of its common stock for net proceeds of $150,972 . and filed a $225,000 debt shelf registration. In May 1987, the Company issued 9.70% Subordinated Notes due in 1997 for $150,000. The net proceeds of these offerings were applied to refinance bank debt incurred to finance the acquisition and associated costs of AccuRay, as well as to repay certain indebtedness of AccuRay and to refinance existing short-term debt. The Company's net working capital balance declined in 1988 due to the adverse effect of a provision for adjustment to contracts, an increase in accounts payable and short-term borrowings. This resulted in a negative net working capital balance which is principally due to substantial liabilities related to contract accruals and advance pay ments. Historically, these obligations have not required immediate payment. Working capital levels have also varied because of acquisi tions, dispositions and discontinued operations. Internal cash flow, proceeds of non-strategic asset sales and avail able credit facilities are expected to be sufficient to meet the liquidity and working capital needs of the Company. From time to time, the Company has and may continue to access capital markets to meet its longer-term needs and to refinance short-term borrowings. Acquisitions, Dispositions and Discontinued Operations The Company has been repositioning with selected divestments and strategic acquisitions to focus on engineering services and products based on advanced technologies that meet customer needs for increased efficiency and performance. To further improve its offerings to the market for control, monitoring and optimization of Dower production and distribution the Company. acquired, in November 1988. the operations of Systems ControlMnc.'s Energy Systems Group (ESG). a leading supplier of energy manage ment systems (EMS). supervisory control and data acquisition systems (SCADA) and advanced application software to the electric power industry for approximately $15,235. The operating results of this . operation have been consolidated with those of the Company since .the date of acquisition. Had this acquisition been consummated at the beginning of 1988, the proforma effect on the results of operations would not have been material. During September 1988, die Company completed the sale of its investment in Jamesbury Corp., a manufacturer and supplier of highperformance valves, including Hammel Dahl Inc., a manufacturer of control valves. During June 1988, the Company had purchased the remaining 70% of Hammel Dahl, Inc. The Company realized net proceeds on this sale of approximately $136,000. AccuRay Corporation was acquired in January 1987 for a purchase price of approximately $206,000 plus associated costs. The Process Automation Business unit was created to combine AccuRay^ meas urement and control systems and Taylor'" process control systems Also within this unit is Afora Ltd. which was acquired in August 1987. Afora Ltd. develops and markets process software. In April 1987. the Bell Technical Operations Corporation of Textron was acquired. This expanded the Company's Operations & Mainte nance Services business to include technical services for government clients. In May 1987, the Company acquired E.C. Jordan which was added to the newly created business, C-E Environmental, Inc. E.C. Jordan's engineering and scientific skills have been merged with existing laboratory analysis and remedial service capabilities to offer full-scope environmental services to our clients. In September 1987, the Company completed the acquisition of certain assets and business operations from the Lurgi Corporation of River Edge. NJ, giving the Company the ability to further develop Lurgi's circulating fluid bed (CFB) combustion process combined with internal experience in coal burning steam generator technology and equipment. The operating results of Bell Technical Operations Corporation, E.C. Jordan. Afora Ltd. and the assets and business operations acquired from Lurgi Corporation have been consolidated with those of the Company since their respective dates of acquisition In June 1988, Baker Hughes sold 70.1 % of the VG Common Shares to Vetco Gray Inc. to Bain Venture Capital. The Company has main tained its investment position in Vetco Gray Inc. As a result of restructuring programs, cost savings and an improving market 1988 operating results of Vetco Gray Inc. have improved significantly over the prior year. Reference should be made to Note 14 and Note 17 of the Notes to Consolidated Financial Statements on pages 42 and 44. Accounting for Income Taxes In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96 "Accounting for Income Taxes" (SFAS 96). In December 1988, the Board amended SFAS 96 (through SFAS 100) by delaying its effective date for financial statements issued for fiscal years beginning on or after January 1, 1990. Adoption of the new standard will result in a cumulative adjustment that will be reported in the year the standard is imple mented. This adjustment is not expected to be significant. At December 31,1988, the Company has approximately $196,000 and $47,000 of domestic and foreign net operating loss carryforwards for financial reporting purposes, which expire in 2003 and beginning in 1992, respectively and approximately $13,000 of foreign tax credit carry forwards which expire in 1990. At December 31,1988, the Company has approximately $27,000 and $12,000 of foreign and investment tax credit carryforwards, respectively, for income tax reporting purposes which expire beginning in 1991 and beginning in 2001, respectively. Domestic and foreign net operating loss carryforwards of approximately $50,000 and $52,000 expire in 2003 and beginning in 1990, respectively. The future utilization of these carryforwards will reduce both the cash cost of income taxes as well as the related book . Capital Resources Expenditures for property, plant and equipment aggregated $257,215 during the years 1986 through 1988. Capital expenditures during 1988 emphasized improved production efficiency, maintenance of operating facilities and the pursuit of market opportunities for new and existing products and services. Provisions for depreciation and amortization of facilities during the years 1986 through 1988 aggregated $216,142. Investment in property, plant and equipment, excluding acquisitions December 31, New Products and Services/Additions to Existing Capacity Replacement and Improvement of Existing Facilities Other and capitalized software, during 1988 totaled $88,728. This compares to additions of $83,599 in 1987. / The unexpended balance of authorized capital projects agyegated $49,848, $52,427 and $40,976 at December 31,1988,1987 and 1986, respectively. The general purpose of these projects is summarized below: 1988 44% 54 2 100% Percentage to Total 1987 47% 49 4 100% 1986 48% 47 5 100% Impact of Inflation and Changing Prices Since the rate of inflation subsided, its immediate impact has not been as severe as that experienced in past history. However, generally competitive market conditions made it difficult to increase selling prices as an offset to inflation. 29 Business Segment Information December 31, (Dollars in thousands) 1988 1987 1986 Net Sales (1)-- Power Generation Process Industries (2) Public Sector and Environmental $1,663,843 1.546,455 273,630 S3.483.928 51,498,031 1,283,218 260,825 53,042,074 51,273,8*1 1,079.858 197,800 52,551,469 Operating Income (Loss) (3)-- Power Generation Process Industries (2) Public Sector and Environmental Corporate expenses - unallocated Gain on dispositions Equity income (loss) 14) IS 89.946} 55.068 ( 113,634) ( 148.512! ( 73.923) 22.829 4.558 5 179,282 48.131 ( 18,786} 208.627 ( 60.397) 8.664 ( 24.824) 5 149.857 8,743 4,083 162,683 ( 52.8011 -- _ 3,934 ($ 195,048) 5 132,070 5 113,816 Backlog (Unaudited)-- Power Generation Process Industries (2) Public Sector and Environmental (5) $1,951,177 976.080 777.245 S3.704.502 52.161,050 623.998 835.469 53,620,517 51,537,415 452.395 776,702 52.766.512 Identifiable Assets-- Power Generation Process Industries (2) Public Sector and Environmental Equity investments Investment in Vetco Gray Inc. Corporate and unallocated assets (6) Net assets of discontinued operations $ 679.817 1,321.651 102,752 2,104,220 48,450 164,099 123.069 105,997 52,545,835 5 682,820 1.303.279 98,127 2.084,226 46.465 163.099 295,274 114,666 52,703,730 5 670.022 890.552 38.149- 1,598,723 37.700 163.099 353.084 115.421 $2,268,027 Additions to Capital Assets-- Power Generation Process Industries (2) Public Sector and Environmental $ 18,021 73,969 1,912 5 21,387 63,244 3,629 5 27.941 50.800 11.434 Corporate 93,902 4,549 S 98,451 88,260 5,509 5 93.769 90.175 6,594 5 96,769 Depreciation and Amortization (7)-- Power Generation Process Industries 12) Public Sector and Environmental S 40,523 59,368 3,350 5 27,102 53,924 1,753 5 27,552 39,923 416 Corporate . 103,241 6,823 S 110,064 82,779 5,873 5 88,652 67,891 3,233 $ 71,124 (11 Includes only sales to unaffiliated customers (intersegment sales ate not sigmtaaM) and no single customer accounts lor 10% or more of the consolidated sales. (21 Process Industries business segment information has been restated io include the Engineering and Construction operations 13) Includes third and fourth quarter 1988 pretax provisions totaling approximately 1272.800 lot adjustments to contracts and restructuring (refer to Note 8 ol Notes to Consolidated Financial Statements). M) Includes a pretax charge of 132.000 in 1987 to reduce to estimated readable value the carrying value of the Company's investment in and advances to an ethanol joint venture (5) Includes contract backlog relating to government contract services totaling approximately $178,000 and $158,000 in 1988 and 1987. respectively, which extend over periods approximating live years, many of which are subject to annual government funding authorization. (6) Includes piimaiily cash, short-term and cost basis investments and corporate facilities (7) Includes amortization of capitalized software of $21,930. $7,926 and $6,356 m 1988.1987 and 1986, respectively (refer to Note4 of Notes to Consolidated Financial Statements for change in estimated useful life for capitalized software). 30 Consolidated Balance Sheet December 31, Assets Current assets: Cash and short-term investments Accounts receivable, net Inventories Prepaid expenses Deferred income taxes Total current assets Investments in associated and other companies: Investment in Vetco Gray Inc. Net assets of discontinued operations Other investments Capital assets, net Goodwill Other assets Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings Accounts payable Accrued liabilities Income taxes Advance payments Total current liabilities Deferred income taxes Long-term debt Other liabilities Commitments and contingent liabilities (Note 12) Shareholders' equity: Preferred stock, no par value-- Authorized and unissued -- 5,000,000 shares Common stock (Note 10). $1 par value-- Authorized --100,000,000 shares Issued -- 38753,596 shares in 1988 and 38,078,983 shares in 1987 Retained earnings * Cumulative translation adjustment Treasury stock, at cost Reference is made to the accompanying notes to consolidated financial statements Combustion Engineering. Inc. and Subsidiary Companies 1388 (Dollars in thousancsl 1987 $ 157,852 658,342 490,173 25,067 -- 1,331,434 $ 151,240 629,775 488,136 23,889 103,397 1,396,437 164,099 105.997 74.549 344,645 571.369 221.751 76,636 J2,545.835 163,099 114.666 75,650 353,415 630,064 251,654 7X160 $2,703,730 $ 120,717 267,328 753.370 65,461 395.244 1,602,120 20,779 316,046 13,702 $ 77,848 188,787 653,375 43,334 390,878 1,354,222 175,322 293,957 17,768 268,737 335,991 ( 10,844) 593,884 696 593.188 $2,545,835 254,437 619,573 ( 10,887) 863,123 662 862,461 $2,703,730 31 Consolidated Statement of Income Years ended December 31 Net Sales Costs and Expenses: Cost of sales (Note 6) Selling, general and administrative expenses Equity income (loss) Dividend income Other income, net Gain on dispositions Operating income (loss) Interest expense Interest earned on securities Income (loss) from continuing operations before income taxes Provision for income taxes Income (loss) from continuing operations Net loss from discontinued operations Net income (loss) Earnings (Loss) Per Share of Common Stock: Continuing operations Discontinued operations Net income (loss) Average Number of Common Shares (In thousands) Reference is made to the accompanying notes to consolidated financial statements Combustion Engineering. Inc and Subsidiary Companies 1988 1987 1986 (Dollars In thousands, except per share amounts) $3,483,928 $3,042,074 $2,551,469 3.338,140 379,300 3,717,440 { 233.512) 4,558 4.274 1,440 28,192 ( 195,048) { 61,352) 17,174 ( 239,226) 5,947 ( 245,173) -- ($ 245,173) 2,585,820 322,633 2,908,453 133,621 1 24,824) 2,728 158 20,387 132,070 i 44,632) 13,024 100,462 43,902 56.560 -- $ 56,560 2,163,448 281,976 2.445,424 106,045 3,934 3,131 706 -7- 113,816 1 23,132) 7.714 98.398 42,069 56.329 t 5.463) $ 50.866 {$ 6.40) -- ($ 6.40) 38,309 $ 1.54 -- $ 1.54 36.645 $ 1.69 ( .16) $ 1.53 33,241 32 Combustion Engineering. Inc. and Subsidiary Companies Consolidated Statement of Changes in Shareholders' Equity (Dollars in thousands! Common Stock Shares Issued Amount January 1,1986 Net income Dividends declared Exercise of stock options Translation adjustments December 31,1986 Net income Dividends declared Issuance of common stock Exercise of stock options Issuance of contingent performance rights awards Translation adjustments December 31,1987 Net loss Dividends declared Restricted stock issued Unamortized deferred compensation - restricted stock Exercise of stock options Issuance of common stock - thrift plan Dividend reinvestment Translation adjustments December 31,1988 33,257,878 $ 97,802 53,139 33,311,017 1,176 98.978 4,600,000 167,966 150.972 4.487 38,078,983 254,437 265,340 ;-- 52,097 306,171 51,005 38.753.596 7.137 ( 5,014) 1.108 9,519 1.550 $268,737 Reference is made to the accompanying notes to consolidated financial statements Retained Earnings $583,407 50,866 ( 33,264) 601,009 56,560 ( 37,996) 619,573 { 245.173) { 38,409) $335,991 Cumulative Translation Adjustment ($16,064) Treasury Stock Shares Amount 46,705 $1,041 4,130 { 11.934) 4.065 50,770 133 1,174 1,047 ( 10,887) 8,765 (26,308) 33,227 33,500 340 ( 852) 662 __ 1,280 34 43 ($10,844) 68,007 $ 696 33 Consolidated Statement of Cash Flows Years ended December 31. Cash Rows from Operating Activities: Income (loss) from continuing operations Adjustments to Reconcile income (Loss) from Continuing Operations to Net Cash: Provision for adjustments to contracts and restructuring Depreciation and amortization Gain on sale of investments Deferred income taxes Orange in assets and liabilities net of effects from business acquisitions and divestments: Decrease (increase) in accounts receivable (Increase) in inventory (Increase) in other current assets (Decrease) in accounts payable and accrued liabilities Increase (decrease) in advance payments Other, net Net cash provided (used) by operating activities Cash Flows from Investing Activities: Proceeds from sales of property, plant and equipment Additions to property, plant and equipment Additions to capitalized software Business divestment Payment for the acquisition of certain businesses, net of cash acquired (Note 17) Proceeds from sales of investments Purchases of investments Other Net cash provided (used) in investing activities Cash Flows from Financing Activities: Dividends paid Exercise of stock options Issuance of common stock Issuance of restricted common stock Principal payments under capital lease obligations Issuance of Subordinated Notes Proceeds of long-term debt Proceeds (repayment) of short-term debt Net cash provided by financing activities Discontinued Operations: Cash provided Disposition of assets . Effect of Exchange Rate Changes on Cash Net Increase (Decrease) in Cash and Short-term Investments Balance at Beginning of Year Balance at End of Year Reference is made 10 the accompanying notes to consolidated financial statements. Combustion Engineering. Inc. and Subsidiary Companies 1988 ($245,173) 1987 (Dolars in thousands] $ 56,560 1986 $ 56,329 272.800 110,064 ( 28,192) ( 28,375} -- 88,652 ( 20,387) 54,761 -- 71,124 -- 115.273 ( 34,272) { 51,594) ( 2.840) ( 105,457) 4,039 6,196 ( 102,804) 22,182 ( 88,728) ( 9,723) 135.750 ( 11.212) 13,933 ( 18,102) 9,353 53,453 ( 36.711) 1,074 -- 2,123 i 2,862) -- 23,540 63,402 50,566 8.669 -- 8,669 ( 3,272) 6,612 151,240 $157,852 16,308 ( 8.346) ( 3.234} { 144,453) ( 23,489) 18,113 34,485 29,484 ( 83,599) ( 10.170) -- I 245,989) 36,507 ( 6,586) ( 2,B02) t 283,155) < 36,796) 4,999 150,972 -- { 2,670) 150.000 4,274 I 17,931) 252,848 755 -- 755 2,194 7,127 144,113 $151,240 ( 214.261) ( -11.876) ( 3,511) ( 16,306} ( 85,102) ( 13,264) ( 10X594) 27,693 ( 84.888) ( 11.881) -- ( 34,463) 1.043 ( 13,593) 23,380 l 92,709) { 33,255) 1,043 -- -- ( 1,388) -- 4,342 31,277 2,019 41,013 110,000 151,013 ( 264) ( 41,535) 185,648 $144,113 34 Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Combustion Engineering, Inc. and its subsidiaries (the Company). Investments in unconsolidated subsidiaries, in which the Company has a 20% to 50% interest, are accounted for on the equity basis and are included in Other Investments. Retained earnings at December 31, 1988, included $7,102 with respect to the undistributed earnings of unconsolidated subsidiaries. Dividends recorded from such subsidi aries aggregated $4,821, $5,004 and $5,536 in 1988.1987 and 1986, respectively. Investments in companies which are less than 20% owned are carried at the lower of aggregate cost or net realizable value and are included in Other Investments. All significant intercompany transactions and balances have been eliminated. In 1988, the Company adopted Statement of Financial Accounting Standards No. 95 "Statement ot Cash Flows", which requires a statement of cash flows, classified by cash receipts and disbursements according to whether the cash flows stem from operating, investing or financing activities. Prior years have been restated. Certain reclassifications have been made to prior year financial statements to conform with current year presentation. Long-term Contracts Profits on long-term contracts are recognized on the percentage-ofcompletion method. Percentage-of-completion is measured principally by the percentage of costs incurred and accrued to date versus the estimated total costs for each contract. Profits on short-term contracts are not recorded for equipment manufactured in the Company's plants prior to billing the customer and prior to shipment of the equipment. Contracts typically extend over a period of several months to three or more years. Provisions for estimated losses, if any, on uncompleted contracts are made in the period in which such losses are determined. Changes in contract performance and estimated profitability, including those * arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in income when their realization is reasonably assured. In accordance with industry practice, inventories, receivables and advance payments include amounts relating to contracts and programs having production cycles longer than one year and therefore, a portion will not be realized within one year. Inventories Inventories, other than inventoried costs relating to long-term con tracts, are stated at the lower of cost (principally first-in, first-out) or market. Inventoried costs relating to tong-term contracts are valued at the lower of cost (average or actual) or market. Such inventories include, among other things, material costs, direct labor and indirect costs (primarily manufacturing overhead). General and administrative costs are charged to expense when incurred. Capital Assets Land, buildings, machinery and equipment and capitalized software are stated at cost. Buildings and machinery and equipment are.generally depreciated on a straight-fine basis over their estimated useful . lives. Annual rates for major items range from 2% to 4% for buildings' and from 5% to 20% for machinery and equipment. Capitalized software is being amortized over periods ranging from five to seven years. Goodwill . Substantially all the goodwill is being amortized on a straight-line' basis primarily over a forty-year period. At December 31,1988 and 1987, accumulated amortization was$13.961 and $9,510, respectively. Income Taxes The provision (benefit) for deferred income taxes represents the tax effect of differences in the timing of income and expense recognition for tax purposes and financial reporting purposes. Deferred income taxes are provided for those earnings of consolidated foreign subsidi aries that are expected to be remitted. Earnings Per Share Earnings per share of common stock is computed based on the weighted-average number of common shares outstanding during each year. Translation of Foreign Currencies Assets and liabilities of operations outside the United States are translated at the current rates of exchange at the balance sheet dates. Results of operations are translated using the weighted-average exchange rates prevailing throughout the period. The gains or losses which result from this translation process are included in the caption, Cumulative Translation Adjustment, while gains and losses resulting from currency transactions are included in net income (loss) Warranty Expense The Company provides for estimated future warranty costs for contractual requirements which it may be required to satisfy. Such costs are expensed relative to revenue recognition on the respective contracts. In addition, specific provisions are made where the costs of warranty are expected to significantly exceed such accruals. Cash and Short-term Investments For purposes of reporting cash flows, cash and short-term investments include cash-on-hand and liquid investments. 35 2. Accounts Receivable December31, Billed Work in progress or completed Retainage Unbilled receivables Other Unearned billings Allowance for doubtful accounts 1988 $569,187 50,222 217,480 5,161 842,050 ( 158,275) ( 25,433) $658,342 1987 $506,569 32,801 215,548 20.685 775,603 ( 123.113) ( 22,715) $629,775 At December 31.1988, unbilled receivables included approximately $169,000 which has been recognized as sates in current and prior periods under the percentage-of-compietion method. With respect to amounts earned, the Company anticipates that approximately $23,000 will be collected after 1989. Other receivables represent income tax refunds. On March 25,1988, the Company entered into a five-year agree ment whereby it can sell up to $100,000 of undivided interests in a designated pool of accounts receivable, principally of the Power Generation and Process Industries segments. At December 31,1988; approximately $100.000 of receivables were sold for cash under this agreement. The undivided interest in the designated pool of receiv ables was sold with limited recourse. On December 31,1987, the Company sold net receivables amount ing to approximately $100,000. ; 3. Inventories December 31, Long-term contracts, iess amounts attributed to earned billings Raw materials and supplies Work in process Finished goods 1988 $134,252 42.301 282,793 30,827 $490,173 1987 $125,241 42,846 281,830 38,219 $488,136 The last-in, first-out (LIFO) method is used for approximately 16% and 19% of inventories at December 31.1988 and 1987, respectively. The excess of current cost over the UFO basis of such inventories was $22,832 and $19,698 at December 31.1988 and 1987, respectively. Reductions in the levels of UFO valued inventories (UFO liquidation) decreased cost of sales by approximately $583, $2,202 and $5,451 in 1988,1987 and 1986, respectively. 4. Capital Assets December 31, Land and land improvements Clay and other mineral deposits Buildings and facilities Machinery and equipment Construction in progress * less--Accumulated depreciation and amortization Capitalized software, net of accumulated amortization of $43,086 in 1988 and $25,151 in 1987 1988 $ 58,196 25,383 246,709 742.596 41,955 1,114,839 580,373 534,466 36,903 S 571,369 1987 $ 61,530 24,213 257,264 765,760 36,039 1,144,806 565,460 579.346 50,718 $ 630,064 Expenditures for maintenance, repairs, renewals and betterments which do not materially prolong the useful life of the asset, or are of a minor nature, are generally charged to costs and expenses. Such amounts aggregated $56,932, $47,738 and $42,442 in 1988,1987 and 1986, respectively. In 1988, the Company changed the useful life of capitalized software from periods greater than seven years to periods ranging from five to seven years. The effect of this change was to increase 1988 Cost of Sales by approximately $11,000. Amounts amortized for capitalized software amounted to $21,930, $7,926 and $6,356 in 1988.1987 and 1986, respectively. 36 Costs incurred in connection with research and development work are expensed as incurred. Company-sponsored research and develop ment expense relating to the development of new products or services or the improvement of existing products or services aggregated $55,943, $50,493 and $48,025 in 1988,1987 and 1986, respectively. Customer-sponsored research and development arrangements are accounted for as contracts to perform research and development services with no obligation for repayment. 5. Accrued Liabilities December31. Wages, salaries and benefits Warranty costs Accrued costs in connection with adjustments to facilities and operations Additional costs on open contracts Taxes, insurance and interest Other 1988 $192,601 51,500 26,503 215,688 68.611 198,467 $753,370 1987 $182,422 52,116 18.668 142,432 47.266 210,471 $653,376 6. Provision for Adjustment to Contracts and Restructuring During the third quarter of 1988, the Company began experiencing completion difficulties on certain long-term contracts. As a result, the Company commenced a reestimation of costs on all long-term con tracts. The contract review and reestimation process was not com pleted for all contracts until the fourth quarter of 1988. As a result, for the third and fourth quarters the Company recorded pretax provisions totaling approximately $272,800 for additional contract costs and restructuring. These charges were made primarily to recognize: la) increases in estimated costs to complete waste-to-energy plants and fluid bed power plants, both involving new, first-time technologies: (b) cost overruns on other fossil fuel systems contracts administered in the . United States and Canada and (c) the estimated costs to repair theboilers in the Hartford, Connecticut waste-to-energy plant which expe rienced tube failures due to corrosion and the cost of related modifica tions required on two other plants under construction. In addition, the Company decided to further restructure its Power Generation segment principally for staff reductions and reorganizations. 7. Short-term Borrowings Short-term borrowings and current maturities are as follows: December 31, Notes payable to: Banks Other Current portion of long-term debt and capital lease obligations 1988 $ 73,220 39,135 8,362 $120,717 1987 $27,012 39.426 11,410 $77,848 Other notes payable included $38,964 and $31,809 in 1988 and 1987. respectively, in connection with a joint venture to construct and * operate a resource recovery facility for the City of Honolulu, whereby the Company obtained the right to utilize cash advanced to the joint venture. The bank notes are supported by revolving credit agreements totaling $500,000; $300,000 was established in 1987 and $200,000 was established in 1988. There were no borrowings outstanding under these agreements during 1988 and 1987. These credit agreements are available to the Company until Oecember 16,1992 and February 24, 1993, respectively. The Company pays commitment fees averaging .08 of 1 % per annum on the unused portions of the $300,000 commit ments. Under the $200,000 agreement, the Company pays a fee of. 125 of 1% per annum for the total facility and .03125 of 1% on the unused portion of the commitments. At December 31,1988 and 1987, $75,000 and $45,000, respectively, of bank notes were classified long-term based on the Company's ability and intent to refinance such obligations on a long-term basis. In addition, the Company defeased in December 1988, $18,000 of short-term debt due January 1989 through the placement of funds in an irrevocable trust. 37 8. Long-term Debt long-term debt payable after one year and final maturity dates are: December 31. 7.45% Sinking Fund Debentures due 1996 9.70% Subordinated Notes due 1997 12.43% Non-recourse note due 2002 Bank notes (Note 7) Industrial Revenue Bonds at interest rates ranging from 4.275% to 9.75% Notes and other term payables 1988 $ 21,267 150,000 25,000 75,000 5,482 39.297 $316,046 1987 $ 21.418 150,000 25,000 45,000 9,704 42,835 $293,957 The Sinking Fund Debentures and Subordinated Notes are direct, unsecured obligations of the Company and are redeemable at the option of the Company, as a whole or in part, at times prior to their respective maturity dates at redemption prices as set forth in the respective Indentures plus accrued interest to the redemption date. The Sinking Fund Debentures can be currently redeemed for amounts approximating par value. Certain of the Indentures under which the long-term debt was issued provide, among other things, for restrictions on the payment of cash dividends and the incurrence of funded debt. At December 31, 1988, consolidated retained earnings were not restricted as to the payment of cash dividends. Under the most restrictive condition, neither the Company nor any restricted subsidiary, as defined by the agreement, may become liable for any senior funded debt, with certain exceptions, unless immediately thereafter consolidated net tangible assets aggregate at least 200% of consolidated senior funded debt. Restrictions on the payment of dividends by consolidated subsidiaries, either by reason of loan agreements or otherwise, are not significant. Notes and other term payables consist of loans and mortgages payable by the Company. Certain fixed assets were pledged to secure $21,205 of these payables at December 31,1988. The 12.43% Non recourse note relates to a cogeneration facility which the Company owns and is leasing to an equity investee. This note is secured bythe facility. Annual maturities of total long-term debt approximate $5,456, $12,453, $10,467, $8,971 and $7,489 forthe years 1989 through 1993, respectively. The Company has made interest payments for long- and short-term debt totaling $56,868, $34,562 and $19,834 for 1988,1987 and 1986, respectively. 9. Income Taxes Income (loss) from continuing operations before income taxes consists of: Domestic Foreign The provision (benefit) for income taxes consists of: Current Federal Foreign State Deferred . 1988 ($262,640) 23,414 ($239,226) 1987 $ 69,829 30,633 $100,462 1986 $107,801 ( 9.403) $ 98,398 $ 9,222 22,568 2,532 1 28,375) $ 5,947 [$ 28,754) 12.651 5,244 54,761 $ 43,902 ($ 82,348) 2.072 7,072 115,273 $ 42,069 Deferred income taxes (benefits) have been provided for as follows: Long-term contracts Adjustments to facilities and operations Depreciation Undistributed earnings Investment in Vetco Gray Inc. Other Reduction of deferred tax requirements from utilization of net operating loss carryforwards State Federal 1988 $- -- -- -- -- -- ( 5,687) ( 22,688) ($28,375) 1987 $12,223 25.093 11,249 -- -- 6,196 -- -- $54,761 1986 $ 3.640 79.438 1,483 12.756 19,384 ( 1,428) -- -- $115,273 The Company's effective income tax rate differed from the Federal statutory rate as follows: Federal statutory rate Depletion Goodwill amortization Foreign operations Foreign losses without income tax benefit Investment tax credit Minimum tax State income taxes Losses without income tax benefit Other ' (34.0%) (2.2 ) 1.1 6.0 3.2 1.2 -- ( 1.3 ) 27.8 0.7 2.5% 40.0% (6.6 ) 2.5 6.7 -- ( 2.5 ) -- 3.1 -- 0.5 43.7% .' 46.0% < 6.6 ) 0.4 ( 3.2. ) ( 0.9 ) 5.1 3.9 -- t 1.9 ) 42.8% At December 31,1988, the Company has approximately $196,000 and $47,000 of domestic and foreign net operating loss carryforwards for financial reporting purposes, which expire in 2003 and beginning in 1992, respectively and approximately $13,000 of foreign tax credit carryforwards which expire in 1990. At December 31,1988, the Company has approximately $27,000 and $12,000 of foreign and investment tax credit carryforwards, respectively, for income tax reporting purposes which expire beginning in 1991 and beginning in 2001, respectively. Domestic and foreign net operating loss carryforwards of approximately $50,000 and $52,000 expire in 2003 and beginning in 1990, respectively. In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96 "Accounting for Income Taxes" (SFAS 96). In December 1988, die Board amended SFAS 96 (through SFAS 100) by delaying its effective date for financial statements issued for fiscal years beginning on or after January 1,1990. Adoption of the new standard will result in a cumulative adjustment thatwill be reported in the year the standard is implemented. This adjustment is not expected to be significant. 10. Common Shareholders'Equity Shareholder Rights Plan On December 19,1988, the Board of Directors of the Company declared a dividend distribution of one Preferred Stock Purchase Right (the Right(si) on each outstanding share of the Company's common stock. The Rights were granted to shareholders of record on December 30,1988 and are not taxable to shareholders. One Right will also be issued with each additional share of the Company's common stock which becomes outstanding prior to the earliest of the time the Rights become exercisable, expire or are redeemed. In general, each Right entitles the holder to purchase a fractional share of a new series of preferred stock of the Company at a specified exercise price. Ihe Rights will only become exercisable ten days after a person or group: (a) acquires shares of the Company's stock having 20% or more of the general voting power; |b) commences a tender offer that would result in such person or group owning shares having ownership of 20% or more of the voting power or (c) has become the beneficial owner of a substantial amount of common stock and the independent directors determine such ownership adverse to the best interests of the Company and its shareholders. If any person becomes the beneficial owner of 20% or more of the Common Stock, other than pursuant to an offer which is fair to and in the best interest of the Company and its shareholders, or if the Board declares a person's substantial ownership of shares to be adverse, each Right not owned by such person will entitle the holder to purchase, for the exercise price, a number of shares of Common Stock having a market value of twice the exercise price. In addition, if the Company is involved in a merger or other business combination in which its shares are changed or converted, each Right will entitle its holder to purchase, for the exercise price, a number of shares of the acquiring or surviving company's common stock having a market value of twice the exercise price. 39 Thrift and Dividend Reinvestment Plan Ouring 1988, the Company revised its thrift plan to allow the Company to issue common stock to this plan in lieu of cash contributions. In addition, on July 8,1988, the Company filed a registration statement, with respect to 200,000 shares of its Common Stock, to be used in connection with the Company's Dividend Reinvestment Plaa During 1988, the Company issued 306,171 and 51.005 shares of common stock to the thrift and dividend reinvestment plans, respectively. 11, Stock Incentives The "1982 Stock Option Ran", which was approved by the Sharehold ers on April 27.1982, provides for the granting to officers and other salaried employees of the Company options to purchase 1,821,396 shares of its Common Stock and related Stock Appreciation Rights (SARs). The payment may be in shares, cash, or a combination of both, Options outstanding, January 1,1988 Granted Cancelled Exercised ($17.00 to $33.25 per share) Shares SARs Options outstanding. December 31,1988 ($25.25 to $40,375 per share) Currently exercisable. December 31,1988 at the discretion of the Compensation Committee of the Board of Directors. Options are granted at no less than fair market value at the time of grant for a period not in excess of ten years. Combined information with respect to stock options is as follows: Shares 1 ,*780,209 1,750 ( 221,681) ( 52,097) ( 40.0001 1,468,181 1,128,081 At December 31,1988.458,614 SARs are outstanding, of which 451,114 are exercisable. Under the plan, either the option or the related SARs may be exercised. In addition, there are 402.700 stand alone SARs outstanding exercisable only for cash, of which 172,500 are currently exercisable. At December 31,19B8 and 1987. there were 290.971 and 71.040 common shares, respectively, available for grant. During 1988, the Company established a restricted stock plan for senior executives, limited to 500.000 shares and non-employee direc- tors, limited to approximately 100,000 shares. During 1988. the Com pany granted, under both plans, 265,340 shares at no cost. The deferred compensation expense represents the market value of the Company's Common Stock at the date of grant and is recognized ratably overthe vesting period, which cannot exceed five years. The restricted shares are considered issued and outstanding. 12. Commitments and Contingent Liabilities Contingent Liabilities It is customary in the Company's industries to issue financial guaran tees and guarantees of Company performance on major projects. Provisions are made in the financial statements at the time it becomes likely that the Company will become liable under such guarantees. Pending Litigation * On June 26,1987, the participants in the Arizona Nuclear Power Project filed a complaint against the Company relating to a 1973 contract under which the Company supplied three nuclear steam supply systems to the participants for the project. The complaint alleges breach of contract and breach of warranty with respect to the reactor coolant systems and the low pressure safety injection system pumps and certain other items of equipment and service, which breaches are alleged to have caused millions of dollars of project delay expenses and unreimbursed costs. The Company believes that it has meritorious defenses and that the resolution of plaintiffs' claims is not likely to have a material adverse effect upon the Company's financial condition. The Company was included in approximately 12,300,16,300 and 10,850 personal injury claims asserted nationwide in asbestos-related litigation in 1988,1987 and 1986, respectively. As of December 31. 1988,15,691 claims were pending. It can be expected that a substan tial number of additional asbestos-related claims will continue to be asserted against the Company. Although the amount of liability, if any, at December 31,1988, with respect to the actions then pending to which the Company is party cannot be ascertained, in the opinion of the Company, any resulting liability will not materially affect the Company's consolidated financial position. Long-term Leases Total rent, other than on capital leases, charged to expense was $53,311, $48,553 and $43,382 in 1988,1987 and 1986, respectively. 40 At December 31,1988, the approximate minimum future payments under capital leases and noncancelable operating leases are: 1989 1990 1991 1992 1993 After 1993 Total minimum lease payments less--Amount representing interest Present value of net minimum lease payments Capital Leases $ 3,668 3,748 4,737 1,007 698 872 14,730 2,370 $12,360 Noncancelable Operating Leases $ 43,086 37.543 30,884 22.750 13,471 40,253 $187,987 The present value of net minimum lease payments, less the current portion of $2,906, is classified in Other Liabilities. Noncancelable operating leases consist predominantly of office space leases at numerous locations, mainly within the United States and Canada. 13. Post Employment Benefits The Company has retirement plans or makes contributions to multi employer union pension plans which cover substantially all employees. The plans are defined benefit plans, certain of which are entirely non contributory and others which permit employee contributions toward the cost of current service benefits. Under the terms of the plans, retirement benefit calculations take into consideration, among other things, years of credited service and compensation levels. Plans cover ing salaried employees were amended in late 1988 to provide for individual accounts which offer lump sum or annuity payment options, with benefits based on accumulated compensation and interest credits made monthly throughout the career of each participant, with an initial opening credit based on the value of retirement benefits accrued prior to the date of such amendment. :f. The Company's funding policy is to make an annual contribution equal to or exceeding the minimum required by the Employee Retire ment Income Security Act of 1974 (ERISA) as amended. In 1986, the Company adopted Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions" (SPAS 87) for its United States pension plans. The effect of this change was to decrease pension expense by $15,677 in 1986. Effective January 1,1988, the Company has adopted SFAS 87 for all hourly and salaried pension plans in Canada. Adoption for foreign pension plans is not required until 1989 with early adoption allowed on a country-by-country basis. The effect of this adoption was not mate rial to the Company's financial condition and results of operations The actuarial present value of the benefit obligation and the funded status of the Company's various United States and Canadian pension plans at December 31 was: Estimated amount of assets required to provide funds for future payment of: Projected benefits based on employment service to date and present pay levels Vested Non-vested Accumulated benefit obligation Additional amounts related to assumed pay increases Projected benefit obligation Funded assets at fair value Assets in excess of projected benefit obligation Unamortized net transition asset Unrecognized net gain Unrecognized prior service cost Prepaid (accrued) pension cost Total Plans $509,104 8,923 518,027 59,306 577,333 603,523 26,190 ( 52,261) ( 15,571) 13,355 ($ 28,287) 1988 Canadian Plans U.S. Plans $15,198 322 15,520 1,025 16,545 26,690 10,145 ( 8.759) < 32) - $ 1,354 $493,906 8,601 502,507 58,281 560,788 576,833 16,045 ( 43,502) ( 15,539) 13,355 ($ 29,641) 1987 Total U.S. Plans $491,203 11,233 502,436 29,863 532,299 563,321 31.022 ( 54,683) ( 8,000) 563 1$ 31,098) 41 Generally, pension funds are invested in various fixed income and equity securities, and held in trust by a major money center bank. The 1988 and 1987 actuarial computations, which used the "projected unit credit" method, assumed a discount rate on benefit obligations of 9.5%, expected long-term rates of return on plan assets of 9.5% and annual compensation increases of 6% over the average remaining Service cost--benefits earned during the year Interest cost on projected benefit obligations Actual return on plan assets Net amortization, estimated gains and other deferred items Amortization of net transition asset Net periodic pension cost (income) for the year service lives of employees under the plans. Variances between actual experience and assumptions are amortized over the remaining service lives of the employees in the plans in accordance with the provisions of SFASB7. The components of net periodic pension cost for United States and Canadian plans were: Total Plans $10,181 51,100 I 69,848) 17,666 [ 3,929) $ 5.170 1988 Canadian Plans $ 518 1,505 1 2.565) 191 < 959) ($1,310) U.S. Plans $ 9,663 49,595 ( 67,283) 17,475 ( 2,970) $ 6,480 1987 Total U.S. Plans $11,376 47,674 ( 2.4071 ( 52,564) ( 3,7781 $ 301 Total pension costs for all plans aggregated $19,535, $15,002 and $10,458 in 1988,1987 and 1986, respectively. Included in 1988,1987 and 1986, respectively, are amounts for multi-employer union pension plans which approximated $8,256, $7,475 and $6,900 and amounts for foreign pension plans which continue to be accounted for under prior guidelines. The Company provides certain health care and life insurance bene fits for domestic retired employees. These costs which approximated $16,654, $14,946 and $13,251 in 1988,1987 and 1986, respectively, are charged to operations as incurred. . 14. Investment in Vetco Gray Inc. In November 1986, Hughes Tool Company (Hughes) acquired the Company's Vetco/Gray operations. These operations became part of a subsidiary (Vetco Gray Inc.) of which Hughes owned 80.1 % of the common stock (VG Common Shares) and to which Hughes contributed its Hughes offshore operations. In exchange for the Vetco/Gray opera tions, the Company received 19.9% of the VG Common Shares, 2,955,878 shares of preferred stock (VG Preferred Shares) with an initial liquidation value of $50 per share (an aggregate of approxi mately $148,000) and $110,000 from bank borrowings made by Vetco Gray Inc. The investment in VG Preferred Shares and VG Common Shares is carried in the consolidated balance sheet at cost. In April 1987, Baker International Corporation and Hughes consum mated a merger of the two companies into Baker Hughes Incorporated (Baker Hughes). In June 1988, Baker Hughes sold 70.1% of the VG Common Shares to Bain Venture Capital (Bain). The VG Preferred Share dividends for each year are to be approxi; mateiy 50% of Vetco Gray Inc.'s net income (subject to certain adjust ments) for the year. Vetco Gray Inc. is obligated to redeem 295,588 VG Preferred Shares on December 31 of each year, commencing Oecember 31,1992. The redemption price per share for that redemption date is $51.40 and increases by $1.25 for each subsequent redemption date, plus, in each case, any accumulated unpaid dividends. In addition, VG Preferred Shares under certain circumstances are subject to earlier redemption at the option of the holder or may be redeemed or purchased by Vetco Gray Inc. or Bain. The VG Common Shares held by the Company are exchangeable, pursuant to warrants of Baker Hughes, for shares of Baker Hughes Common Stock after the later of October 1,1991. or the date on which at least one VG Preferred Share has been redeemed. Baker Hughes has options to purchase the shares of its common stock issued pursuant to the warrants and the VG Common Shares held by the Company. Bain also has an option to purchase the VG Common Shares upon redemption or purchase of all of the VG Preferred Shares. In 1988, Vetco Gray Inc. issued 20,000 additional VG Preferred Shares to the Company, vafued at $1.000, as a settlement for various trade payables owed to the Company. The liquidation value of these shares is $50 per share redeemable on December 31,2001. During 1987, Vetco Gray Inc. began a significant restructuring of its worldwide operations. Additionally, the worldwide oil and gas markets continued to be depressed. As a result of these factors, Vetco Gray Inc. reported a significant loss for the year 1987, including charges relating to the restructuring program. As a result of the above restructuring, cost savings and an improving market, 1988 operating results have improved significantly over the same period last year. As of December 31.1988 and 1987. the Company had guaranteed $60,000 and $78,000, respectively, of Vetco Gray Inc. debt of which $52,000 is outstanding at December 31,1988. The Company's rights to receive payments and exercise certain rights in respect to VG Preferred Shares are subordinate to the rights of the lenders under certain circumstances. 42 15. Discontinued Operations In 1985, the Company announced that it would sell major portions of its oil and gas equipment and services operations and provided a pre tax provision of $ 120,812 ($79,599 after-tax or $2.39 per share). In 1986, the Company provided an additional $5,463 for losses net of a tax benefit of $2,140 as a result of continued weakness in the markets December31. Current assets Current liabilities Working capital Capital assets Other, net served by these operations. Revenues and income (losses) from these operations were $291,065 and $147 in 1988, $258,940 and $178 in 1987 and $501,603 and ($5,463) in 1986. Net assets of discontinued operations include: 1988 $ 79,591 44,765 34,826 47,375 23,796 $105,997 1987 $105,128 68,684 36,444 64,571 13.651 $114,666 16. Business Segments Information with respect to the revenues, operating income (loss), identifiable assets, depreciation and amortization and additions to capital assets of the Company's principal business segments is con- tained on page 30. Significant financial data by geographic area follows (1): ; December 31, Net sales (2)-- United States Domestic sales Export sales (4) Canada Europe Other foreign ; 1988 1987 1986 $2,106,269 580,020 2,666,289 334,398 365.953 117,288 $3,483,928 $2,034,798 383,663 2,418,461 255,439 293.344 74,830 $3,042,074 $1,784,412 357,416 2,141,826 217,966 155,592 36,083 $2,551,469 Net income (loss)-- United States Canada Europe Other foreign Identifiable assets (3)-- United States Canada Europe Other foreign ($ 265,642) ( 26,426) 29,443 17,452 ($ 245.173) $1,903,401 111.540 317,693 107,204 $2,439,838 $ 40.727 979 6,664 8,190 $ 56,560 $2,045,843 128,995 279,623 134.603 $2,589,064 $ 74,634 I 6,594) ( 13,438) 1,727 $ 56,329 $1,785,752 96.830 161,539 108,485 $2,152,606 (1) Data presented for geographic areas outside of the United States includes operations of foreign subsidiaries and operations of domestic subsidiaries located in foreign areas. (2) Includes only safes to unaffiliated customers [rntergeographic sales are not significant). (3) Excludes the net assets of discontinued operations. (4) Includes United Stales export sales by geographic area as follows Europe, Middle East and Africa Canada. Central and South America Far East $ 221,881 99,065 239,074 $ 172,847 57,143 153,673 $ 178,805 56,102 122.509 $ 560,020 $ 383,663 $ 357,416 43 17. Business Acquisitions and Dispositions 1988 In September, the Company completed the sale of its investment in Jamesbury Corp.. a manufacturer and supplier of high-performance valves including Hammel Dahl Inc., a manufacturer of control valves, realizing net proceeds of approximately 1136,000 resulting'm a pretax gain of approximately $36,800. in June, the Company had purchased the remaining 70% of Hammel Dahl, Inc. which was previously accounted for as an equity investee. In November, the Company acquired the assets of Energy Systems Group (ESG) from Systems Control Inc., using the purchase method of accounting, for approximately$15,235. ESG specializes in energy management and supervisory control systems which are used for data acquisition, analysis and control in optimizing electrical power grids, including distribution and transmission networks. The operating results of ESG have been consolidated with those of the Company since its date of acquisition. Had ESG been acquired at the beginning of 1987, the pro forma effect on results of operations (including financing costs! would not have been material. In December, the Company signed an agreement for the disposition of its C-E Natco, C-E Invalco, Premier Refractories and Chemicals (formerly C-E Refractories) and C*E Tyler businesses for estimated proceeds of $90,000 which approximates net book value. The transac tion is scheduled to be completed during the first quarter of 1989. in February 1989, the Company signed an agreement for the sale of its Vetco Services oil and gas operations for an amount in excess of its net book value. 1987 In January, the Company acquired AccuRay Corporation (AccuRayl, a leading supplier of control technology primarily to the pulp and paper industry, using the purchase method of accounting, for approximately $206,000 plus associated costs. The Company's acquisition of AccuRay resulted in approximately $170,000 of goodwill. On a pm forma basis, assuming that the Company had acquired AccuRay as of January 1,1986, the Company's 1986 sales would have increased from $2,551,469 to $2,701,900 and income from continuing operations would have decreased from $56,329 to $41,800 (equivalent to $1.69 and $1.26 per share, respectively). The operating results of AccuRay have been consolidated with those of the Company since January 1987. During 1987, the Company made the following additional acquisi tions, using the purchase method of accounting: In April, the Company acquired Bell Technical Operations Corpora tion, expanding the Company's operations and maintenance services business to include technical services for governmental clients. In May, the Company acquired the E.C. Jordan operations adding consulting, engineering and design services to the Company's. ; remedial services and waste treatment systems and analysis business. In August, the Company expanded its process automation business through the acquisition of the operations of Afora ltd., a company based in Finland. Afora Ltd's operations include advanced, on-line, sensing devices and pulpmill optimization software. In September, the Company acquired certain assets and business operations from lurgi Corporation of River Edge, New Jersey (Lurgi CFB). The operating results of Bell Technical Operations Corporation, E.C. - Jordan, Afora Ltd. and Lurgi CFB have been consolidated with those of the Company since their respective dates of acquisition. Had these acquisitions been consummated at the beginning of 1987 and 1986, the pro forma effect on results of operations (including financing costs) would not have been material. Aggregate costs of these acquisitions were approximately $60,000. 1986 In August, the Company acquired the Sprout-Waldron division of Koppers Company, Inc. for approximately $37,000. Report of Independent Public Accountants To the Board of Directors and Shareholders of Combustion Engineering, Inc.: We have audited the accompanying consolidated balance sheet of Combustion Engineering, Inc. la Delaware corporation) and subsidiary companies as of December 31,1988 and 1987, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31,1988 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 generally accepted auditing standards. 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 Combustion Engineering, Inc. and subsidiary companies as of December 31,1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1988, in conformity with generally accepted accounting principles. As explained in Note 13 to the financial statements, effective January 1,1986, the Company changed its method of accounting for pension costs. Stamford, Connecticut February 17.1989 Arthur Andersen & Co. 44 16. Quarterly Financial Data {Unaudited) Summarized quarterly financial data is as follows: 1988 Net sales Operating income (loss) Net income {loss! Earnings (loss) per share of common stock Dividends declared Common stock price High Low 1987 Net sales Operating income Net income Earnings per share of common stock Dividends declared Common stock price High low * First $756,133 $ 30,549 $ 13,638 $ .36 $ .25 Second $907,739 $ 36,652 $ 15,205 $ .40 $ .25 ThirdU) $897,149 ($114,165) ($ 91,747) 1$ 2.39) $ .25 Fourth (2) Total $922,907 ($148,084) ($182,269) $3,483,928 ($ 195,048) ($ 245,173) 1$ 4.72) ($ 6.40) $ .25 $ 1.00 $37% 28% First (3) $638,901 $ 25,457 $ 11,012 $ .33 $ .25 $36 29% Second(4) $716,822 $ 29,267 $ 12,688 $ .34 $ .25 $36 30% Third (5) $791,224 $ 35,636 $ 15,322 $ .40 $ .25 $32 25% Fourth $895,127 $ 41,710 $ 17,538 $ .46 $ .25 . Total $3,042,074 $ 132,070 $ 56,560 $ 1.54 $ TOO $40% 31% $38% 32% $45% 36% $45% 22% Due to changes in the numbet of shares outstanding, quarterly earnings per share of common stock do not add to the total for dieyear. (t) tncImJes a $147,500 provision primaritv for; (a)the recognition of increases in estimated costs tocompletewaste-to-energv plants and fluid bedpower plants both involving new. first-time technologies; (b)cost overruns on other fossil fuel systems contracts administered in the United States and m Canada and lc) the estimated costs to repair the boilers in the Hartford. Connecticut wa$te*to-energy plant whicn experienced tube failures due to corrosion, and the cost ol related modifications required on two other plants under construction. In the third quarter of 1988. theCompany completed its previously announced sale of Jamesbury Corp. realizing net proceeds of approximately $136,000 resulting in a pretax gain of approximately $36,800. In addition, the Company recorded a pretax provision of $14.1X10 in connectionwith the anticipatedlosses on the potential sale of other businesses and a $5,400 pretax gain from (he sale of a foreign equity basis investment. 12) lndudesa$125.300provisionforrecognitionofincreases.resultingfromthereestimationprocessforcosts.tocompletewaste-to-eneFgyplant$andf)uidbedpowe(plants and restructuring charges for the Power Generation segment. In addition, die Company recorded a charge ol $11.000 to reflect The change in useful lives of capitalized software. 131 includes a $7,700 provision for restructuring the Power Generation segment, offset by again horn the sale of the Company's investment in Northern Engineering Industries PIC. (4) includes a $20,000 charge to reduce to estimated realizable value the carrying value of the Company's investment in and advances to an ethanol joint venture, partially offset by gains from the safes of a foreign investment heldat cost and a portion ol the Company's iwestment m Westwood Energy Properties LimitedPartnership 15} Includes a $12,000 charge to reduce to estimated realizable value the carrying value of the Company's investment in and advances to an ethanol joint venture. 45 Summary of Operations (Dollars in thousands, except per share amounts! 1988(1) 1987 1986 1985(2) 1984 1983(2) Net sales $3,483,928 $3,042,074 $2,551,469 $2,407,658 $2,331,734 $2,272,598 Operating income (loss) Interest, net ( 195,048) 132,070 113,816 ( 22.922) ( 44,178) ( 31,608) ( 15,418) 2,521 98,355 20,465 20,062 41,086 Income (loss) from continuing operations before income taxes Income taxes (3) * ( 239,226) 5,947 100,462 43,902 98,398 ( 20,401) 42,069 ( 19,037) 118,820 10,575 61,148 10.799 Income (loss) from continuing operations Loss from discontinued operations (4) Net income (loss) ( 245,173) IS 245,173) 56,560 $ 56,560 56,329 ( 5,463) $ 50,866 ( 1,364) ( 94,049) ($ 95,413) 108,245 ( 8,675) $ 99,570 50,349 ( 70,724) ($ 20,375) Earnings (loss) per share of common stock Continuing operations Discontinued operations |4) Net income (loss) (S 6.40) $ (S 6.40) $ 1.54 $ ( 1.54 $ 1.69 ($ .16) ( 1.53 ($ .04) $ 2.83) 1 2.87) $ 3.26 $ .26) ( 3.00 ($ 1.5T 2.12) 61) Average number of common shares (In thousands) 38,309 36,645 33,241 33,193 33,152 33,110 Dividends declared Total Per share $ 38,409 1.00 $ 37,996 1.00 $ 33,264 1.00 $ 47,164 1.42 $ 61,033 1.84 $ 60,991 1.84 (1) A provision of $272,800 was included in operating loss in 1388 for the recognition of: fa) increases in estimated costs to complete waste-to-energy plants and fluid bed power plants both involving new. first-time technologies; (b| cost overruns on other fossil fuel systems contracts administered in the United States and in Canada; (cl the estimated costs to repair the boilers in the Hartford. Connecticut waste-to-energy plant which experienced tube failures due to corrosion, and (d| the cost of related modifications required on two other plants under construction, and (d) restructuring charges for the Power Generation segment. (2) Provisions of $92,070 and $109,100 were included in operating income (loss) in 19B5 and 1983. respeclively. for the following purposes: la) adjustments to facilities to improve overall cost effectiveness and (o reduce the Company's productive capacity in several business segments; (b) to reduce to estimated realizable value the carrying value of certain operations in distressed markets and (c) in 1985. to record the costs of an early retirement program. (3) Includes in 1984. $32,200 ($ 97 per share) from the waiver of DISC deferred taxes provided in prior years (4) In September 1985, the Company announced plans to sell major portions of its oil and gas equipment and services operations. Accordingly, the results of those operations and the estimated ioss on disposition have been classified as discontinued operations for all periods presented (see Note 15 of the Notes to Consolidated financial Statements!. 46 Financial Position and Other Data (Dollars in thousands, except per share amounts) 1988 Financial Position Working capital Capital assets Investments Total assets Deferred income taxes Long-term debt Long-term lease obligations Common shareholders' equity Amount Per shared) (X 270.686} 571.369 344,645 2,545,835 20.779 316,046 9,454 593,188 15.33 Other Data Return on equity Return on sales Current ratio Long-term debt to capital Capital expenditures Depreciation and amortization Bookings Backlog ( 33.7%) ( 7.0%) .8 34.6% X 98,451 110,064 3,641.663 3,704,502 Employees Shareholders of record 28,832 25.369 (II Based on nei assets and common shares outstanding at year end. 1987 X 42,215 630.064 353,415 2,703,730 175,322 293.957 13,590 862,461 22.67 7.3% 1.9% 1.0 22.9% t 93,769 88,652 3,865.162 3,620,517 27,581 25,854 1986 1985 1984 1983 (X 44,230) 559.609 358,124 2,268,027 156,779 86.362 9,570 ($ 338,430) 528,373 523,498 2,161,118 20,368 78,110 10,672 (S 127,286) 516,876 577.242 2,306,654 166.079 55,743 11,936 (t 36,120) 463,599 612,654 2.366.453 204.044 54.726 11,412 686,879 20.65 664,104 20.00 795.787 24.00 769.195 23.21 7.5% 2.2% 1.0 10.2% X 96,769 71,124 3,042,360 2,766,512 ( 13.1%) ( 0.1%) .8 11.5% X 91.647 69,009 2,095,564 2,175.405 24,149 28.014 24,761 30.646 12.7% ( 2.5% i 4.6% 2.2% .9 1.0 6.6% 6.4% $ 60,888 X 51,897 63,665 60,962 2.319,002 1,900.913 2,430,466 2,199,370 27,642 32,361 26.212 32,955 47 Board of Directors Lucy Wilson Benson (1987)* President Benson & Associates Walter H. Helmerich, III (1981)TM Chairman and Chief Executive Officer Helmerich & Payne, Inc. Charles E. Hugel (1982)* Chairman and Chief Executive Officer Combustion Engineering, Inc. Robert M. Jenney (1963}n Trustee, Jenney Oil Trust George S. Kimmel (1981) President and Chief Operating Officer Combustion Engineering, Inc. Paul W. MacAvoy (1960)TM Dean. William E. Simon Graduate School of Business Administration University of Rochester Scott L Probasco, Jr. (1960) Chairman of the Board American National Bank and Trust Company Arthur J. Santry, Jr. (1957)*TM Retired Chairman of the Board Combustion Engineering, Inc. Robert C. Seamans, Jr. (1977)* Senior lecturer. Department of Aeronautics and Astronautics Massachusetts Institute of Technology Robert G. Stone. Jr (1963)* Chairman of the Board Kirby Exploration Company, Inc. Kenneth J. Whalen (1984)* Retired Executive Vice President American Telephone & Telegraph Company David R. Whitwam (1987) Chairman and Chief Executive Officer Whirlpool Corporation Director Emeritus James F Thornton 'Member of the Executive Committee Robert G. Stone. Ji.. Chairman "Member of the Audit Committee Walter H Helmerich, 111. Chairman Date following name indicates the year first elected Director Officers Charles E. Hugel Chairman and Chief Executive Officer George S. Kimmel President and Chief Operating Officer Charles E. Barnett Vice President and General Counsel William J. Connolly Vice President - Corporate and Investor Relations Robert EKistner Vice President - Information Systems and Services Robert H. Masson Vice President-Venture finance and international Jeffrey S. Rubin Vice President-Finance Jack I Sanderson Vice President - Corporate Technology Dale E Smith Vice President - Human Resources and Operations Support Bernard J. Garry Secretary Preston E Insley Controller Fred R. Jones Treasurer 48 Combustion Engineering provides engineered products, systems and services to the worldwide power, process and public sector markets. Wtorid Headquarters Combustion Engineering, Inc. 900 Long Ridge Road Post Office Box 9308 Stamford, Conn. 06904 Telephone: (203)329-8771 Telex: 965950 (COMBENG STD) Fax:(203)328-2263 FwmlO-K The Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission may be obtained after March 31.1989, by writing to the Office of toe Secretary at the above address. Transfer Agents and Registrars The Chase Manhattan Bank, NA. One New tork Plaza, New Ybrk, N.Y 10081 The Connecticut Bank and Trust Company One Constitution Plaza, Hartford, Conn. 06115 Shareholder Inquiries Shareholder inquiries concerning name or address changes, stock transfers, dividend mailings or consolidation of accounts should be directed to The Chase Manhattan Bank at the above address. Questions on other matters related to \our holdings should be directed to toe Corporate Secretary at toe Company headquarters address at toe head of this column. Annual Meeting Shareholders are cordially invited to attend the Company's Annual Meeting, which will be held Thursday. April 27.1989. at 10:30 a.m., in the Baroque Room of The Plaza, Fifth Avenue at 59th Street New York, N Y Securities Listing The Common Stock and 7.45% Sinking Fund Debentures due 1996 are listed on the New York Stock Exchange. Ticker Symbol for Common Stock: CSP The Company's daily trading activity and common stock price may be found in the financial section of most major U S. newspapers under: CmbEn. Dividend Reinvestment Plan Combustion Engineering's Dividend Reinvestment Plan enables shareholders to use dividend payments to buy shares of common stock without incurring bank service charges or brokerage commissions. Authorization forms for participation are available from: The Chase Manhattan Bank, NA. Dividend Reinvestment Service Post Office Box 283 Bowling Green Station New York. N.Y 10274 The high gloss paper used in this Annual Report is coated with Georgia Kaolin'" clay. The uncoated sheets contain Georgia Kaolin filler clay. Both are specialty mineral products supplied by Combustion Engineering. The names Combustion Engineering, C*E, or the Company, as used in this publication, refer to Combustion Engineering, Inc., or its subsidiaries. Public Broadcasting Television Series <6 Combustion Engineering is continuing its sponsor ship of the public television series Conserving America. Two new programs, produced in conjunction MF with the National Wildlife Federation, the Richard King Mellon Foundation and public broadcast station WQED/ ^ Pittsburgh, will be presented. Champions of Wildlife is scheduled for broadcast in most areas March 22 on toe Public Broad casting System, It features people dedicated to saving endangered species. Later in toeyear. ConservingAmerica will examine efforts under way to protea the nation's coastlines from toe pressures of urban growth. ,