Special purpose project debt consisted of debt held by the following special purpose subsidiaries:
The accompanying condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $801,451 at March 28, 2003. The Company has substantial debt obligations and during 2002 it was unable to comply
with certain debt covenants under the previous revolving credit agreement. Accordingly, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. While management believes its operating plans, if met, are sufficient to assure compliance with the terms of its new debt agreements, as amended, there is no assurance that the Company will do so during 2003. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s plans in regard to these matters are described below.
As of March 28, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash of $473,000 compared to $429,000 as of December 27, 2002. Of the total at March 28, 2003, approximately $327,000 was held by foreign subsidiaries, of which $68,000 was restricted. The foreign subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs. Accordingly, these funds may not be readily available for repatriation to U.S. entities. In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility, including a $71,000 term loan, a $69,000 revolving credit facility, and a $149,000 letter of credit facility, expires on April 30, 2005. This facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and 66% of the stock of the first-tier foreign subsidiaries. The facility has no scheduled repayments prior to maturity on April 30, 2005. The facility requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the facility commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) level as described in the agreement, as amended. With the sale of the Company’s interest in a corporate office building on March 31, 2003 (see Note 16), the $77,000 threshold discussed above has been exceeded. Accordingly, a principal prepayment of $1,445 was made on the revolving credit facility in the second quarter of 2003.
Amendment No. 1 to the Credit Agreement, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pre-tax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. Through the first quarter of 2003, $11,000 of the contingency risks were favorably resolved, and additional project reserves were established for $24,000 leaving a contingency balance of $28,000.
Amendment No. 2 to the Credit Agreement, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal on the term loan in the aggregate amount of $10,000.
The Company’s 6.75% Notes have a security interest in the stock and debt of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $187,300 at March 28, 2003) have a senior position to the 6.75% Notes in these assets while the security interest of the 6.75% Notes is equal and ratable with another $69,000 of debt under the Senior Credit Facility.
The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating financing lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation is included in capital lease obligations in the accompanying consolidated balance sheet.
During the third quarter of 2002, the Company also completed a receivables financing arrangement of up to $40,000. The funding available to the Company is dependent on the amount and characteristics of the domestic receivables. This financing arrangement expires in August 2005 and is subject to covenant compliance. Certain of the financial covenants commence at the end of the first quarter of 2003 and
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include a senior leverage ratio and a minimum EBITDA level. Noncompliance with the financial covenants allows the lender to terminate the arrangement and accelerate any amounts then outstanding. Although the Company has not received a notice of termination, the Company has been informed by the lender that it believes that Foster Wheeler Funding LLC, the wholly-owned special purpose subsidiary operating the facility, is out of compliance with certain maintenance covenants regarding the nature and amount of domestic receivables. The Company is currently in discussions with the lender to bring the Company into compliance. Until the receivables financing documents are amended to reflect these adjustments, the Company has no availability under this facility. As of March 28, 2003, the Company had no borrowings outstanding under this facility. See Note 3 for further information regarding the facility.
The Company initiated a comprehensive plan to enhance cash generation and to improve profitability during 2002. Management forecasts that the cash on hand, together with cash from operations, asset sales, collection of receivables and claims recoveries will be sufficient to fund the Company’s working capital needs through the first quarter of 2004. It is possible that asset sales may result in amounts realized which differ materially from the balances recorded in the financial statements. There can be no assurance that the Company will meet its forecast. Failure by the Company to achieve its forecast could have a material adverse effect on the Company’s financial condition.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2003. The forecast indicates EBITDA in excess of the minimum debt covenant amounts during 2003. However, there can be no assurance that the actual results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility or the sale/leaseback arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, the sale/leaseback arrangement, and certain of the special-purpose project debt, which would allow such debt to be accelerated. The total amount of the debt that could be accelerated, including the amount outstanding under the Senior Credit Facility is $922,500 as of March 28, 2003. It is unlikely that the Company would be able to repay amounts borrowed if the payment dates were accelerated. Failure by the Company to repay such amounts would have a material adverse effect on the Company’s financial condition and operations.
The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Due to the Company’s significant leverage, management is reviewing various options to restructure its balance sheet. Although no definitive plans have been finalized at this point, such options may include, among other things, debt for equity exchanges, debt for debt exchanges, equity for equity exchanges, and additional asset sales. There can be no assurances, however, that the Company can successfully effect any of the foregoing.
On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, for sales proceeds of approximately $72,000. The Company also retained approximately $8,000 of cash on hand at the time of the asset sale. The sales proceeds are subject to adjustment based on a final net worth calculation to be finalized in the second quarter. Net assets sold of approximately $57,000 essentially consisted of government and commercial contracts. The Company recorded a gain on the asset sale of $15,300. The Company's December 27, 2002 backlog included approximately $1,700,000 related to the contracts that were sold. Such amounts are no longer reflected in the Company's consolidated backlog.
As discussed in the Company's 2002 Form 10-K, the Company expected to receive an additional $57,000 under one of the contracts retained by Foster Wheeler Environmental Corporation in 2003. The projection of the timing of these receipts has been revised and the Company currently expects to receive these funds late 2003 through 2004. This project required the Company to fund the initial construction costs. Recovery of the capital costs and profits occurs throughout the processing period. This project is expected to commence commercial operations in the 4th quarter 2003. A project reserve of $13,500 was recorded on this project in the first quarter of 2003 to reflect an anticipated loss on the contract.
A project reserve of approximately $7,600 was established during the quarter to reflect a less optimistic view of cost recovery on another government contract retained by Foster Wheeler Environmental Corporation. This contract had been previously terminated for convenience by the ultimate client.
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The Company also retained a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. In addition, the Company is in process of submitting requests for equitable adjustment related to this contract. At March 28, 2003 and December 27, 2002, the Company anticipates collection of approximately $7,000 and $9,000, respectively, in requests for equitable adjustments. The recently started second phase is billed on a cost plus fee basis and is expected to last for approximately 24 months. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is expected to begin in first quarter of 2004, is for the construction, start-up and testing of the facility for a fixed price of $114,000, which is subject to escalation. This phase is expected to last two years and requires that a subsidiary of the Company fund the construction cost. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. There can be no assurance that the Company will be able to fund the construction costs or obtain the surety bond.
In certain instances in its normal course of business, the Company has provided security for contract performance consisting of standby letters of credit, bank guarantees and surety bonds. The Company may experience difficulty in obtaining surety bonds and bank guarantees/letters of credit on an unsecured basis in the future due to the changing view toward risk of loss in the current market, and the Company’s credit rating. This may impact the Company’s ability to secure new business.
On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors. The principal changes consist of the following: the pension plan will be frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan will be available on a subsidized premium basis only to currently active employees who are eligible to retire under the terms of the pension plan by May 31, 2006; and the 401(k) plan will be enhanced to increase the level of employer matching contribution. The net effect of these changes is expected to positively impact the financial condition of the Company through reduced costs and reduced cash outflow. The Company anticipates a reduction in expenses of approximately $10,000 per year with similar reductions in cash outflows. The reduction in expenses will begin in 2003 while the cash savings will not begin until 2004. The Company has frozen the Supplemental Employee Retirement Plan (“SERP”) and, in April 2003, issued letters of credit totaling $2,424 to certain employees to support its obligations under the SERP.
The Company maintains several defined benefit pension plans in its North American, United Kingdom, and Canadian operations. Funding requirements for these plans are dependent, in part, on the performance of global equity markets and the discount rates used to calculate the present value of the liability. The poor performance of the global equity markets and low interest rates are expected to significantly increase the funding requirements of these plans in 2004. The domestic pension plans have been frozen and the United Kingdom’s plan is currently under review. The interest rate used to calculate the U.S. funding requirements is established by the Internal Revenue Service. The U.S. Congress passed legislation that increased the interest rate which results in reduced funding requirements. This increased rate expires at the end of 2003. If the current rate is not extended, the funding requirement for the U.S. plans will approximate $40,000 in 2004 versus $12,000 in 2003. If the current funding rate is extended, the 2004 funding requirement will be reduced by approximately $12,000. These funding requirements incorporate the savings achieved through the modification of the Company’s domestic pension plans discussed above.
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Foster Wheeler received a formal notice, dated March 18, 2003, from the New York Stock Exchange (“NYSE”) indicating that it was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. The Company has held discussions with the NYSE and has submitted a business plan on May 5, 2003 that will demonstrate compliance with the continued listing standard within 18 months of notice from the NYSE. The NYSE is currently reviewing the plan and the Company expects a decision on the NYSE acceptance of the Company’s plan within the next 45 days. The Company’s business plan, if accepted, will be reviewed by the NYSE for ongoing compliance with its goals and objectives. Throughout the review process, Foster Wheeler’s common stock will continue to be listed on the NYSE, subject to reassessment.
Performance Improvement Intervention
In March 2002, the Company initiated a comprehensive plan to enhance cash generation and to improve profitability. The operating performance portion of the plan concentrates on the quality and quantity of backlog, the execution of projects in order to achieve or exceed the profit and cash targets and the optimization of all non-project related cash sources and uses. In connection with this plan, a group of outside consultants was hired for the purpose of carrying out a performance improvement intervention. The tactical portion of the performance improvement intervention concentrates on booking current projects, and generating incremental cash from high leverage opportunities such as overhead reductions, procurement, and accounts receivable. The systemic portion of the performance improvement intervention concentrates on sales effectiveness, estimating, bidding, and project execution procedures.
Some of the details of the activities to date include the following:
Procurement
The Company is in the final stages of implementing the procurement initiative begun in March of 2002. The initiative focused on reducing internal man-hours and cycle times as well as engaging in strategic agreements with key suppliers. The ongoing work is associated with completing the final nine strategic agreements which are in development. This work is targeted to be complete within 90 days. To date, 10 agreements have been completed. The initiative also explored and then elected not to pursue agreements for an additional 11 commodity groups.
Accounts Receivable
A company-wide management operating system was implemented to identify and track actions relating to collection of all receivables. A new policy has been established requiring actions to be taken prior to receivables becoming due as well as the actions to be taken when collections are past due. One aspect of the new policy requires the reporting of significant past due amounts to senior management on a timely basis. Provisions for non-payments of customer balances are normally addressed within the overall profit calculation of the contracts and are not specifically covered by allowances for doubtful accounts. As a result, the amount considered to be in the receivable qualifying account (allowance for doubtful accounts) does not represent the full allowance.
Trade accounts and notes receivable at March 28, 2003 and December 27, 2002 were $513,700 and $599,500, respectively.
Overhead Reductions
Management progressed in its evaluation of all domestic overhead. Staffing levels at the corporate headquarters and in the North American operations were reduced by 214 individuals since the overhead reduction program began in mid 2002. Annualized salaries, benefits, and other non-essential expenses were reduced by approximately $33,000. Technical and non-technical positions were eliminated including executive and middle management, engineering, manufacturing, administrative support staff, and overhead personnel. The staff reductions include early retirements, voluntary and involuntary terminations. The full benefits of the reductions are not fully realized due to the time phasing of the reductions and notice period
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and severance payments. The savings will ultimately appear in cost of operating revenues, and selling, general and administrative overheads.
Management will continue to adjust the Company’s resources to match its workload. In the first quarter of 2003, additional reductions in force occurred at the Energy Group’s North American operations and reflect the power market conditions prevailing in the United States. Reviews also continue on ways to increase efficiencies and reduce costs at the US corporate center. A review of compensation and benefits has also begun in the UK in 2003.
Sales
The Company continues to emphasize booking high quality contracts. In May 2002, the Company launched an initiative to improve the sales effectiveness of its North American Energy and E&C Groups. The sales effectiveness initiatives were aimed at building up the level of sales activities in each group by strengthening the selling skills of sales personnel. Sales training was completed and a management operating system was implemented in North America that provides management with a disciplined system to track sales opportunities and targets, and actions needed to convert those opportunities into bookings. The initial training activities have been completed and are updated as needed. Given the competitive nature of the business, it is difficult to quantify the results of the sales effectiveness initiatives.
Risk Management
The Company’s Project Risk Management Group, established in the second quarter of 2002, is responsible for reviewing proposals and contracts for work and projects that have been contracted for and are in execution to ensure that the Company is protected from taking unacceptable levels of financial risk. The Project Risk Management Group is assisted in this effort by Deloitte & Touche LLP, the Company’s internal auditors. During the first quarter of 2003, 83 proposals were evaluated with 21 formally reviewed plus 62 projects in execution were reviewed.
The Project Risk Management Group also issued, in conjunction with the financial group, a set of Corporate Policies to govern proposals and contracting, project execution including subcontracting, and procurement and contract accounting.
High-leverage Projects
The Company launched a major initiative in the second quarter of 2002 that focused on the way the Company plans and executes projects in the field. The initiative’s objective was to build a best in class, Foster Wheeler project management system. This activity sought to take best practices and integrate them into a Company wide system. The original scope of the initiative was 22 of the Company’s projects worldwide.
The initiative was completed in January 2003 and updated systems and procedures have been implemented on a consistent basis.
Internal Control Review
The Company initiated a detailed review of internal controls in the third and fourth quarters of 2002. The review included evaluation of the Company’s contracting policies and procedures relating to bidding and estimating practices. Among other things, these reviews included evaluation of the Company’s reserving practices for bad debts and uncollectible accounts receivables, warranty costs, change orders and claims. Management, with approval of the Audit Committee of the Board of Directors, enhanced its policies and established more formalized and higher level approvals for setting and releasing project contingencies and reserves, establishing claims and change orders, and requires that all claims to be recorded in excess of $500 be reviewed and approved in advance by the corporate chief financial officer.
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Management strengthened the Company’s financial controls and supplemented its financial expertise in 2002. This included expanding the scope of the audit function, both internally and externally.
The Company outsourced its internal audit function to Deloitte & Touche LLP in the fourth quarter of 2002. Outsourcing internal audit allows access to a world-class organization with skilled professionals and the latest information technology audit resources. Key objectives of the revised internal audit function include:
| | • | Focusing resources on improving operational and financial performance in areas of highest risk; |
| | | |
| | • | Reviewing and strengthening existing internal controls; |
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| | • | Mitigating the risk of internal control failures; and |
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| | • | Ensuring best practices are implemented across all business units. |
The Company formed a disclosure review committee in the first quarter of 2003. The purpose of the committee is to evaluate, review and modify as necessary the disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s periodic reports is recorded, processed, summarized and reported accurately in all material respects within the time periods required by the SEC’s rules and forms.
Management has begun the formal documentation of the Company’s worldwide internal controls as part of new requirements under the Sarbanes-Oxley legislation.
Backlog and New Orders Booked
CONSOLIDATED DATA
| | | Three Months Ended | |
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| | | March 28, 2003 | | March 29, 2002 | | $ Change | | % Change | |
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| Backlog | | $ | 3,530,220 | | $ | 5,966,617 | | $ | (2,436,397 | ) | | (40.8 | )% |
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| New orders | | $ | 476,335 | | $ | 792,830 | | $ | (316,495 | ) | | (39.9 | )% |
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As of March 28, 2003, 45% of the consolidated backlog was from lump-sum work (64% of which was for the Energy Group), and 55% was from reimbursable work. As of March 29, 2002, 34% of the consolidated backlog was from lump-sum work (64% of which was for the Energy Group) and 66% was from reimbursable work.
The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of backlog is not necessarily indicative of the future earnings of the Company related to the performance of such work. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which management has determined are likely to be performed. Although backlog represents only business that is considered firm, cancellations or scope adjustments may occur. Due to factors outside the Company’s control, such as changes in project schedules, the Company cannot predict with certainty the portion of backlog to be performed in a given year. Backlog is adjusted to reflect project cancellations, deferrals, sale of subsidiaries and revised project scope and cost.
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Backlog at March 28, 2003 was favorably impacted by exchange rate variances of approximately $34,600 primarily related to the strength of the Euro. The change in backlog from March 29, 2002 to March 28, 2003 includes an adjustment for the reduction of approximately $1,700,000 related to contracts sold as part of the aforementioned sale of assets of Foster Wheeler Environmental Corporation. The balance of the change reflects declines in the E&C Group and Energy Group of approximately $450,000 and $300,000, respectively. Refer to the further discussions below regarding the changes in the E&C and Energy Group’s backlog.
Engineering and Construction Group
| | | Three Months Ended | |
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| | | March 28, 2003 | | March 29, 2002 | | $ Change | | % Change | |
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| Backlog | | $ | 2,195,693 | | $ | 4,346,226 | | $ | (2,150,533 | ) | | (49.5 | )% |
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| New orders | | $ | 262,773 | | $ | 383,310 | | $ | (120,537 | ) | | (31.4 | )% |
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The decline in backlog includes an adjustment of approximately $1,700,000 related to the sale of the Foster Wheeler Environmental Corporation contracts. The remaining decrease in backlog was primarily due to projects being delayed to the remaining months of 2003 and early 2004.
The drop in new orders was primarily due to the sale of contracts held by Foster Wheeler Environmental Corporation combined with timing delays occurring in the marketplace mainly within the Continental European operation. These decreases more than offset an increase in new orders recorded by the UK operating unit, which included a front-end engineering design and project management consultancy for a new linear alkyl benzene plant in Qatar plus an engineering, procurement and construction contract for a new active pharmaceutical ingredients plant in Ireland.
Strong growth continues in liquefied natural gas (“LNG”) plants and receiving terminals. The Company and a Japanese partner were awarded a contract for a new LNG train in Oman and the Company is separately executing new LNG terminals and expansions in India and Spain. Environmental legislation continues to drive refinery investments.
The war in Iraq and the SARS illness have had no significant impact on the Group’s operations.
Energy Group
| | | Three Months Ended | |
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| | | March 28, 2003 | | March 29, 2002 | | $ Change | | % Change | |
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| Backlog | | $ | 1,341,665 | | $ | 1,642,909 | | $ | (301,244 | ) | | (18.3 | )% |
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| New orders | | $ | 210,150 | | $ | 413,973 | | $ | (203,823 | ) | | (49.2 | )% |
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The Energy Group’s backlog decreased primarily due to several large Heat Recovery Steam Generators and Selective Catalytic Reduction contracts in the North American unit that were booked during 2001 and executed in 2002. In addition, this unit’s 2002 backlog and new orders included a major engineering, construction and procurement power project that was booked and largely executed during that year. Backlog continued to be strong across the European power operating units.
The decline in new orders was largely centered in the North American operating units. The North American power market continues to suffer from slow economic growth, over capacity, and the financial difficulties of independent power producers. Growth opportunities in the North American power market are expected to shift toward maintenance and service contracts and away from the supply of new equipment associated with solid fuel boiler contracts. Internationally, growth opportunities in circulating fluidized bed boilers are expected to continue in selective European and Asian markets, while industrial boiler sales continue in selected Middle Eastern markets.
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The Company was awarded the front-end work for a project in Europe that utilizes the next generation of circulating fluidized bed (“CFB”) technology. The full notice to proceed is expected in the fourth quarter of 2003.
The war in Iraq and the SARS illness have had no significant impact on the Group’s operations.
Non-Audit Services
On May 6, 2003, the Audit Committee of the Board of Directors of the Company approved non-audit services to be provided by PricewaterhouseCoopers LLP for $1,951. Approximately $651 was for audit-related services and $1,300 was for tax related services.
Other Matters
In April 2003, Joseph T. Doyle, Foster Wheeler’s Chief Financial Officer since July 2002, left the Company. Kenneth A. Hiltz, a principal with AlixPartners, LLC, succeeded him. Refer to Exhibit 10.6 filed as part of this Form 10-Q for the consulting agreement between AlixPartners, LLC and the Company.
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters, which are subject to change as events evolve and as additional information becomes available during the administration and litigation processes.
In the ordinary course of business, the Company and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be brought against the Company by customers alleging deficiencies in either equipment design or plant construction. Based on its knowledge of the facts and circumstances relating to the Company’s liabilities, if any, and to its insurance coverage, management of the Company believes that the disposition of such suits will not result in charges materially in excess of amounts provided in the accounts.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In Thousands of Dollars)
Management’s strategy for managing transaction risks associated with currency fluctuations is for each operating unit to enter into derivative transactions, such as forward foreign exchange agreements, to hedge its exposure on contracts into the operating unit’s functional currency. The Company utilizes all such financial instruments solely for hedging. Corporate policy prohibits the speculative use of such instruments. The Company is exposed to credit loss in the event of nonperformance by the counter parties to such financial instruments. To minimize this risk, the Company enters into these financial instruments with financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. The geographical diversity of the Company’s operations mitigates to some extent the effects of the currency translation exposure. However, the Company maintains substantial operations in Europe and is subject to translation risk for the Euro and the pound Sterling. No significant unhedged assets or liabilities are maintained outside the functional currency of the operating subsidiaries. Accordingly, translation exposure is not hedged.
Interest Rate Risk - The Company is exposed to changes in interest rates primarily as a result of its borrowings under its Revolving Credit Agreement and its variable rate project debt. If market rates average 1% more in 2003 than in 2002, the Company’s interest expense for the next twelve months would increase, and income before tax would decrease by approximately $1,668. This amount has been determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate balances as of March 28, 2003. In the event of a significant change in interest rates, management would likely take action to further mitigate its exposure to the change. However, due to uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company’s financial structure.
Foreign Currency Risk - The Company has significant overseas operations. Generally, all significant activities of the overseas affiliates are recorded in their functional currency, which is generally the currency of the country of domicile of the affiliate. This results in a mitigation of the potential impact of earnings fluctuations as a result of changes in foreign exchange rates. In addition, in order to further mitigate risks associated with foreign currency fluctuations, the affiliates of the Company enter into foreign currency exchange contracts to hedge the exposed contract value back to their functional currency. As of March 28, 2003, the Company had approximately $262,276 of foreign exchange contracts outstanding. These contracts mature between 2003 and 2004. The contracts have been established by various international subsidiaries to sell a variety of currencies and either receive their respective functional currency or other currencies for which they have payment obligations to third parties. The Company does not enter into foreign currency contracts for speculative purposes.
Inflation
The effect of inflation on the Company’s revenues and earnings is minimal. Although a majority of the Company’s revenues are made under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to complete in these future periods. In addition, some contracts provide for price adjustments through escalation clauses.
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ITEM 4 CONTROLS AND PROCEDURES
Immediately following the signature page of this report is the Certification that is required under Section 302 of the Sarbanes-Oxley Act of 2002. This section of the report contains information concerning the controls evaluation referred to in the Section 302 Certifications and the information contained herein should be read in conjunction with the Certification.
Internal controls are designed with the objective of ensuring that assets are safeguarded, transactions are authorized, and financial reports are prepared on a timely basis in accordance with generally accepted accounting principles in the United States. The disclosure control procedures are designed to comply with the regulations established by the Securities and Exchange Commission.
Internal controls, no matter how designed, have limitations. It is the Company’s intent that the internal controls be conceived to provide adequate, but not absolute, assurance that the objectives of the controls are met on a consistent basis. Management plans to continue its review of internal controls and disclosure procedures on an ongoing basis.
The Company’s principal executive officer and principal financial officer, after supervising and participating in an evaluation of the effectiveness of the Company’s internal and disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s internal and disclosure controls and procedures were effective.
There were no significant changes in the Company’s internal and disclosure controls or in other factors that could significantly affect such internal and disclosure controls subsequent to the date of their evaluation.
Code of Ethics
The Company maintains a Code of Ethics for all employees, including executive management. No exceptions were granted to any employee during the first quarter 2003.
Safe Harbor Statement
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other sections of this Report on Form 10-Q and other reports and oral statements made by representatives of the Company from time to time may contain forward-looking statements that are based on management’s assumptions, expectations and projections about the Company and the various industries within which the Company operates. These include statements regarding the Company’s expectation regarding revenues (including as expressed by its backlog), its liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Company cautions that a variety of factors, including but not limited to the factors described under Item 1. “Business—Risk Factors of the Business” and the following, could cause business conditions and results to differ materially from what is contained in forward-looking statements:
| | • | changes in the rate of economic growth in the United States and other major international economies; |
| | • | changes in investment by the power, oil & gas, pharmaceutical, chemical/petrochemical and environmental industries; |
| | • | changes in the financial condition of our customers; |
| | • | changes in regulatory environment; |
| | • | changes in project design or schedules; |
| | • | contract cancellations; |
| | • | changes in estimates made by the Company of costs to complete projects; |
| | • | changes in trade, monetary and fiscal policies worldwide; |
61
| | • | currency fluctuations; |
| | • | war and/or terrorist attacks on facilities either owned or where equipment or services are or may be provided; |
| | • | outcomes of pending and future litigation, including litigation regarding the Company’s liability for damages and insurance coverage for asbestos exposure; |
| | • | protection and validity of patents and other intellectual property rights; |
| | • | increasing competition by foreign and domestic companies; |
| | • | compliance with debt covenants; |
| | • | monetization of certain Power System facilities; |
| | • | recoverability of claims against customers; and |
| | • | changes in estimates used in its critical accounting policies. |
Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. The reader should consider the areas of risk described above in connection with any forward-looking statements that may be made by the Company.
The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is advised, however, to consult any additional disclosures the Company makes in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.
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PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Refer to Note 5 to the Condensed Consolidated Financial Statements presented in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of legal proceedings, which is incorporated by reference in this Part II.
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| (a) | Date of Annual Meeting. |
| | |
| | The Annual meeting of Shareholders of the Company was held on April 29, 2003, at the offices of the Company located at Perryville Corporate Park, Clinton, New Jersey. |
| | |
| (b) | Election of Directors – Voting Results. |
Nominee | | For | | Voted to
Withhold Authority | |
| |
|
| |
|
| |
| John P. Clancey | | | 35,807,706 | | | 496,872 | |
| John E. Stuart | | | 35,544,898 | | | 759,680 | |
| James D. Woods | | | 35,813,784 | | | 490,794 | |
| | Other Directors continuing in office: |
| | |
| | Eugene D. Atkinson |
| | Martha Clark Goss |
| | Victor A. Hebert |
| | Joseph J. Melone |
| | Raymond J. Milchovich |
| | |
| (c) | Additional Matters Voted Upon. |
| | |
| | Ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants for the Company for 2003. |
For | | Against | | Abstain | | Broker
Non-votes | |
|
| |
|
| |
|
| |
|
| |
| | 35,971,436 | | | 254,565 | | | 78,577 | | | 0 | |
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit No. | Exhibits |
| | |
| 4.1 | Amendment of Guarantee Agreement, dated as of March 15, 2003, made by Foster Wheeler Ltd. in favor of FW Preferred Capital Trust I. |
| | |
| 4.2 | Second Supplemental Indenture, dated as of March 15, 2003, among Foster Wheeler Ltd., FW Preferred Capital Trust I and BYN Midwest Trust Company. |
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| 10.1 | Asset Purchase Agreement dated as of February 17, 2003 by and among Tetra Tech, Inc., Tetra Tech FW, Inc., and Foster Wheeler Ltd., Foster Wheeler LLC, Foster Wheeler USA Corporation, Foster Wheeler Environmental Corporation and Hartman Consulting Corporation. |
| | |
| 10.2 | Amendment to the Asset Purchase Agreement dated as of March 7, 2003 by and among Tetra Tech, Inc., Tetra Tech FW, Inc., and Foster Wheeler Ltd., Foster Wheeler LLC, Foster Wheeler USA Corporation, Foster Wheeler Environmental Corporation and Hartman Consulting Corporation. |
| | |
| 10.3 | Deed between Foster Wheeler LLC and Foster Wheeler Realty Services, Inc. and CIT Group Inc. (NJ) dated March 31, 2003. |
| | |
| 10.4 | Separation letter between Joseph T. Doyle and Foster Wheeler Ltd. dated April 4, 2003. |
| | |
| 10.5 | Interim Management and Restructuring Services letter agreement between AP Services and Foster Wheeler Ltd. dated November 22, 2002. |
| | |
| 10.6 | First Amendment to the Interim Management Restructuring Services letter agreement between AP Services and Foster Wheeler Ltd. dated April 7, 2003. |
| | |
| 10.7 | Amendment No. 2 dated April 21, 2003 to the Lease Agreement between Energy (NJ) QRS 15-10, Inc. and Foster Wheeler Realty Services, Inc. |
| | |
| 12.1 | Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges and Combined Fixed Charges. |
| | |
| 99.1 | Certification of Raymond J. Milchovich. |
| | |
| 99.2 | Certification of Kenneth A. Hiltz. |
Reports on Form 8-K
Report Date | | Description |
| | | |
| March 10, 2003 | | Foster Wheeler announced the sale of the operating business of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, to Tetra Tech, Inc. on March 7, 2003 (Items 5, 7 and 9). |
| | | |
| March 25, 2003 | | Foster Wheeler announced its financial results for the fourth quarter 2002 and year (Item 9). |
| | | |
| April 4, 2003 | | Foster Wheeler announced the resignation of its chief financial officer. (Items 5 and 9). |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | FOSTER WHEELER LTD. |
| | (Registrant) |
| | |
Date: May 12, 2003 | /s/ RAYMOND J. MILCHOVICH |
| | Raymond J. Milchovich |
| | Chairman, President and |
| | Chief Executive Officer |
| | |
Date: May 12, 2003 | /s/ KENNETH A. HILTZ |
| | Kenneth A. Hiltz |
| | Chief Financial Officer |
65
CERTIFICATIONS
I, Raymond J. Milchovich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foster Wheeler Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 12, 2003 | |
| | |
| | /s/ RAYMOND J. MILCHOVICH |
| | Raymond J. Milchovich |
| | Chairman, President and |
| | Chief Executive Officer |
66
I, Kenneth A. Hiltz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foster Wheeler Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 12, 2003 | |
| | |
| | /s/ KENNETH A. HILTZ |
| | Kenneth A. Hiltz |
| | Chief Financial Officer |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.