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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
9. Bank Loans — (Continued)
Interest costs incurred (including dividends on preferred security) in 2002, 2001, and 2000 were $84,296, $85,184 and $83,405 of which $1,368, $718 and $151, respectively, were capitalized.
10. Corporate and Other Debt and Notes Payable to Affiliate
Corporate Debt — The Company has $200,000 Notes (the “Senior Notes”) in the public market, which bear interest at a fixed rate of 6.75% per annum, payable semiannually, and mature November 15, 2005. The Senior Notes were issued under an indenture between the Company and BNY Midwest Trust Company. The Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements.
As a result of the reorganization on May 25, 2001, Foster Wheeler LLC, as successor to Foster Wheeler Corporation, became obligor for the 6.75% notes due November 15, 2005 (the “Notes”). In connection with the Company’s finalizing the Senior Credit Facility, Foster Wheeler Ltd., Foreign Holdings Ltd. and the following 100% owned companies issued guarantees in favor of the holders of the Notes: Equipment Consultants, Inc., Foster Wheeler Asia Limited, Foster Wheeler Capital & Finance Corporation, Foster Wheeler Constructors, Inc., Foster Wheeler Development Corporation, Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Enviresponse, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler Power Group, Inc., Foster Wheeler Power Systems, Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., FW Mortshal, Inc., FW Technologies Holding, LLC, HFM International, Inc., Process Consultants, Inc., Pyropower Operating Services Company, Inc., and Perryville III Trust. Each of the guarantees is full and unconditional and joint and several. Each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. Each of the subsidiary guarantors except Foreign Holdings, Ltd., are 100% owned, directly or indirectly, by the Company.
Holders of the Senior Notes due November 15, 2005 have a security interest in the stock and debt of the Company’s subsidiaries and on facilities owned by the Company 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 $184,700 at December 27, 2002) have priority to the Senior Notes in these assets while the security interest of the Senior Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.
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 commence at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA level as described in the agreement, as amended. With the sale of Foster Wheeler Environmental Corporation on March 7, 2003, cumulative sales proceeds received, as defined in the agreement, approximate $75,000.
The term loan and revolving loans bear interest at the Company’s option of (a) LIBOR plus 3.50% or (b) the Base Rate plus 2.50%. The “Base Rate” means the higher of (i) the Bank of America prime rate and (ii) the Federal Funds rate plus 0.5%.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
10. Corporate and Other Debt and Notes Payable to Affiliate — (Continued)
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 pre-tax charges related to specific contingencies may be excluded from the covenant calculation, if incurred, through December 31, 2003.
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 must make a prepayment of principal in the aggregate amount of $10,000.
As of December 27, 2002, $140,000 was borrowed under the Senior Credit Facility. This amount appears on the Consolidated Statement of Financial Position under the caption “Corporate and Other Debt.” As of December 27, 2002, $113,670 of standby letters of credit were outstanding.
Corporate and other debt consisted of the following:
| | | 2002 | | 2001 | |
| | |
| |
| |
| | | | | | | | |
| Senior Credit Facility (average interest rate 5.15%) | | $ | 140,000 | | $ | 70,000 | |
| 6.75% Notes due November 15, 2005 | | | 200,000 | | | 200,000 | |
| Other | | | 6,707 | | | 27,627 | |
| | |
|
| |
|
| |
| | | | 346,707 | | | 297,627 | |
| Less: Current portion | | | 5,005 | | | 297,627 | |
| | |
|
| |
|
| |
| | | $ | 341,702 | | $ | 0 | |
| | |
|
| |
|
| |
| Principal payments are payable in annual installments of: | | | | | | | |
| 2004 | | $ | 1,401 | | | | |
| 2005 | | | 340,134 | | | | |
| 2006 | | | 116 | | | | |
| 2007 | | | 51 | | | | |
| | |
| | | | |
| Balance due in installments through 2007 | | $ | 341,702 | | | | |
| | |
| | | | |
Notes Payable to Affiliate and Guarantee of Convertible Subordinated Notes — In May and June 2001, Foster Wheeler Ltd. issued convertible subordinated notes having an aggregate principal amount of $210,000. The notes are due in 2007 and bear interest at 6.50% per annum, payable semi-annually on June 1 and December 1 of each year, commencing December 2001. The proceeds of these securities were loaned to the Company and are included in the caption “Notes payable to affiliate” on the accompanying consolidated financial statements. Debt issuance costs are amortized over the term of the notes and are a component of interest expense. Interest expense was $14,917 and $8,739 for 2002 and 2001, respectively. The Company has issued a guarantee in favor of the holders of the convertible subordinated notes.
For the years ended December 27, 2002 and December 26, 2001, the Company recorded $14,917 and $8,739, respectively of intercompany interest expense on this note payable. This interest expense is included in the caption interest expense on the accompanying consolidated statement of operations and comprehensive loss. Of these amounts, $1,138 and $1,138 as of December 27, 2002 and December 26, 2001, respectively, were unpaid and included in accrued expenses on the accompanying consolidated statement of financial position.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
11. Derivative Financial Instruments
The Company operates on a worldwide basis. The Company’s activities expose it to risks related to the effect of changes in the foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS 133. At December 27, 2002, the Company did not meet the requirements for deferral under SFAS 133 and recorded in the year ended December 27, 2002 a $5,300 net gain on derivative instruments which is recorded as a reduction in cost of operating revenues on the consolidated statement of earnings and comprehensive income. The Company is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. As of December 27, 2002, approximately $177,140 was owed to the Company by counterparties and $103,950 is owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive income as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS 133.
The maximum term over which the Company is hedging exposure to the variability of cash flows is twenty-four months.
A reconciliation of current period changes, net of applicable income taxes, in accumulated other comprehensive income relating to derivatives qualifying as cash flow hedges are as follows:
| | | | | |
| Balance as of December 28, 2001 | | $ | 3,834 | |
| Reclassification to earnings | | | (3,834 | ) |
| | |
|
| |
| Balance at December 27, 2002 | | $ | 0 | |
| | |
|
| |
12. Subordinated Robbins Facility Exit Funding Obligations
Foster Wheeler’s subordinated obligations entered into in connection with the restructuring of debt incurred to finance construction of a waste-to-energy facility in the Village of Robbins, Illinois (the “Exit Funding Agreement”) are limited to funding:
| | | | | |
| 1999C Bonds 7 1/4% interest, due October 15, 2009 ($13,710) and October 15, 2024 ($77,155) | | $ | 90,865 | |
| 1999D Bonds accrued at 7% due October 15, 2009 | | | 18,000 | |
| | |
|
| |
| Total | | $ | 108,865 | |
| | |
|
| |
1999C Bonds. The 1999C Bonds are subject to mandatory sinking fund reduction prior to maturity at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the redemption date by application by the Trustee of funds on deposit to the credit of the 1999C Sinking Fund Installment Subaccount on October 15 in the years and in the principal amounts as follows:
1999C BONDS DUE 2009
Year
| | Amount | | | Year | | Amount | |
| |
|
| | |
| |
|
| |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 2003 | | $ | 1,580 | | | 2006 | | $ | 1,940 | |
| 2004 | | | 1,690 | | | 2007 | | | 2,080 | |
| 2005 | | | 1,810 | | | 2008 | | | 2,225 | |
| | | | | | | 2009 | | | 2,385 | |
| | | | | | | | |
| |
| | | | | | | | | $ | 13,710 | |
| | | | | | | | |
| |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
12. Subordinated Robbins Facility Exit Funding Obligations — (Continued)
1999C BONDS DUE 2024
Year
| | | Amount | |
| | |
| |
| | | | | |
| 2023 | | $ | 37,230 | |
| 2024 | | | 39,925 | |
| | |
|
| |
| | | | 77,155 | |
| | |
|
| |
| | | $ | 90,865 | |
| | |
|
| |
See Note 21 for further information.
13. Mandatorily Redeemable Preferred Securities
On January 13, 1999, FW Preferred Capital Trust I, a Delaware business trust which is a 100% owned finance subsidiary of the Company, issued $175,000 in Preferred Trust Securities. The Preferred Trust Securities are fully and unconditionally guaranteed by the Company and Foster Wheeler Ltd. These Preferred Trust Securities are entitled to receive cumulative cash distributions at an annual rate of 9.0%. Distributions are paid quarterly in arrears on April 15, July 15, October 15, and January 15 of each year. Such distributions may be deferred for periods up to five years during which time additional interest accrues at 9.0%. In accordance with this provision, the Company has deferred all quarterly distributions beginning with the distribution due on January 15, 2002. Such deferred interest totals $20,100. The maturity date is January 15, 2029. Foster Wheeler can redeem these Preferred Trust Securities on or after January 15, 2004.
14. Special-purpose Project Debt
Special-purpose project debt represents debt incurred to finance the construction of cogeneration facilities or waste-to-energy projects. The notes and/or bonds are collateralized by certain assets of each project. The Company’s obligations with respect to this debt are limited to guaranteeing the operating performance of the projects.
| | | 2002 | | 2001 | |
| | |
| |
| |
| | | | | | | | |
| Note payable, interest varies based on one of several money market rates (2002-year-end rate 2.705%), due semiannually through July 30, 2006 | | $ | 27,907 | (1) | $ | 33,367 | |
| Senior Secured Notes, interest 11.443%, due annually April 15, 2003 through 2015 | | | 40,077 | (2) | | 42,075 | |
| Solid Waste Disposal and Resource Recovery System Revenue Bonds, interest 7.125% to 7.5%, due annually December 1, 2003 through 2010 | | | 88,920 | (3) | | 97,978 | |
| Resource Recovery Revenue Bonds, interest 7.9% to 10%, due annually December 15, 2003 through 2012 | | | 48,936 | (4) | | 52,636 | |
| | |
|
| |
|
| |
| | | | 205,840 | | | 226,056 | |
| Less: Current portion | | | 24,227 | | | 20,216 | |
| | |
|
| |
|
| |
| | | | $181,613 | | | $205,840 | |
| | |
|
| |
|
| |
| | | | | | | | |
| (1) | The note payable for $27,907 represents a loan under a bank credit facility to a limited partnership whose general partner is a special-purpose subsidiary. |
| (2) | The Senior Secured Notes of $40,077 were issued in a total amount of $42,500. The notes are collateralized by certain revenues and assets of a special-purpose subsidiary which is the indirect owner of the project. |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
14. Special-purpose Project Debt — (Continued)
| (3) | The Solid Waste Disposal and Resource Recovery System Revenue Bonds totaling $88,920 were issued in a total amount of $133,500. The bonds are collateralized by a pledge of certain revenues and assets of the project, but not the plant (see Note 21). |
| (4) | The Resource Recovery Revenue Bonds of $48,936 were issued in a total amount of $86,780. The bonds are collateralized by a pledge of certain revenues and assets of the project. |
Principal payments are payable in annual installments as follows:
| 2004 | | $ | 23,195 | |
| 2005 | | | 25,165 | |
| 2006 | | | 27,072 | |
| 2007 | | | 15,323 | |
| Balance due in installments through 2015 | | | 90,858 | |
| | |
|
| |
| | | $ | 181,613 | |
| | |
|
| |
15. Guarantees
The Company has provided indemnifications to third parties relating to businesses and/or assets the Company previously owned. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by the Company prior to the sale.
| | | Maximum Potential
Payment | | Carrying Amount of
Liability | |
| | |
| |
| |
| | | | | | | | |
| Environmental indemnifications | | | No limit | | $ | 5,400 | |
| Tax indemnifications | | | No limit | | $ | 0 | |
The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.
| Balance as of December 28, 2001 | | $ | 52,700 | |
| Accruals | | | 45,600 | |
| Settlements | | | (8,600 | ) |
| Adjustments to provisions | | | (7,800 | ) |
| | |
|
| |
| Balance as of December 27, 2002 | | $ | 81,900 | |
| | |
|
| |
16. Equity Interests
The Company owns a non-controlling equity interest in three energy projects and one waste-to-energy project; three of which are located in Italy and one in Chile. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. The project in Chile is 85% owned by the Company. However, the Company does not have a controlling financial interest in the Chilean project. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
16. Equity Interests — (Continued)
| | | December 27, 2002 | | December 28, 2001 | |
| | |
| |
| |
| | | Italian
Projects | | Chilean
Project | | Italian
Projects | | Chilean
Projects | |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | |
| Current assets | | $ | 80,966 | | $ | 22,352 | | $ | 75,942 | | $ | 23,301 | |
| Other assets (primarily buildings and equipment) | | | 344,993 | | | 218,990 | | | 311,584 | | | 227,019 | |
| Current liabilities | | | 20,665 | | | 14,748 | | | 12,487 | | | 14,747 | |
| Other liabilities (primarily long-term debt) | | | 344,148 | | | 152,949 | | | 329,030 | | | 158,124 | |
| Net assets | | | 61,146 | | | 73,645 | | | 46,009 | | | 77,449 | |
| | | | | | | | | | | | | | |
| | | December 27, 2002 | | December 28, 2001 | |
| | |
| |
| |
| | | Italian Projects | | Chilean Project | | Italian Projects | | Chilean Projects | | Venezuela Project | |
| | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | |
Income Statement Data for twelve months: | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 171,565 | | $ | 38,425 | | $ | 159,845 | | $ | 40,546 | | $ | 4,428 | |
| Income before income taxes | | | 31,358 | | | 10,087 | | | 21,618 | | | 10,467 | | | 2,684 | |
| Net earnings | | | 17,648 | | | 8,372 | | | 11,955 | | | 8,689 | | | 2,582 | |
As of December 27, 2002, the Company’s share of the net earnings and investment in the equity affiliates totaled $14,006 and $88,523, respectively. Dividends of $9,744 were received during the year 2002. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $2,800 per year for the four projects. The Company has provided a $10,000 debt service reserve letter of credit providing liquidity should the performance of the project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.
In April 2001, the Company completed the sale of its interests in two hydrogen production plants in South America. The net proceeds from these transactions were approximately $40,000. An after-tax loss of $5,000 was recorded in the second quarter of 2001 relating to these sales.
17. Income Taxes
The components of (loss)/earnings before income taxes for the years 2002, 2001 and 2000 were taxed under the following jurisdictions:
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | |
| Domestic | | $ | (506,639 | ) | $ | (244,809 | ) | $ | (37,334 | ) |
| Foreign | | | (3,710 | ) | | 32,012 | | | 89,500 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | (510,349 | ) | $ | (212,797 | ) | $ | 52,166 | |
| | |
|
| |
|
| |
|
| |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
17. Income Taxes — (Continued)
The provision/(benefit) for income taxes on those earnings was as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | |
| Current tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | $ | 5,931 | | $ | 5,486 | | $ | 2,116 | |
| Foreign | | | 10,978 | | | 22,604 | | | 15,094 | |
| | |
|
| |
|
| |
|
| |
| Total current | | | 16,909 | | | 28,090 | | | 17,210 | |
| | |
|
| |
|
| |
|
| |
| Deferred tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | | — | | | 102,147 | | | (14,079 | ) |
| Foreign | | | (2,252 | ) | | (6,783 | ) | | 12,048 | |
| | |
|
| |
|
| |
|
| |
| Total deferred | | | (2,252 | ) | | 95,364 | | | (2,031 | ) |
| | |
|
| |
|
| |
|
| |
| Total provision/(benefit) for income taxes | | $ | 14,657 | | $ | 123,454 | | $ | 15,179 | |
| | |
|
| |
|
| |
|
| |
Deferred tax liabilities (assets) consist of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | |
| | | | | | | | | | | |
| Difference between book and tax depreciation | | $ | 35,002 | | $ | 34,369 | | $ | 72,195 | |
| Pension assets | | | (61,279 | ) | | 7,584 | | | 22,881 | |
| Capital lease transactions | | | 7,376 | | | 8,612 | | | 9,733 | |
| Revenue recognition | | | (7,210 | ) | | 5,999 | | | 16,736 | |
| Other | | | — | | | 192 | | | 740 | |
| | |
|
| |
|
| |
|
| |
| Gross deferred tax liabilities (assets) | | | (26,111 | ) | | 56,756 | | | 122,285 | |
| | |
|
| |
|
| |
|
| |
| Current taxability of estimated costs to complete long-term contracts | | | (14,278 | ) | | (4,297 | ) | | (5,750 | ) |
| Income currently taxable deferred for financial reporting | | | (4,175 | ) | | (5,307 | ) | | (5,491 | ) |
| Expenses not currently deductible for tax purposes | | | (129,917 | ) | | (122,983 | ) | | (132,898 | ) |
| Investment tax credit carry forwards | | | (30,893 | ) | | (30,893 | ) | | (30,251 | ) |
| Postretirement benefits other than pensions | | | (67,113 | ) | | (47,242 | ) | | (56,250 | ) |
| Asbestos claims | | | (6,200 | ) | | (7,000 | ) | | (7,963 | ) |
| Minimum tax credits | | | (10,883 | ) | | (11,073 | ) | | (10,263 | ) |
| Foreign tax credits | | | (9,579 | ) | | (6,485 | ) | | (13,763 | ) |
| Net operating loss carryforwards | | | (178,067 | ) | | (15,332 | ) | | (68,260 | ) |
| Effect of write-downs and restructuring reserves | | | (40,873 | ) | | (63,680 | ) | | — | |
| Other | | | (15,621 | ) | | (19,871 | ) | | (5,432 | ) |
| Valuation allowance | | | 444,427 | | | 268,851 | | | 71,816 | |
| | |
|
| |
|
| |
|
| |
| Net deferred tax assets | | | (63,172 | ) | | (65,312 | ) | | (264,505 | ) |
| | |
|
| |
|
| |
|
| |
| | | $ | (89,283 | ) | $ | (8,556 | ) | $ | (142,220 | ) |
| | |
|
| |
|
| |
|
| |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
17. Income Taxes — (Continued)
The domestic investment tax credit carryforwards, if not used, will expire in the years 2003 through 2008. Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2004 through 2007. As reflected above, the Company has recorded various deferred tax assets. Realization is dependent on generating sufficient taxable income prior to the expiration of the various credits. Management believes that it is more likely than not that the remaining net deferred tax assets (after consideration of the valuation allowance) will be realized through future earnings and/or tax planning strategies. The amount of the deferred tax assets considered realizable, however, could change in the near future if estimates of future taxable income during the carryforward period are changed. The valuation allowance increased by $175,600 and $197,000 in 2002 and 2001, respectively. Such increase is required under FASB 109, “Accounting for Income Taxes”, when there is an evidence of losses from operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided in the current year do not begin expiring until 2020 and beyond, based on the current tax laws.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings before income taxes, as a result of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Tax provision/(benefit) at U.S.statutory rate | | | (35.0 | )% | | (35.0 | )% | | 35.0 | % |
| State income taxes, net of Federal income tax benefit | | | 0.4 | | | 1.9 | | | 6.7 | |
| Increase in valuation allowance | | | 34.4 | | | 86.2 | | | — | |
| Difference in estimated income taxes on foreign income and losses, net of previously provided amounts | | | 2.0 | | | 2.2 | | | (7.5 | ) |
| Other | | | 1.1 | | | 2.6 | | | (5.1 | ) |
| | |
|
| |
|
| |
|
| |
| | | | 2.9 | % | | 57.9 | % | | 29.1 | % |
| | |
|
| |
|
| |
|
| |
18. Operating Leases
The Company entered into a sale/leaseback of its waste-to-energy plant in Charleston, South Carolina, in 1989. The terms of the agreement consisted of a long-term operating lease of 25 years. The Company recorded a deferred gain of $13,800 related to this transaction which is being amortized to income over the term of the lease. As of December 28, 2001, the unamortized gain was $6,500, net of the current portion of $500 each year. The lease expense recognized for 2002 was $6,300 and for 2001 and 2000 was $7,500 per year. The Charleston facility was sold in October of 2002.
The Company and certain of its subsidiaries are obligated under other operating lease agreements primarily for office space. Rental expense for these leases totaled $32,000 in 2002, $29,800 in 2001, and $30,200 in 2000. Future minimum rental commitments on non- cancelable leases are as follows:
Fiscal year: | | | | |
| 2003 | | $ | 26,937 | |
| 2004 | | | 25,805 | |
| 2005 | | | 21,208 | |
| 2006 | | | 16,443 | |
| 2007 | | | 15,159 | |
| Thereafter | | | 157,574 | |
| | |
|
| |
| | | $ | 263,126 | |
| | |
|
| |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Capital Leases
During 2002, the Company entered into sales-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capitalized leases. The sales-leaseback transaction in Finland is a non-cash investing activity and as such is not reflected in the statement of cash flows. Assets under capital leases are summarized as follows:
| | | 2002 | |
| | |
| |
| | | | | |
| Buildings and improvements | | $ | 35,755 | |
| Less accumulated amortization | | | 342 | |
| | |
|
| |
| Net assets under capital lease | | $ | 35,413 | |
| | |
|
| |
The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 27, 2002:
Fiscal year: | | | | |
| 2003 | | $ | 6,152 | |
| 2004 | | | 6,152 | |
| 2005 | | | 6,152 | |
| 2006 | | | 6,679 | |
| 2007 | | | 6,679 | |
| Thereafter | | | 134,927 | |
| Less: Interest | | | (107,754 | ) |
| | |
|
| |
| Net minimum lease payments under capital leases | | $ | 58,987 | |
| | |
|
| |
20. Quarterly Financial Data (Unaudited)
| | | Three Months Ended | |
| | |
| |
2002
| | March 29 | | June 28 | | Sept. 27 | | Dec. 27 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
| | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | | | | |
| Operating revenues | | $ | 795,409 | | $ | 944,334 | | $ | 799,069 | | $ | 980,365 | |
| Gross earnings/(loss) from operations | | | 83,477 | | | 48,787 | | | (58,858 | ) | | 18,861 | |
| Net (loss) prior to cumulative effect of a change in accounting principle | | | (25,557 | ) | | (85,943 | ) | | (150,957 | ) | | (112,049 | ) |
| Cumulative effect of a change in accounting principle for goodwill, net of $0 tax | | | (150,500 | ) | | | | | | | | | |
| Net (loss) | | | (176,057 | ) | | (85,943 | ) | | (150,957 | ) | | (112,049 | ) |
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | |
| |
2001
| | March 30 | | June 29 | | Sept. 28 | | Dec. 28 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
| | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | | (Restated)
(See Note 3) | |
| Operating revenues | | $ | 682,643 | | $ | 826,882 | | $ | 808,798 | | $ | 996,991 | |
| Gross earnings from operations | | | 74,958 | | | 84,421 | | | 68,390 | | | (76,480 | ) |
| Net earnings | | | 6,974 | | | (342 | ) | | 165 | | | (343,048 | ) |
21. Litigation and Uncertainties
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 or plant construction and
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
21. Litigation and Uncertainties — (Continued)
seeking resulting alleged damages. 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 material charges against assets or earnings materially in excess of amounts previously provided in the accounts.
Some of the Company’s U.S. subsidiaries, along with many other companies, are codefendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States. Plaintiffs claim damages for personal injury alleged to have arisen from exposure to or use of asbestos in connection with work allegedly performed by the Company’s subsidiaries during the 1970s and prior. A summary of claim activity for the three years ended December 27, 2002 is as follows:
| | | Number of Claims | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| Balance, beginning of year | | | 110,700 | | | 92,100 | | | 73,600 | |
| New claims | | | 45,200 | | | 54,700 | | | 41,300 | |
| Claims resolved | | | (16,100 | ) | | (36,100 | ) | | (22,800 | ) |
| | |
|
| |
|
| |
|
| |
| Balance, end of year | | | 139,800 | | | 110,700 | | | 92,100 | |
| | |
|
| |
|
| |
|
| |
The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed or will be reimbursed from insurance coverage, was $57,200 in 2002, $66,900 in 2001, and $56,200 in 2000.
The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $1.6. In view of the many uncertainties associated with asbestos bodily injury claims, the Company believes that the average cost may increase in the future.
The Company has recorded assets of $569,000 relating to probable insurance recoveries of which approximately $35,000 is recorded in accounts and notes receivables, and $534,000 is recorded as long term. The Company has funded approximately $59,000 as of December 27, 2002. The asset is an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending proceedings with certain insurers, as well as recoveries under a funding arrangement with other insurers, which has been in place since 1993. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $337,500 and an estimated liability relating to future unasserted claims of approximately $217,300. Of the total, $35,000 is recorded in accrued expenses and $519,800 is recorded in asbestos related liability on the consolidated statement of financial position. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type; and the breakdown of known and future claims into disease type. The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are expected to be incurred over the next sixteen years during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2018 but in light of uncertainties inherent in long term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs which might be incurred after 2018. Nonetheless, the Company plans to update its forecasts periodically to take into consideration its future experience and other considerations such as legislation to continuously update its estimate of future costs and expected insurance recoveries. Historically, defense costs have represented approximately 24% of total costs. Through December 27, 2002, total indemnity costs paid, prior to insurance recoveries, were approximately $294,600 and total defense costs paid were approximately $95,100.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
21. Litigation and Uncertainties — (Continued)
As of December 27, 2002, all of the $569,000 asset was contested by the Company’s insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the Company’s various insurers and the Company as self-insurer. The Company believes that any amounts that its subsidiaries might be allocated as self-insurer would be immaterial. Based on the nature of the litigation and opinions received from outside counsel, the Company also believes that the possibility of not recovering the full amount of the asset is remote.
The Company’s management after consultation with counsel, has considered the ongoing proceedings with insurers and the financial viability and legal obligations of its insurers, and believe that except for those insurers that have become or may become insolvent, the insurers or their guarantors will continue to adequately fund claims and defense costs relating to asbestos litigation. It should be noted that the estimate of the assets and liabilities related to asbestos claims and recovery is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainty as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with asbestos claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.
A subsidiary of the Company in the United Kingdom has also received a limited number of claims alleging personal injury arising from exposure to asbestos. None of these claims have resulted in material costs to the Company.
A San Francisco, California jury returned a verdict on March 26, 2002 finding Foster Wheeler Corporation liable for $10,600 in the case of Todak vs. Foster Wheeler Corporation. The case was brought against Foster Wheeler Corporation, the U.S. Navy, and several other companies by a 59-year-old man suffering from mesothelioma which allegedly resulted from exposure to asbestos. The Company believes there was no credible evidence presented by the plaintiff that he was exposed to asbestos contained in a Foster Wheeler Corporation product. In addition, the Company believes that the verdict was clearly excessive and should be set aside or reduced on appeal. Foster Wheeler Corporation has appealed this judgment. Management of the Company believes the financial obligation that may ultimately result from entry of a final judgment in this case will be paid by insurance.
On April 3, 2002 the United States District Court for the Northern District of Texas entered an amended final judgment in the matter of Koch Engineering Company et al vs. Glitsch, Inc. et al. Glitsch, Inc. (now known as Tray, Inc.) is an indirect subsidiary of the Company. This lawsuit claimed damages for patent infringement and trade secret misappropriations and has been pending for over 18 years. A judgment was entered in this case on November 29, 1999 awarding plaintiffs compensatory and punitive damages plus prejudgment interest in an amount to be calculated. This amended final judgment in the amount of $54,283 included interest for the period beginning in 1983 when the lawsuit was filed through entry of judgment. Post-judgment interest would have accrued at a rate of 5.471% per annum from November 29, 1999. The management of Tray, Inc. believes that the Court’s decision contains numerous factual and legal errors subject to reversal on appeal. Tray, Inc. has filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit.
In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations. The immediate effect was to eliminate the guaranteed supply of municipal solid waste to the Camden County Waste-to-Energy Project (the “Project”) with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Those market-based revenues have not been, and are not expected to be,
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
21. Litigation and Uncertainties — (Continued)
sufficient to service the debt on outstanding bonds which were issued to construct the Project and to acquire a landfill for Camden County’s use.
The Company’s project subsidiary, Camden County Energy Recovery Associates, LP (“CCERA”), has filed suit against the involved parties, including the State of New Jersey, seeking among other things to void the applicable contracts and agreements governing the Project. (Camden County Energy Recovery Assoc. v. N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as it became due. In January 2002, the State of New Jersey enacted legislation providing a mechanism for state-supported refinancing of bond debt on solid waste facilities located within the state. The legislation expired on December 31, 2002, without any refinancing having been accomplished. Press reports indicate that it is unlikely that any state-supported refinancing will occur in the near future, but those same reports include statements by state officials that the State will continue to ensure that debt service payments are made when due. Given the foregoing, management is seeking to identify other potential mechanisms for refinancing the Project’s bond debt. Any refinancing would likely involve restructuring CCERA’s contracts related to the Project, including its service agreement.
The bonds outstanding on the Camden Project are public debt, not debt of either the Company or CCERA, and the bonds are not guaranteed by the Company. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies.
At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. However, management believes that pending the conclusion of the foregoing litigation, the Project will continue to operate at full capacity receiving market rates for waste disposal and generating sufficient revenues to pay CCERA its service fee. Because the debt outstanding on the Camden Project is not CCERA’s, and is not secured by CCERA’s plant, the Company’s management does not believe that an attempt by the bondholders to exercise their remedies would have a material adverse effect on CCERA or the Company.
In 1996, the Company completed the construction of a recycling and waste-to-energy project located in the Village of Robbins, Illinois (the “Robbins Facility”). By virtue of the Robbins Facility qualifying under the Illinois Retail Rate Law as a qualified solid waste-to- energy facility, it was to receive electricity revenues projected to be substantially higher than the utility’s “avoided cost”. Under the Retail Rate Law, the utility was entitled to a tax credit against a state tax on utility gross receipts and invested capital. The State of Illinois (the “State”) was to be reimbursed by the Robbins Facility for the tax credit beginning after the 20th year following the initial sale of electricity to the utility. The State repealed the Retail Rate Law insofar as it applied to the Robbins Facility. In 1996, the Company’s project subsidiaries filed a legal action against state officials and the utility, asserting a number of claims, including a claim that the repeal should not be construed to retroactively apply to the Robbins Facility. (Now pending as Village of Robbins and Robbins Resource Recovery Partners, L.P. v. Wright, et. al., Circuit Court of Cook County, Illinois, Chancery Division, No. 00 CH 3754) (previously 96 CH 12873).
In November 2002, the Circuit Court issued a Memorandum Order, and related judgments, holding that the repeal of the Retail Rate Law could not be retroactively applied to the Robbins Facility. The defendants have appealed, and the trial court’s rulings have been stayed.
In October 1999, the Company reached an agreement (the “Robbins Agreement”) with the holders of bonds issued by the Village of Robbins to finance the construction of the Robbins Facility (the “Bondholders”). As part of the Robbins Agreement, the Company agreed to continue to contest this repeal through litigation. Pursuant to the Robbins Agreement, the Company has also agreed that any proceeds of
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
21. Litigation and Uncertainties — (Continued)
such litigation will be allocated in a certain order of priority. Pursuant to an agreement reached with the debtor project companies and the Bondholders and approved by the bankruptcy court on March 5, 2002 (In re: Robbins Resource Recovery Partners, L.P., N.D. Illinois, Case No. 00B 25018), the foregoing allocation was modified so that any proceeds will now be allocated in the following order of priority: (1) to any attorneys entitled to a contingency fee, up to 15%; (2) up to the next $10,000, 50% to the Company, 50% to redeem outstanding 1999D Bonds; (3) to redeem all of the outstanding 1999D Bonds; (4) to reimburse the Company for any amounts paid by it in respect of the 1999D Bonds; (5) to reimburse the Company for any costs incurred by it in connection with prosecuting the Retail Rate litigation; (6) to redeem all of the outstanding 1999C Bonds; and (7) 10.6% interest on the foregoing items 4 and 5 to the Company. Then, to the extent there are further proceeds, 80% of any such proceeds shall be paid to the Indenture Trustee of Non-Recourse Robbins Bonds until an amount sufficient to repay such Bonds in full has been paid over, with the remaining 20% being paid over to the Company. After the foregoing payments shall have been made, any remaining proceeds shall be paid over to the Company.
On December 1, 1999, three special purpose subsidiaries of the Company commenced reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code in order to effectuate the terms of the Robbins Agreement. On January 21, 2000, these subsidiaries’ plan of reorganization was confirmed, and the plan was consummated on February 3, 2000.
On August 8, 2000, the Company initiated the final phase of its exit from the Robbins Facility. As part of the Robbins Agreement, the Company agreed to operate the Robbins Facility subject to being reimbursed for all costs of operation. Such reimbursement did not occur and, therefore, pursuant to the Robbins Agreement, the Company on October 10, 2000, completed the final phase of its exit from the project. The Company had been administering the project companies through a Delaware business trust, which owned the project on behalf of the Bondholders. As a result of its exit from the project, the Company is no longer administering the project companies, which project companies again commenced reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code in August and October 2000. A subsidiary of the Company reached an agreement with the debtor project companies and the requisite holders of the bonds, which was approved by the bankruptcy court on March 5, 2002 (In re: Robbins Resource Recovery Partners, L.P., N.D. Illinois, Case No. 00B 25018). In June 2002, the Plan of Reorganization incorporating the agreement, among other things, was confirmed and became effective. The foregoing agreement is expected to favorably resolve any issues related to the exit from the project.
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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.
22. Financial Instruments and Risk Management
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values:
Cash and Short-term Investments — All investments are considered available for sale and the carrying amount approximates fair value because of the short-term maturity of these instruments.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
22. Financial Instruments and Risk Management — (Continued)
Long-term Debt — The fair value of the Company’s long-term debt (including current installments) is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amount for 2001 includes those debt issuances that were classified to current liabilities due to the covenant violations under the Company’s Senior Credit Facility and the potential for acceleration of debt under certain debt agreements. See Note 2 for further information.
Foreign Currency Contracts — The fair values of these financial instruments (used for hedging purposes) are estimated by obtaining quotes from brokers. The Company is exposed to market risks from fluctuations in foreign exchange rates. Financial instruments are utilized by the Company to reduce this risk. The Company does not hold or issue financial instruments for trading purposes. The Company is exposed to credit loss in the event of nonperformance by the counterparties. All of these financial instruments are with significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s (see Notes 3 and 11).
Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:
| | | 2002 | | 2001 | |
| | |
| |
| |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
Nonderivatives: | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 344,576 | | $ | 344,576 | | $ | 224,291 | | $ | 224,291 | |
| Restricted Cash | | | 84,793 | | | 84,793 | | | — | | | — | |
| Long-term debt | | | (823,114 | ) | | (532,598 | ) | | (735,158 | ) | | (592,517 | ) |
Derivatives: | | | | | | | | | | | | | |
| Foreign currency contracts | | | 5,300 | | | 5,300 | | | 5,900 | | | 5,900 | |
In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $718,751 and $1,025,612 as of December 27, 2002 and December 28, 2001, respectively. These balances include the standby letters of credit issued under the Senior Credit Facility discussed in Note 10. In the Company’s past experience, no material claims have been made against these financial instruments. Management of the Company does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero.
As of December 27, 2002, the Company had $281,090 of foreign currency contracts outstanding. These foreign currency 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 currencies or other currencies for which they have payment obligations to third parties.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and trade receivables. The Company places its cash equivalents with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. As of December 27, 2002 and December 28, 2001, the Company had no significant concentrations of credit risk. The Company had issued a third-party financial guarantee totaling $2,750 at year-end 2002 and 2001 with respect to a partnership interest in a commercial real estate project.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
23. Business Segments — Data
The business of the Company and its subsidiaries falls within two business groups. THE ENGINEERING AND CONSTRUCTION GROUP designs, engineers and constructs petroleum, chemical, petrochemical and alternative-fuels facilities and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment, water treatment facilities and process plants for the production of fine chemicals, pharmaceuticals, dyestuffs, fragrances, flavors, food additives and vitamins. Also, the E&C Group provides a broad range of environmental remediation services, together with related technical, design and regulatory services. THE ENERGY GROUP designs, manufactures and erects steam generating and auxiliary equipment for power stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized-bed and conventional boilers firing coal, oil, gas, biomass and other municipal solid waste, waste wood and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat- recovery equipment and low-NOx burners. Site services related to these products encompass plant erection, maintenance engineering, plant upgrading and life extension and plant repowering. The Energy Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solids mechanics. In addition, the Energy Group also builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries.
The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues and operating income over the last ten years. In 2002, the E&C Group accounted for approximately 57% of the operating revenues. The geographic dispersion of these operating revenues was as follows: 25% North America, 20% Asia, 31% Europe, 13% Middle East, 5% South America and 6% other. The Energy Group accounted for 43% of the operating revenues of the Company. The geographic dispersion of these operating revenues was as follows: 62% North America, 31% Europe, 4% Asia, 2% Middle East, and 1% South America.
Earnings of segments represent revenues less expenses attributable to that group or geographic area where the operating units are located. Revenues between business segments are immaterial and are eliminated in Corporate and Financial Services.
Export revenues account for 5.3% of operating revenues. No single customer represented 10% or more of operating revenues for 2002, 2001, or 2000.
Identifiable assets by group are those assets that are directly related to and support the operations of each group. Corporate assets are principally cash, investments and real estate.
Summary financial information concerning the Company’s reportable segments is shown in the following table:
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
23. Business Segments — Data — (Continued)
| | | Total | | Engineering
and
Construction Group | | Energy
Equipment Group | | Corporate
and
Financial
Services(1) | |
| | |
| |
| |
| |
| |
2002
| | | | | | | | | | | | | |
| Revenues | | | $3,574,537 | | $ | 2,027,531 | | $ | 1,576,774 | | | $(29,768 | ) |
Interest income(2) | | | 12,251 | | | 10,667 | | | 6,026 | | | (4,442 | ) |
Interest expense(2) | | | 82,928 | | | (415 | ) | | 21,621 | | | 61,722 | (3) |
| Loss before income taxes and cumulative effect of a change in accounting principle for goodwill | | | (359,849 | ) | | (56,513 | )(4)(6) | | (90,391 | )(4)(5)(6) | | (212,945 | )(4)(5)(6) |
| Income taxes/(benefits) | | | 14,657 | | | (11,485 | ) | | (62,859 | ) | | 89,001 | |
| Net loss before cumulative effect of a change in accounting principle for goodwill | | | (374,506 | ) | | (45,028 | ) | | (27,532 | ) | | (301,946 | ) |
| Cumulative effect on prior years of a change in accounting principle for goodwill (net of $0 tax) | | | (150,500 | ) | | (48,700 | ) | | (101,800 | ) | | — | |
| Net loss | | | (525,006 | ) | | (93,728 | ) | | (129,332 | ) | | (301,946 | ) |
| Identifiable assets | | | 2,909,218 | | | 1,103,211 | | | 1,494,961 | | | 311,046 | |
| Capital expenditures | | | 53,395 | | | 9,907 | | | 9,317 | | | 34,171 | |
| Depreciation and amortization | | | 57,825 | | | 15,490 | (7) | | 37,622 | (7) | | 4,713 | |
| | | | | | | | | | | | | | |
2001
| | | | | | | | | | | | | |
| Revenues | | | $3,392,474 | | | $1,944,018 | | $ | 1,468,844 | | | $(20,388 | ) |
Interest income(2) | | | 9,060 | | | 6,551 | | | 4,108 | | | (1,599 | ) |
Interest expense(2) | | | 84,466 | | | (179 | ) | | 26,493 | | | 58,152 | (3) |
| (Loss)/earnings before income taxes | | | (212,797 | ) | | 15,119 | (8) | | (88,186 | )(8)(9) | | (139,730 | )(8)(9) |
| Income taxes/(benefits) | | | 123,454 | | | 10,982 | | | (27,430 | ) | | 139,902 | (10) |
| Net (loss)/earnings | | | (336,251 | ) | | 4,137 | | | (60,756 | ) | | (279,632 | ) |
| Identifiable assets | | | 3,326,005 | | | 1,289,207 | | | 1,758,399 | | | 278,399 | |
| Capital expenditures | | | 33,998 | | | 11,494 | | | 15,463 | | | 7,041 | |
| Depreciation and amortization | | | 55,750 | | | 17,721 | | | 34,470 | | | 3,559 | |
| | | | | | | | | | | | | | |
2000
| | | | | | | | | | | | | |
| Revenues | | | $3,969,355 | | $ | 2,800,222 | | $ | 1,273,510 | | $ | (104,377 | ) |
Interest income(2) | | | 15,737 | | | 16,658 | | | 9,712 | | | (10,633 | ) |
Interest expense(2) | | | 83,254 | | | 6,297 | | | 35,452 | | | 41,505 | (3) |
| Earnings/(loss) before income taxes | | | 52,166 | | | 86,113 | | | 46,875 | | | (80,822 | ) |
| Income taxes/(benefits) | | | 15,179 | | | 26,927 | | | 18,808 | | | (30,556 | ) |
| Net earnings/(loss) | | | 36,987 | | | 59,186 | | | 28,067 | | | (50,266 | ) |
| Identifiable assets | | | 3,507,581 | | | 1,224,826 | | | 1,772,362 | | | 510,393 | |
| Capital expenditures | | | 45,807 | | | 32,152 | | | 12,195 | | | 1,460 | |
| Depreciation and amortization | | | 57,716 | | | 20,386 | | | 35,099 | | | 2,231 | |
| | | | | | | | | | | | | | |
| (1) | Includes general corporate income and expense, the Company’s captive insurance operation and eliminations. |
| (2) | Includes intercompany interest charged by Corporate and Financial Services to the business groups on outstanding borrowings. |
(footnotes continued on next page)
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NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
23. Business Segments — Data — (Continued)
(footnotes continued from previous page)
| (3) | Includes dividends on Preferred Security of $16,610 in 2002, $15,750 in 2000 and 2001. |
| (4) | Includes in 2002, revaluation of contract estimates and provisions for uncollectible receivables of $216,700 ($210,800 after tax): Engineering and Construction Group (EC) $121,650, Energy Group (Energy) $86,450 and Corporate and Financial Services (CF) $8,600; and a provision for mothballing a domestic manufacturing facility of $18,700 for Energy. |
| (5) | Includes in 2002, anticipated loss on sale of assets of $54,500 in Energy and provisions for asbestos claim of $26,200 in CF. |
| (6) | Includes in 2002, $79,300 ($79,000 net of tax) performance intervention activities, debt restructuring efforts, accrual for legal settlements, severance costs and increased pension, postretirement cost: $6,500 in EC, $12,700 in Energy, and $60,100 in CF. |
| (7) | Excluded cumulative effect in 2002, goodwill change in accounting principle of $48,700 in EC and $101,800 in Energy. |
| (8) | Includes in 2001, contract write-downs of $160,600 ($104,400 after-tax): Engineering and Construction Group $51,700, Energy Group $103,900 and Corporate and Financial Services $5,000. |
| (9) | Includes in 2001, loss on sale of cogeneration plants in Energy Group of $40,300 ($27,900 after-tax), increased pension and postretirement benefit cost in Corporate and Financial Services of $9,100 ($6,000 after-tax), provision for domestic plant impairment of $6,100 ($4,000 after tax), severance of $4,700 ($3,100 after tax), cancellation of company owned life insurance of $20,000 ($13,000 after tax) and legal settlements and other provisions of $13,500 ($8,800 after tax). |
| (10) | Includes in 2001, a valuation allowance for deferred tax assets of $194,600 on Corporate and Financial Services. |
| | |
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
Equity earnings in unconsolidated subsidiaries were as follows: | | | | | | | | | | |
| | | | | | | | | | | |
| Engineering and Construction Group | | $ | 7,334 | | $ | 4,432 | | $ | 6,719 | |
| Energy Group | | | 6,672 | | | 8,404 | | | 13,268 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 14,006 | | $ | 12,836 | | $ | 19,987 | |
| | |
|
| |
|
| |
|
| |
Geographic Concentration | | | | | | | | | | |
| | | | | | | | | | | |
Revenues: | | | | | | | | | | |
| United States | | $ | 1,544,827 | | $ | 1,673,457 | | $ | 1,897,038 | |
| Europe | | | 1,923,211 | | | 1,669,409 | | | 2,099,539 | |
| Canada | | | 136,267 | | | 126,851 | | | 77,155 | |
| Corporate and Financial Services, including eliminations | | | (29,768 | ) | | (77,243 | ) | | (104,377 | ) |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 3,574,537 | | $ | 3,392,474 | | $ | 3,969,355 | |
| | |
|
| |
|
| |
|
| |
Long-lived assets: | | | | | | | | | | |
| | | | | | | | | | | |
| United States | | $ | 345,934 | | $ | 534,345 | | $ | 628,940 | |
| Europe | | | 195,359 | | | 174,058 | | | 228,762 | |
| Canada | | | 1,537 | | | 1,958 | | | 1,511 | |
| Corporate and Financial Services, including eliminations | | | 76,394 | | | 47,894 | | | 44,507 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 619,224 | | $ | 758,255 | | $ | 903,720 | |
| | |
|
| |
|
| |
|
| |
Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
23. Business Segments — Data — (Continued)
Operating revenues by industry segment for the three years ending December 2002 were as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Power | | $ | 1,647,135 | | $ | 1,399,450 | | $ | 1,402,411 | |
| Oil and gas/refinery | | | 922,267 | | | 807,367 | | | 1,455,983 | |
| Pharmaceutical | | | 404,825 | | | 485,786 | | | 300,235 | |
| Chemical | | | 156,606 | | | 177,777 | | | 338,898 | |
| Environmental | | | 353,981 | | | 337,248 | | | 358,571 | |
| Power production | | | 130,843 | | | 150,990 | | | 144,600 | |
| Eliminations and other | | | (96,480 | ) | | (43,304 | ) | | (109,337 | ) |
| | |
|
| |
|
| |
|
| |
| Total Operating Revenues | | $ | 3,519,177 | | $ | 3,315,314 | | $ | 3,891,361 | |
| | |
|
| |
|
| |
|
| |
24. Restatement
Management determined that the assets, liabilities and results of operations associated with one of the Company’s postretirement medical plans were not accounted for in accordance with SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Company’s consolidated statement of financial position as of December 28, 2001 and the related consolidated statements of operations and comprehensive income, member’s equity/(deficit) and cash flows for each of the two years in the period ended December 28, 2001 have been revised to account for the assets, liabilities and results of operations associated with this benefit plan in accordance with SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The postretirement and other employee benefits other than pensions liability was increased to reflect the updated obligation, calculated on a going concern basis. The cumulative effect on member’s equity as of December 29, 2000 was a decrease of $9,620. A summary of the effects of the restatement on the Company’s consolidated statement of financial position, consolidated statement of operations and comprehensive income is shown below.
| Statement of Financial Position | | 12/28/01
As Reported | | 12/28/01
Restated | | | Statement
of
Operations and
Comprehensive Income | | 12/28/01
Year
As Reported | | 12/28/01
Year
Restated | |
| |
|
| |
|
| | |
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
Pension, post retirement and other employee benefits* | | $ | 239,076 | | $ | 257,976 | | | Other deductions | | $ | 122,245 | | $ | 126,345 | |
| | $ | (109,763 | ) | $ | (128,663 | ) | | (Loss)/earnings before income taxes | | $ | (208,697 | ) | $ | (212,797 | ) |
| | $ | (29,435 | ) | $ | (48,335 | ) | | Provision (benefit) for income taxes | | $ | 118,274 | | $ | 123,454 | |
| | | | | | | | | | Net (loss)/earnings | | $ | (326,971 | ) | $ | (336,251 | ) |
| | | | | | | | | | | | | | | | | |
| * | The pension, postretirement and other employee benefits liability as reported reflects an increase of $70,927 related to a reclassification of pension liabilities from other long-term liabilities. |
| | |
| Statement of Financial Position | | 12/9/00
As Reported | | 12/9/00
Restated | | | Statement
of
Operations and
Comprehensive Income | | 12/9/00
Year
As Reported | | 12/9/00
Year
Restated | |
| |
|
| |
|
| | |
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| Beginning retained earnings | | $ | 194,167 | | $ | 185,262 | | | Other deductions | | $ | 41,721 | | $ | 42,821 | |
| Ending retained earnings | | $ | 222,096 | | $ | 212,476 | | | Earnings before income taxes | | $ | 53,266 | | $ | 52,166 | |
| Total member’s equity | | $ | 344,935 | | $ | 335,315 | | | Provision for income taxes | | $ | 15,564 | | $ | 15,179 | |
| | | | | | | | | | Net earnings | | $ | 37,702 | | $ | 36,987 | |
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FOSTER WHEELER LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
25. Subsequent Events
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. Additionally, approximately $8,000 of cash on hand was retained by Foster Wheeler at the time of the sale.
Net assets sold of approximately $57,000 essentially consisted of government and commercial contracts. The Company recorded a pre-tax gain on the asset sale of $15,300 in the first quarter of 2003.
26. Valuation and Qualifying Accounts |
| |
| | | 2002 (Restated) | |
| | |
| |
Description
| | Balance at
Beginning of
Year | | Additions Charged
to Costs and
Expenses | | Additions Charged
to Other
Accounts(2) | | Deductions | | Balance at the
End of the Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Reserve for Insurance Claims Receivable | | $ | 18,836 | | $ | 26,200 | | | | | $ | 7,159 | | $ | 37,877 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Allowance for Doubtful Accounts(1) | | $ | 2,988 | | $ | 19,608 | | | | | $ | 5,999 | | $ | 16,597 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| | | 2001 | |
| | |
| |
Description
| | | Balance at
Beginning of
Year | | | Additions Charged
to Costs and
Expenses | | | Additions Charged
to Other
Accounts(2) | | | Deductions | | | Balance at the
End of the Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Reserve for Insurance Claims Receivable | | $ | 7,192 | | | | | $ | 11,300 | | $ | (344 | ) | $ | 18,836 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Allowance for Doubtful Accounts(1) | | $ | 3,379 | | $ | 1,190 | | | | | $ | 1,581 | | $ | 2,988 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| | | 2002 | |
| | |
| |
Description
| | | Balance at
Beginning of
Year | | | Additions Charged
to Costs and
Expenses | | | Additions Charged
to Other
Accounts(2) | | | Deductions | | | Balance at the
End of the Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Reserve for Insurance Claims Receivable | | $ | 9,943 | | | | | | | | $ | 2,751 | | $ | 7,192 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Allowance for Doubtful Accounts(1) | | $ | 1,413 | | $ | 3,315 | | | | | $ | 1,349 | | $ | 3,379 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| 1. | 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. |
| 2. | Primarily due to additional recoveries from insurers. |
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| |
Foster Wheeler International Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
For the Three Years Ended December 31, 2002 |
158
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Report of Independent Auditors
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive (loss)/income, of cash flows and of shareholder’s (deficit)/ equity present fairly, in all material respects, the financial position of Foster Wheeler International Holdings, Inc. and its subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”) at December 27, 2002 and December 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming the Parent will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Parent has incurred significant losses in each of the years in two-year period ended December 27, 2002 and has a shareholder deficit of $780,939,000 at December 27, 2002. The Parent has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, the Parent received waivers for covenant violations and ultimately negotiated new credit facilities, in August 2002. The Parent was unable to comply with certain debt covenants under the new credit facility agreement and therefore obtained an amendment of such agreement. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to generate cash flows from operations, assets sales and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the Parent maintaining credit facilities and bonding capacity adequate to conduct its business. The stock and debt of the Company has been pledged as collateral to the holders of the $200,000,000 Senior Notes issued by the Parent. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 25, 2003
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Foster Wheeler International Holdings, Inc. and Subsidiaries
Consolidated Statement of Operations and Comprehensive (Loss)/Income
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Revenues: | | | | | | | | | | |
| Operating revenues | | $ | 1,634,310 | | $ | 1,491,579 | | $ | 1,933,372 | |
| Interest income (including $6,299 in 2002, $6,362 in 2001 and $10,038 in 2000 with affiliates) | | | 11,278 | | | 12,427 | | | 18,166 | |
| Other income | | | 35,814 | | | 41,746 | | | 39,020 | |
| | |
|
| |
|
| |
|
| |
| Total Revenues | | | 1,681,402 | | | 1,545,752 | | | 1,990,558 | |
Costs and Expenses: | | | | | | | | | | |
| Cost of operating revenues | | | 1,600,628 | | | 1,421,664 | | | 1,843,619 | |
| Selling, general and administrative expenses | | | 70,296 | | | 82,565 | | | 91,991 | |
| Other deductions | | | 30,256 | | | 10,154 | | | 13,597 | |
| Interest expense (including $5,899 in 2002, $6,239 in 2001 and $10,155 in 2000 to affiliates) | | | 6,686 | | | 8,013 | | | 13,710 | |
| | |
|
| |
|
| |
|
| |
| Total Costs and Expenses | | | 1,707,866 | | | 1,522,396 | | | 1,962,917 | |
| | |
|
| |
|
| |
|
| |
| (Loss)/earnings before income taxes | | | (26,464 | ) | | 23,356 | | | 27,641 | |
| Provision for income taxes | | | 9,529 | | | 17,417 | | | 9,592 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings | | | (35,993 | ) | | 5,939 | | | 18,049 | |
| Other comprehensive (loss)/income: | | | | | | | | | | |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of tax benefit of $324 in 2001) | | | — | | | (602 | ) | | — | |
| Change in net gain on derivative instruments designated as cash flow hedges (net of tax benefit of $4 in 2002 and $320 in 2001) | | | 6 | | | 596 | | | — | |
| Change in accumulated translation adjustment during the year | | | 31,707 | | | (11,967 | ) | | (18,446 | ) |
| Minimum pension liability adjustment (net of tax benefits of $73,400 in 2002) | | | (170,303 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Comprehensive (loss)/income | | $ | (174,583 | ) | $ | (6,034 | ) | $ | (397 | ) |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler International Holdings, Inc. and Subsidiaries
Consolidated Balance Sheet
(in thousands of dollars)
| | | December 27, 2002 | | December 28, 2001 | |
| | |
|
| |
|
| |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | $ | 172,471 | | $ | 121,054 | |
| Short-term investments | | | 41 | | | 36 | |
| Accounts and notes receivable: | | | | | | | |
| Trade | | | 259,827 | | | 306,918 | |
| Other (including $26,322 in 2002 and $24,697 in 2001 with affiliates) | | | 46,973 | | | 44,297 | |
| Intercompany notes | | | 161 | | | 7,210 | |
| Contracts in process | | | 60,423 | | | 69,972 | |
| Inventories | | | 1,445 | | | 1,136 | |
| Prepaid, deferred and refundable income taxes | | | 40,703 | | | 19,798 | |
| Prepaid expenses | | | 7,848 | | | 7,378 | |
| | |
|
| |
|
| |
| Total current assets | | | 589,892 | | | 577,799 | |
| | |
|
| |
|
| |
| Land, buildings and equipment | | | 121,907 | | | 115,452 | |
| Less accumulated depreciation | | | 89,754 | | | 82,881 | |
| | |
|
| |
|
| |
| Net book value | | | 32,153 | | | 32,571 | |
| | |
|
| |
|
| |
| Restricted cash | | | 30,169 | | | — | |
| Notes and accounts receivable - long-term | | | 1,425 | | | 1,866 | |
| Intercompany notes receivable - long-term | | | 25,883 | | | 20,718 | |
| Investment and advances | | | 91,537 | | | 72,459 | |
| Prepaid pension cost and related benefit assets | | | — | | | 103,164 | |
| Other assets | | | 8,709 | | | 4,887 | |
| Deferred income taxes | | | 69,381 | | | 6,708 | |
| | |
|
| |
|
| |
| TOTAL ASSETS | | $ | 849,149 | | $ | 820,172 | |
| | |
|
| |
|
| |
LIABILITIES AND SHAREHOLDER’S (DEFICIT)/EQUITY | | | | | | | |
Current Liabilities: | | | | | | | |
| Current installments on long-term debt | | $ | 105 | | $ | - | |
| Bank loans | | | 13,266 | | | 14,454 | |
| Accounts payable (including $65,190 in 2002 and $50,218 in 2001 with affiliates) | | | 187,275 | | | 195,310 | |
| Accrued expenses | | | 83,138 | | | 65,140 | |
| Intercompany notes payable | | | 19,179 | | | 27,860 | |
| Estimated costs to complete long-term contracts | | | 227,092 | | | 176,626 | |
| Advance payments by customers | | | 65,492 | | | 36,258 | |
| Income taxes | | | 39,447 | | | 23,853 | |
| | |
|
| |
|
| |
| Total current liabilities | | | 634,994 | | | 539,501 | |
| Long-term debt less current installments | | | 319 | | | — | |
| Intercompany notes payable - long-term | | | 134,372 | | | 129,283 | |
| Deferred income taxes | | | 6,638 | | | 11,791 | |
| Pension, postretirement and other employee benefits | | | 143,688 | | | 17,558 | |
| Other long-term liabilities and minority interest | | | 69,883 | | | 66,217 | |
| | |
|
| |
|
| |
| TOTAL LIABILITIES | | | 989,894 | | | 764,350 | |
Shareholder’s (Deficit)/Equity: | | | | | | | |
Common stock, no par value 1,000 shares authorized 1 share issued and outstanding | | | 1 | | | 1 | |
| Capitalization of intercompany notes | | | (10,539 | ) | | 10,859 | |
| Paid-in capital | | | 4,703 | | | 4,703 | |
| Retained earnings | | | 95,944 | | | 132,523 | |
| Accumulated other comprehensive loss | | | (230,854 | ) | | (92,264 | ) |
| | |
|
| |
|
| |
| TOTAL SHAREHOLDER’S (DEFICIT)/EQUITY | | | (140,745 | ) | | 55,822 | |
| | |
|
| |
|
| |
TOTAL LIABILITIES AND SHAREHOLDER’S (DEFICIT)/EQUITY | | $ | 849,149 | | $ | 820,172 | |
| | |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler International Holdings, Inc. and Subsidiaries
Consolidated Statement of Shareholder’s (Deficit)/Equity
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Common Stock | | | | | | | | | | |
| Balance at beginning and end of year | | $ | 1 | | $ | 1 | | $ | 1 | |
| | |
|
| |
|
| |
|
| |
Capitalization of Intercompany Notes | | | | | | | | | | |
| Balance at beginning of year | | | 10,859 | | | (9,158 | ) | | (99,168 | ) |
| Current year activity | | | (21,398 | ) | | 20,017 | | | 90,010 | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (10,539 | ) | | 10,859 | | | (9,158 | ) |
| | |
|
| |
|
| |
|
| |
Paid-in Capital | | | | | | | | | | |
| Balance at beginning and end of year | | | 4,703 | | | 4,703 | | | 4,703 | |
| | |
|
| |
|
| |
|
| |
Retained Earnings | | | | | | | | | | |
| Balance at beginning of year | | | 132,523 | | | 181,584 | | | 227,542 | |
| Net (loss)/earnings for the year | | | (35,993 | ) | | 5,939 | | | 18,049 | |
| Dividends paid | | | (586 | ) | | (55,000 | ) | | (64,007 | ) |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | 95,944 | | | 132,523 | | | 181,584 | |
| | |
|
| |
|
| |
|
| |
Accumulated Other Comprehensive Loss | | | | | | | | | | |
| Balance at beginning of year | | | (92,264 | ) | | (80,291 | ) | | (61,845 | ) |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of tax benefit of $324 in 2001) | | | — | | | (602 | ) | | — | |
| Change in net loss on derivative instruments designated as cash flow hedges (net of tax benefit of $4 in 2002 and $320 in 2001) | | | 6 | | | 596 | | | — | |
| Change in accumulated translation adjustment during the year | | | 31,707 | | | (11,967 | ) | | (18,446 | ) |
| Minimum pension liability (net of tax benefits of $73,400 in 2002) | | | (170,303 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (230,854 | ) | | (92,264 | ) | | (80,291 | ) |
| | |
|
| |
|
| |
|
| |
Total Shareholder’s (Deficit)/ Equity | | $ | (140,745 | ) | $ | 55,822 | | $ | 96,839 | |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler International Holdings, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
| Net (loss)/earnings | | $ | (35,993 | ) | $ | 5,939 | | $ | 18,049 | |
| Adjustments to reconcile net (loss)/earnings to cash flows from operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 9,917 | | | 10,667 | | | 13,632 | |
| Deferred tax | | | 1,879 | | | 7,240 | | | 275 | |
| Net gain on asset sales | | | (3,506 | ) | | (11,081 | ) | | (11,655 | ) |
| Equity earnings, net of dividends | | | (9,627 | ) | | (6,621 | ) | | (8,644 | ) |
| Other noncash items | | | (6,031 | ) | | 8,764 | | | 34,299 | |
| Changes in assets and liabilities: | | | | | | | | | | |
| Receivables | | | 69,203 | | | 95,783 | | | 4,854 | |
| Contracts in process and inventories | | | 12,932 | | | 18,915 | | | (5,516 | ) |
| Accounts payable and accrued expenses | | | (3,275 | ) | | (55,222 | ) | | 10,471 | |
| Estimated costs to complete long-term contracts | | | 35,669 | | | (37,189 | ) | | (39,275 | ) |
| Advance payments by customers | | | 29,065 | | | 4,135 | | | (1,137 | ) |
| Income taxes | | | (5,076 | ) | | 13,337 | | | (22,371 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash provided/(used) by operating activities | | | 95,157 | | | 54,667 | | | (7,018 | ) |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Change in restricted cash | | | (30,169 | ) | | — | | | — | |
| Capital expenditures | | | (7,085 | ) | | (8,953 | ) | | (27,269 | ) |
| Proceeds from sale of properties | | | 793 | | | 14,825 | | | 51,567 | |
| Decrease/(increase) in investments and advances | | | 350 | | | 14,367 | | | 18,815 | |
| Decrease/(increase) in short-term investments | | | (5 | ) | | 29 | | | 726 | |
| | |
|
| |
|
| |
|
| |
| Net cash (used)/provided by investing activities | | | (36,116 | ) | | 20,268 | | | 43,839 | |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Capitalization of intercompany notes | | | (21,398 | ) | | 20,017 | | | 90,010 | |
| Dividends paid | | | (586 | ) | | (55,000 | ) | | (64,007 | ) |
| Increase/(decrease) in notes payable to affiliates | | | 8,597 | | | (22,453 | ) | | (29,324 | ) |
| Payments of long-term debt | | | (619 | ) | | — | | | (2,199 | ) |
| Decrease/(increase) bank loans | | | (2,133 | ) | | 2,473 | | | (24,146 | ) |
| | |
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| Net cash (used)/provided by financing activities | | | (16,139 | ) | | (54,963 | ) | | (29,666 | ) |
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|
| |
|
| |
|
| |
| Effect of exchange rate changes on cash and cash equivalents | | | 8,515 | | | (10,551 | ) | | 4,041 | |
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| |
INCREASE IN CASH AND CASH EQUIVALENTS | | | 51,417 | | | 9,421 | | | 11,196 | |
| Cash and cash equivalents at beginning of year | | | 121,054 | | | 111,633 | | | 100,437 | |
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|
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| |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 172,471 | | $ | 121,054 | | $ | 111,633 | |
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|
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| |
| Cash paid during the year for: | | | | | | | | | | |
| Interest | | $ | 4,781 | | $ | 7,844 | | $ | 9,663 | |
| Income taxes | | $ | 6,669 | | $ | 12,527 | | $ | 29,725 | |
See notes to consolidated financial statements.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries
Foster Wheeler International Holdings, Inc. and subsidiaries (the “Company”) is a wholly owned subsidiary of Foster Wheeler LLC (“FWLLC”), which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company operates primarily outside of the United States with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore, Thailand, Malaysia, South Africa, and Canada.
The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and cash flows of the Company have been impacted by these transactions and relationships as discussed on notes 2, 18 and 20.
2. Liquidity and Going Concern
The accompanying 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, Foster Wheeler Ltd.’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 Foster Wheeler Ltd. maintaining credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939 at December 27, 2002. Foster Wheeler Ltd. has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, Foster Wheeler Ltd. 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 Foster Wheeler Ltd. will do so during 2003. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. Foster Wheeler Ltd.’s plans in regard to these matters are described below.
In August 2002, Foster Wheeler Ltd. 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. Foster Wheeler Ltd. retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the facility commence at the end of the first quarter 2003 and include a senior leverage ratio and a minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) level as described in the agreement, as amended. With the sale of Foster Wheeler Environmental Corporation on March 7, 2003, cumulative sales proceeds received, as defined in the agreement, approximate $75,000.
Amendment No. 1 to the Credit Agreement, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by Foster Wheeler Ltd. 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. In the 4th quarter 2002, $11,000 of the contingency risks were favorably resolved, and additional project reserves were established for $19,000 leaving a contingency balance of $33,000.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
2. Liquidity and Going Concern — (Continued)
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, Foster Wheeler Ltd. made a prepayment of principal in the aggregate amount of $10,000.
Due to Foster Wheeler Ltd.’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 Foster Wheeler Ltd. can successfully effect any of the foregoing.
During the third quarter of 2002, Foster Wheeler Ltd. also completed a receivables financing arrangement of up to $40,000. The funding available to Foster Wheeler Ltd. is dependent on the amount and characteristics of the domestic receivables. The amount available to Foster Wheeler Ltd. fluctuates daily, but Foster Wheeler Ltd. estimates that approximately $15,000 to $20,000 will be available during 2003. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commence at the end of the first quarter of 2003 and 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. As of December 27, 2002, Foster Wheeler Ltd. had $0 borrowings outstanding under this facility.
Foster Wheeler Ltd. initiated a comprehensive plan to enhance cash generation and to improve profitability during 2002. Management’s comprehensive plan to address Foster Wheeler Ltd.’s domestic liquidity issues included generating approximately $150,000 from asset sales, collection of receivables and resolving disputed claims through the end of the first quarter 2003, and an additional $40,000 over the following six months. As of December 27, 2002, Foster Wheeler Ltd. generated approximately $60,000 through these efforts, and with the sale of the operating business of Foster Wheeler Environmental Corporation on March 7, 2003, an additional $80,000 has been generated. An additional $10,000 has also been received through more efficient working capital management. The $40,000 is still expected to be received from asset sales and claims recoveries over the course of the year 2003. 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 Foster Wheeler Ltd.’s working capital needs through the first quarter of 2004. Failure by Foster Wheeler Ltd. to achieve its forecast could have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition.
3. Summary of Significant Accounting Policies
Principles of Consolidation — The consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler International Corporation and all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.
The Company’s fiscal year is the 52- or 53- week annual accounting period ending the last Friday in December for domestic companies and December 31 for foreign companies. For domestic companies, the years 2002, 2001 and 2000 included 52 weeks.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, and contingencies, among others. At December 27, 2002, December 28, 2001 and December 29, 2000, the Company has recorded commercial claims of $0, $50,200 and $52,700 respectively. The decreases in recorded claims resulted from the collection of $6,500 in 2002 and a 2002 provision established for the outstanding balance of commercial claims. The Company revised its estimates in 2002 of claim revenues to reflect recent adverse recovery experience, management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company.
Revenue Recognition on Long-term Contracts — Revenues and profits on long term fixed price contracts are recorded under the percentage of completion method. Progress towards completion is measured using the cost to cost method, the efforts expended method or variations thereof. These methods are applied consistently to all contracts having similar characteristics in similar circumstances. Under the cost to cost method, revenues and profits are recognized based on the ratio that costs incurred bear to total estimated costs. Under the efforts expended method, revenue and profits are recognized based on the ratio that incurred labor hours bear to total estimated labor hours. Variations of these two methods are used on multiyear contracts that require significant engineering effort and multiple delivery of units. These methods are subject to physical verification of actual progress towards completion.
Revenues and profits on costs reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.
Contracts in progress are stated at cost increased for profits recorded on the completed efforts or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.”
The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of approximately $172,000 are maintained by foreign subsidiaries as of December 27, 2002. These 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.
Restricted Cash — Restricted cash consists of approximately $30,200 at December 27, 2002, that the Company was required to deposit to collateralize letters of credit and bank guarantees.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific identification method. For the years ended 2002, 2001 and 2000, the investment balances and realized and unrealized gains and losses were immaterial.
Trade Accounts Receivable — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld, which might not be received within a one-year period, are indicated in Note 5. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets. Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history within various markets served and general economic trends are also evaluated when considering the necessity of a provision.
Accounts and Notes Receivable Other — Accounts receivable and notes receivable other consist primarily of receivables from affiliated companies of $26,322 at December 27, 2002, and $24,697 at December 28, 2001, and foreign refundable value-added tax.
Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement was not material to the Company.
Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses the accounting for long-lived assets to be disposed of by sale and resolves significant implementation issues relating to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The provisions of this statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company’s results of operations and financial position were not affected by the initial adoption of this statement.
Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
cost method is appropriate. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates are recorded using the cost method.
Income Taxes — Income tax expense in the Company’s statements of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company’s tax return, deferred tax assets, subject to considerations about the need for a valuation allowance, are recognized for the carryforward amounts.
Provision is made for Federal income taxes which may be payable on foreign subsidiary earnings to the extent that the Company anticipates they will be remitted. Unremitted earnings of foreign subsidiaries which have been, or are intended to be, permanently reinvested (and for which no Federal income tax has been provided) aggregated $243,790 as of December 27, 2002. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.
Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.
| | | 2002 | | 2001 | | 2000 | |
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|
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|
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| Cumulative translation adjustment at beginning of year | | $ | (92,258 | ) | $ | (80,291 | ) | $ | (61,845 | ) |
| Current year foreign currency adjustment | | | 31,707 | | | (11,967 | ) | | (18,446 | ) |
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| Cumulative translation adjustment at end of year | | $ | (60,551 | ) | $ | (92,258 | ) | $ | (80,291 | ) |
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| | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 | |
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|
| |
| Foreign currency transaction gains | | $ | 3,300 | | $ | 8,700 | | $ | 5,700 | |
| Foreign currency transaction gains, net of tax | | | 2,100 | | | 5,700 | | | 3,700 | |
The Company enters into foreign exchange contracts in its management of foreign currency exposures related to commercial contracts. Changes in the fair value of derivative contracts that qualify as designated cash flow hedges are deferred until the hedged forecasted transaction affects earnings. Amounts receivable (gains) or payable (losses) under foreign exchange hedges are recognized as deferred gains or losses and are included in either contracts in process or estimated costs to complete long-term contracts. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2002 an after-tax gain on derivative instruments of approximately $1,768.
Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
Stock Option Plans —Foster Wheeler Ltd. has two fixed option plans which reserve shares of common stock for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of the SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Based Compensation – Transition and Disclosure.” Accordingly, no compensation cost has been recognized by the Company relating to these stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards in 2002, 2001, and 2000 consistent with the provisions of SFAS No. 123, the Company’s net (loss)/earnings would have been reduced to the pro forma amounts indicated below:
| | | 2002 | | 2001 | | 2000 | |
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| Net (loss)/earnings - as reported | | $ | (35,993 | ) | $ | 5,939 | | $ | 18,049 | |
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| Net (loss)/earnings - pro forma | | $ | (36,578 | ) | $ | 5,617 | | $ | 17,863 | |
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The assumption regarding the stock options issued in 2002, 2001, and 2000 was that 100% of such options vested in the year of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | 2002 | | 2001 | | 2000 | |
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| Dividend yield | | | 0.00 | % | | 1.36 | % | | 3.18 | % |
| Expected volatility | | | 83.62 | % | | 79.20 | % | | 59.20 | % |
| Risk-free interest rate | | | 2.90 | % | | 4.23 | % | | 6.46 | % |
| Expected life (years) | | | 5.0 | | | 5.0 | | | 5.0 | |
Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 5,300,000.
These plans provide that shares granted be issued from Foster Wheeler Ltd.’s authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. An option may not be exercised within one year from the date of grant and no option will be exercisable after ten years from the date of grant.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Information regarding these option plans for the years 2002, 2001, and 2000 is as follows (presented in actual number of shares):
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
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| Options outstanding, beginning of year | | | 661,933 | | $ | 17.64 | | | 508,933 | | $ | 21.42 | | | 435,183 | | $ | 23.60 | |
| Options exercised | | | — | | | | | | (24,000 | ) | | 9.56 | | | — | | | — | |
| Options granted | | | 811,090 | | | 1.64 | | | 177,000 | | | 5.69 | | | 79,000 | | | 9.00 | |
| Options cancelled or expired | | | (7,250 | ) | | 10.86 | | | — | | | — | | | (5,250 | ) | | 15.06 | |
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| Options outstanding, end of year | | | 1,465,773 | | $ | 8.83 | | | 661,933 | | $ | 17.64 | | | 508,933 | | $ | 21.42 | |
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| Option price range at end of year | | $ | 1.64 - $42.1875 | | | | | $ | 5.6875 - $42.1875 | | | | | $ | 9.00 - $42.1875 | | | | |
| Option price range for exercised shares | | | | | | | | $ | 9.00 - $13.50 | | | | | | | | | | |
| Options available for grant at end of year | | | 445,069 | | | | | | 430,180 | | | | | | 1,029,180 | | | | |
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| Weighted-average fair value of options granted during the year | | $ | 1.11 | | | | | $ | 2.80 | | | | | $ | 3.63 | | | | |
| Options exercisable at end of year | | | 654,683 | | | | | | 484,933 | | | | | | 429,933 | | | | |
| Weighted-average exercise price of exercisable options at end of year | | $ | 17.73 | | | | | $ | 22.01 | | | | | $ | 23.70 | | | | |
The following table summarizes information about fixed-price stock options outstanding as of December 27, 2002:
| | | Options Outstanding | | Options Exercisable | |
| | |
| |
| |
Range of
Exercise Prices | | Number
Outstanding
at 12/27/02 | | Weighted-
Average
Remaining
Contractual Life | | Weighted-
Average
Exercise Price | | Number
Exercisable
at 12/27/02 | | Weighted-
Average
Exercise Price | |
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|
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| $29.75 | | | 61,600 | | | 3 years | | $ | 29.75 | | | 61,600 | | $ | 29.75 | |
| 42.1875 | | | 14,583 | | | 4 years | | | 42.19 | | | 14,583 | | | 42.19 | |
| 36.9375 | | | 65,000 | | | 5 years | | | 36.94 | | | 65,000 | | | 36.94 | |
| 13.00 | | | 91,000 | | | 6 years | | | 27.63 | | | 91,000 | | | 27.63 | |
| 13.50 to 15.062 | | | 191,250 | | | 7 years | | | 14.30 | | | 191,250 | | | 14.30 | |
| 9.00 | | | 58,000 | | | 8 years | | | 9.00 | | | 58,000 | | | 9.00 | |
| 5.6875 | | | 173,250 | | | 9 years | | | 5.69 | | | 173,250 | | | 5.69 | |
| 1.64 | | | 811,090 | | | 10 years | | | 1.64 | | | — | | | — | |
| |
| | | | | | | |
| | | | |
| 1.64 to 42.1875 | | | 1,465,773 | | | | | | | | | 654,683 | | | | |
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Recent Accounting Developments — In June 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds previous statements regarding the extinguishment of debt and amends SFAS No. 13, “Accounting for Leases” to eliminate an inconsistency between the required accounting for sale/leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale/leaseback transactions. The provisions of SFAS 145 related to the extinguishment of debt are to be applied to fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to the amendment of SFAS 13 are effective for transactions occurring after May 15, 2002. The adoption of this new standard will not impact the Company.
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires liabilities associated with an exit or disposal activity be recognized at fair value when the liability is incurred. This contrasts with existing accounting requirements, under which liabilities for exit or disposal activities are recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, although early adoption is permitted. The Company implemented SFAS 146 in the fourth quarter of 2002 and there was no impact on the Company.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. FIN 45 also incorporates, without change, the guidance in FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded.
This Interpretation does not apply to certain guarantee contracts and the provisions related to recognizing a liability at inception for the fair value of the guarantor’s obligation do not apply to the following:
b. Guarantees that are accounted for as derivatives
c. Guarantees that represent contingent consideration in a business combination
d. Guarantees for which the guarantor’s obligations would be reported as an equity item (rather than a liability)
e. An original lessee’s guarantee of lease payments when that lessee remains secondarily liable in conjunction with being relieved from being the primary obligor (that is, the principal debtor) under a lease restructuring
f. Guarantees issued between either parents and their subsidiaries or corporations under common control
g. A parent’s guarantee of a subsidiary’s debt to a third party, and a subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent.
However, the guarantees described in (a)-(g) above are subject to the disclosure requirements.
The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
ending after December 15, 2002. The Company in its 2002 consolidated financial statements has implemented the disclosure requirements of this interpretation.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS 123 to require prominent disclosures, in both interim and annual financial statements, about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The provisions of this standard relating to the fair value measurements do not affect the Company as it accounts for stock-based employee compensation under the provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” as permitted under SFAS 123. The Company in its 2002 consolidated financial statements has implemented the disclosure requirements of this standard.
4. Research and Development
For the years 2002, 2001, and 2000, approximately $500, $1,800 and $2,000 respectively, were spent on Company-sponsored research activities. During the same periods, approximately $2,300, $2,400 and $3,100, respectively, were spent on customer-sponsored research activities.
5. Accounts and Notes Receivable - Trade
The following tabulation shows the components of trade accounts and notes receivable:
| | 2002 | | 2001 | |
| | |
|
| |
|
| |
| From long-term contracts: | | | | | | | |
| Amounts billed due within one year | | $ | 163,060 | | $ | 178,273 | |
| Retention - Billed: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 10,233 | |
| 2003 | | | 18,574 | | | 2,243 | |
| 2004 | | | 5,702 | | | — | |
| | |
|
| |
|
| |
| Total billed | | | 24,276 | | | 12,476 | |
| | |
|
| |
|
| |
| Retention - Unbilled: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 109,610 | |
| 2003 | | | 86,497 | | | 9,537 | |
| 2006 | | | 4 | | | — | |
| | |
|
| |
|
| |
| Total unbilled | | | 86,501 | | | 119,147 | |
| | |
|
| |
|
| |
| Total retentions | | | 110,777 | | | 131,623 | |
| | |
|
| |
|
| |
| Total receivables from long-term contracts | | | 273,837 | | | 309,896 | |
| Other trade accounts and notes receivable | | | 389 | | | 10 | |
| | |
|
| |
|
| |
| Gross Trade Accounts and Notes Receivable | | | 274,226 | | | 309,906 | |
| Less allowance for doubtful accounts | | | 14,399 | | | 2,988 | |
| | |
|
| |
|
| |
| Net Trade Accounts and Notes Receivable | | $ | 259,827 | | $ | 306,918 | |
| | |
|
| |
|
| |
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
5. Accounts and Notes Receivable - Trade — (Continued)
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.
Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.
Changes in the allowance for doubtful accounts during the periods ended December 2000 through 2002 are presented below.
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Balance at beginning of year | | $ | 2,988 | | $ | 3,347 | | $ | 1,354 | |
| Additions charged to expense | | | 19,019 | | | 1,207 | | | 708 | |
| (Deductions)/amounts recovered | | | (7,608 | ) | | (1,566 | ) | | 1,285 | |
| | |
|
| |
|
| |
|
| |
Balance at end of year | | $ | 14,399 | | $ | 2,988 | | $ | 3,347 | |
| | |
|
| |
|
| |
|
| |
The additions charged to expense are included in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
6. Contracts in Process and Inventories
The following tabulation shows the elements included in contract in process as related to long-term contracts:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Contracts in Process | | | | | | | |
| Costs plus accrued profits less earned revenues | | | | | | | |
| on contracts currently in process | | $ | 60,423 | | $ | 74,259 | |
| Less progress payments | | | — | | | 4,287 | |
| | |
|
| |
|
| |
| Net | | $ | 60,423 | | $ | 69,972 | |
| | |
|
| |
|
| |
Costs of inventories are shown below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Inventories | | | | | | | |
| Materials and supplies | | $ | 1,222 | | $ | 804 | |
| Finished goods | | | 223 | | | 332 | |
| | |
|
| |
|
| |
| | $ | 1,445 | | $ | 1,136 | |
| | |
|
| |
|
| |
7. Land, Buildings and Equipment
Land, buildings and equipment are stated at cost and are set forth below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Land and land improvements | | $ | 328 | | $ | 290 | |
| Buildings | | | 21,831 | | | 23,385 | |
| Equipment | | | 99,681 | | | 91,517 | |
| Construction in progress | | | 67 | | | 260 | |
| | |
|
| |
|
| |
| | $ | 121,907 | | $ | 115,452 | |
| | |
|
| |
|
| |
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
7. Land, Buildings and Equipment — (Continued)
Depreciation expense for the years 2002, 2001, and 2000 was $9,770, $10,613, and $13,597, respectively.
8. Advances, Investments and Equity Interests
The Company owns a non-controlling equity interest in two energy projects and one waste-to-energy project; all are located in Italy. Two of the projects are each 42% owned while the third is 49% owned by the Company. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.
| | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Balance Sheet Data: | | | | | | | |
| Current assets | | $ | 79,569 | | $ | 74,404 | |
| Other assets (primarily buildings and equipment) | | | 344,993 | | | 311,584 | |
| Current liabilities | | | 19,429 | | | 11,137 | |
| Other liabilities (primarily long-term debt) | | | 344,148 | | | 329,030 | |
| | |
|
| |
|
| |
| Net assets | | $ | 60,985 | | $ | 45,821 | |
| | |
|
| |
|
| |
| | | | | | | | |
For the year ended | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Total revenues | | $ | 168,421 | | $ | 156,639 | |
| Income before taxes | | | 31,013 | | | 21,290 | |
| Net earnings | | $ | 17,303 | | $ | 11,627 | |
As of December 27, 2002, the Company’s share of the net earnings and investment in the equity affiliates totaled $7,334 and $25,447, respectively. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $1,400 per year in total for the three projects.
The undistributed retained earnings of the Company’s equity investees amounted to $17,000 and $12,000 at December 27, 2002 and December 28, 2001.
Additionally, at December 27, 2002 the Company holds investments in unconsolidated affiliates of $44,949 and made advances of $21,141 to its third-party equity investees.
9. Bank Loans
The approximate weighted average interest rates on borrowings outstanding at the end of 2002 and 2001 were 4.14% and 4.49%, respectively.
The Company had unused lines of credit for short-term bank borrowings of $1,541 at the end of 2002.
Interest costs incurred on bank loans in 2002, 2001, and 2000 were $702, $1,774 and $3,554, respectively.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
10. Income Taxes
The components of (loss)/earnings before income taxes for the years 2002, 2001 and 2000 were taxed under the following jurisdictions:
| | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Domestic | | $ | 13,761 | | $ | 7,212 | | $ | (23,228 | ) |
| Foreign | | | (40,225 | ) | | 16,144 | | | 50,869 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | (26,464 | ) | $ | 23,356 | | $ | 27,641 | |
| | |
|
| |
|
| |
|
| |
The provision/(benefit) for income taxes on those (loss)/earnings was as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Current tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | $ | 1,646 | | $ | 213 | | $ | 22 | |
| Foreign | | | 10,471 | | | 14,382 | | | 16,005 | |
| | |
|
| |
|
| |
|
| |
| Total current | | | 12,117 | | | 14,595 | | | 16,027 | |
| | |
|
| |
|
| |
|
| |
| Deferred tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | | — | | | — | | | — | |
| Foreign | | | (2,588 | ) | | 2,822 | | | (6,435 | ) |
| | |
|
| |
|
| |
|
| |
| Total deferred | | | (2,588 | ) | | 2,822 | | | (6,435 | ) |
| | |
|
| |
|
| |
|
| |
| Total provision for income taxes | | $ | 9,529 | | $ | 17,417 | | $ | 9,592 | |
| | |
|
| |
|
| |
|
| |
Deferred tax liabilities (assets) consist of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Net operating loss carryforwards | | $ | (29,146 | ) | $ | (27,177 | ) | $ | (24,244 | ) |
| Valuation allowance | | | 36,324 | | | 21,970 | | | 18,617 | |
| Fixed assets and operating leases | | | (27,605 | ) | | (19,973 | ) | | (20,046 | ) |
| Pension | | | (38,603 | ) | | 29,742 | | | 28,485 | |
| Other | | | (644 | ) | | (1,596 | ) | | (910 | ) |
| Difference between book and tax recognition of income | | | 580 | | | 157 | | | (224 | ) |
| Tax credit carryforwards | | | (5,097 | ) | | (535 | ) | | (2,365 | ) |
| Contract and bonus reserve | | | (17,500 | ) | | (10,036 | ) | | (9,583 | ) |
| | |
|
| |
|
| |
|
| |
| Net deferred tax assets | | $ | (81,691 | ) | $ | (7,448 | ) | $ | (10,270 | ) |
| | |
|
| |
|
| |
|
| |
Tax credit carryforwards were generated in foreign subsidiaries and are not subject to expiration. As reflected above, the Company has recorded various deferred tax assets. Realization is dependent on generating sufficient taxable income. Management believes that it is more likely than not that the remaining net deferred tax assets (after consideration of the valuation allowance) will be realized through future earnings and/or tax planning strategies. The amount of the deferred tax assets considered realizable, however, could change in the near future if estimates of future taxable income during the carryforward period are changed. The valuation allowance increased by $14,354 and $3,353 in 2002 and 2001, respectively. Such increase is required under FASB 109, “Accounting for Income Taxes,” when there is an evidence of losses from domestic and foreign operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided in the current year do not begin expiring until 2020 and beyond, based on the current tax laws.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
10. Income Taxes — (Continued)
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to (loss)/earnings before income taxes, as a result of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Tax provision/(benefit) at U.S.statutory rate | | | (35.0 | %) | | 35.0 | % | | 35.0 | % |
| Permanent differences/non-deductible expenses | | | 94.7 | | | 6.3 | | | 13.9 | |
| AMT | | | 4.6 | | | 0.9 | | | — | |
| Valuation allowance | | | 54.7 | | | 14.4 | | | 0.5 | |
| Foreign rate differential | | | (6.1 | ) | | 16.9 | | | (1.5 | ) |
| Foreign tax credit utilized | | | (81.1 | ) | | — | | | — | |
| Fixed assets | | | — | | | — | | | (14.2 | ) |
| Other | | | 4.2 | | | 1.1 | | | 1.0 | |
| | |
|
| |
|
| |
|
| |
| | | 36.0 | % | | 74.6 | % | | 34.7 | % |
| | |
|
| |
|
| |
|
| |
11. Pensions, Postretirement and Other Employee Benefits
Pension Benefits — The Company’s subsidiaries in the United Kingdom and Canada have pension plans which cover all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation. At December 27, 2002, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $243,721 pre-tax, resulting in an after-tax charge to other comprehensive (loss)/income of $170,303. As of December 27, 2001, the Company had prepaid costs of $103,164. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
The following chart contains the disclosures for pension benefits for the years 2002, 2001 and 2000.
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Projected Benefit Obligation (PBO) | | | | | | | |
| PBO at beginning of period | | $ | 352,316 | | $ | 330,017 | |
| Service cost | | | 12,374 | | | 11,248 | |
| Interest cost | | | 20,502 | | | 18,356 | |
| Plan participants contributions | | | 5,690 | | | 4,004 | |
| Plan amendments | | | 3,091 | | | 1,535 | |
| Actuarial loss | | | 73,212 | | | 4,209 | |
| Benefits paid | | | (16,810 | ) | | (16,303 | ) |
| Special termination benefits/other | | | (1,291 | ) | | (432 | ) |
| Foreign currency exchange rate changes | | | 38,649 | | | (318 | ) |
| | |
|
| |
|
| |
| PBO at end of period | | | 487,733 | | | 352,316 | |
| | |
|
| |
|
| |
Plan Assets | | | | | | | |
| Fair value of plan assets at beginning of period | | | 324,106 | | | 358,034 | |
| Actual return on plan assets | | | (45,489 | ) | | (24,093 | ) |
| Employer contributions | | | 24,757 | | | 6,897 | |
| Plan participant contributions | | | 5,690 | | | 4,004 | |
| Benefits paid | | | (16,810 | ) | | (16,303 | ) |
| Other | | | (8,805 | ) | | (416 | ) |
| Foreign currency exchange rate changes | | | 26,827 | | | (4,017 | ) |
| | |
|
| |
|
| |
| Fair value of plan assets at end of period | | | 310,276 | | | 324,106 | |
| | |
|
| |
|
| |
Funded Status | | | | | | | |
| Funded Status | | | (177,457 | ) | | (28,210 | ) |
| Unrecognized net actuarial loss/(gain) | | | 286,824 | | | 121,292 | |
| Unrecognized prior service cost | | | 11,305 | | | 10,082 | |
| Adjustment for the minimum liability | | | (243,721 | ) | | — | |
| | |
|
| |
|
| |
| Prepaid (accrued) benefit cost | | $ | (123,049 | ) | $ | 103,164 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Net Periodic Benefit Cost | | | | | | | | | | |
| Service cost | | $ | 12,374 | | $ | 11,248 | | $ | 12,140 | |
| Interest cost | | | 20,502 | | | 18,356 | | | 18,852 | |
| Expected return on plan assets | | | (25,757 | ) | | (31,311 | ) | | (33,497 | ) |
| Amortization of transition asset | | | 63 | | | 64 | | | 74 | |
| Amortization of prior service cost | | | 1,352 | | | 1,029 | | | 1,594 | |
| Recognized actuarial loss/(gain) other | | | 8,340 | | | 2,243 | | | (377 | ) |
| | |
|
| |
|
| |
|
| |
| Total SFAS No. 87 net periodic pension cost | | $ | 16,874 | | $ | 1,629 | | $ | (1,214 | ) |
| | |
|
| |
|
| |
|
| |
Weighted-Average Assumptions | | | | | | | | | | |
| Discount rate | | | 5.75 | % | | 5.75 | % | | 5.75 | % |
| Long-term rate of return | | | 8.00 | % | | 9.00 | % | | 9.00 | % |
| Salary scale | | | 4.00 | % | | 4.00 | % | | 4.00 | % |
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government-mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee for each year of the employee’s service, payable when the employee leaves the Company. In 2002, 2001 and 2000, the Company recorded an expense of approximately $3,300, $3,200, and $3,400, respectively. A liability of $20,639 in 2002 and $17,558 in 2001 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.
12. Sale/leaseback Transactions
The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $3,197, $3,080, and $2,777 for the years ended December 2002, 2001, and 2000, respectively. As of December 27, 2002 and December 28, 2001, the balance of the deferred gains was $69,540, and $65,627, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.
13. Operating Leases
The Company and certain of its subsidiaries are obligated under other operating lease agreements primarily for office space. Rental expense for these leases totaled $16,084 in 2002, $16,481 in 2001, and $17,458 in 2000. Future minimum rental commitments on non- cancelable leases are as follows:
Fiscal year: | | | | |
| 2003 | | $ | 15,148 | |
| 2004 | | | 15,014 | |
| 2005 | | | 14,853 | |
| 2006 | | | 12,786 | |
| 2007 | | | 11,855 | |
| Thereafter | | | 146,594 | |
| | |
|
| |
| | $ | 216,250 | |
| | |
|
| |
14. Derivative Financial Instruments
The Company’s activities expose it to risks related to the effect of changes in the foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 27, 2002 a $2,721 pretax net gain on derivative instruments which is recorded as a reduction in cost of operating revenues on the consolidated statement of operations and comprehensive(loss)/ income. The Company is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. As of December 27, 2002, approximately $104,089 was owed to the Company by counterparties and $26,059 was owed by the Company to counterparties. A $6 net of tax loss was recorded in other
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
14. Derivative Financial Instruments — (Continued)
comprehensive income as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.
The maximum term over which the Company is hedging exposure to the variability of cash flows is twenty-four months.
A reconciliation of current period changes, net of applicable income taxes, in accumulated other comprehensive income relating to derivatives qualifying as cash flow hedges are as follows:
| Balance as of December 28, 2001 | | $ | (6) | |
| Reclassification to earnings | | | 6 | |
| | |
|
| |
| Balance at December 27, 2002 | | $ | — | |
| | |
|
| |
15. Warranty Reserves
The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.
| Balance as of December 28, 2001 | | $ | 18,100 | |
| Accruals | | | 13,100 | |
| Settlements | | | (1,500 | ) |
| Adjustments to provisions | | | (4,000 | ) |
| | |
|
| |
| Balance as of December 27, 2002 | | $ | 25,700 | |
| | |
|
| |
16. Litigation and Uncertainties
<R>
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 or plant construction and seeking resulting alleged damages. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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 material charges against assets or earnings materially in excess of amounts previously provided in the accounts. During 2002, approximately $5,000 was accrued related to exposures. This charge was recorded in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty.
17. Financial Instruments and Risk Management
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values:
Cash and Short-term Investments — All investments are considered available for sale and the carrying amount approximates fair value because of the short-term maturity of these instruments.
Long-term Debt — The fair value of the Company’s third-party long-term debt (including current installments) is estimated based on the quoted market prices for the same or similar issues or on the current
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
17. Financial Instruments and Risk Management — (Continued)
rates offered to the Company for debt of the same remaining maturities. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.
Foreign Currency Contracts — The fair values of these financial instruments (used for hedging purposes) are estimated by obtaining quotes from brokers. The Company is exposed to market risks from fluctuations in foreign exchange rates. Financial instruments are utilized by the Company to reduce this risk. The Company does not hold or issue financial instruments for trading purposes. The Company is exposed to credit loss in the event of nonperformance by the counterparties. All of these financial instruments are with significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s.
Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:
| | 2002 | | 2001 | |
| | |
| |
| |
| | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value | |
| | |
|
| |
|
| |
|
| |
|
| |
Nonderivatives: | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 172,512 | | $ | 172,512 | | $ | 121,090 | | $ | 121,090 | |
| Restricted cash | | | 30,169 | | | 30,169 | | | — | | | — | |
| Third-party long-term debt | | | 424 | | | 424 | | | — | | | — | |
| Intercompany notes receivable - current | | | 161 | | | — | | | 7,210 | | | — | |
| Intercompany notes receivable - long-term | | | 25,883 | | | — | | | 20,718 | | | — | |
| Intercompany notes payable - current | | | 19,179 | | | — | | | 27,860 | | | — | |
| Intercompany notes payable - long-term | | | 134,372 | | | — | | | 129,283 | | | — | |
Derivatives: | | | | | | | | | | | | | |
| Foreign currency contracts | | | 2,721 | | | 2,721 | | | (10 | ) | | (10 | ) |
In the ordinary course of business, the Company is contingently liable for performance under letters of credit and bank guarantees totaling $263,654 and $200,444 as of December 27, 2002 and December 28, 2001, respectively. In the Company’s past experience, no material claims have been made against these financial instruments. Management of the Company does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero.
As of December 27, 2002, the Company had $130,148 of foreign currency contracts outstanding. These foreign currency 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 currencies or other currencies for which they have payment obligations to third parties.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and trade receivables. The Company places its cash equivalents with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. As of December 27, 2002 and December 28, 2001, the Company had no significant concentrations of credit risk.
18. Related Party Transactions
The Company enters into long-term contracts as a subcontractor and/or performs subcontract work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive (loss)/income for 2002, 2001 and 2000 related to these contracts and intercompany borrowings is the following:
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
18. Related Party Transactions — (Continued)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Operating revenues | | $ | 12,014 | | $ | 16,632 | | $ | 13,950 | |
| Cost of operating revenues | | | 25,965 | | | 46,284 | | | 55,625 | |
| Interest income | | | 6,299 | | | 6,362 | | | 10,038 | |
| Interest expense | | | 5,899 | | | 6,239 | | | 10,155 | |
Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $24,199, $15,925 and $19,666 in 2002, 2001 and 2000, respectively.
Included in the consolidated balance sheet for 2002 and 2001 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Accounts and notes receivable - other | | $ | 26,322 | | $ | 24,697 | |
| Intercompany notes receivable | | | 26,044 | | | 27,928 | |
| Accounts payable | | | 65,190 | | | 50,218 | |
| Intercompany notes payable | | | 153,551 | | | 157,143 | |
Also reflected in the consolidated balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s (deficit)/equity for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s (Deficit)/Equity and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $10,539 and an increase of $10,859 at December 27, 2002, and December 28, 2001, respectively.
Additionally, at December 27, 2002 the Company holds investments in unconsolidated affiliates of $44,949 at cost.
All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 27, 2002, December 28, 2001, and December 29, 2000.
19. Business Segments Data
The business of the Company and its subsidiaries falls within two business segments. THE ENGINEERING AND CONSTRUCTION (“E&C”) GROUP designs, engineers and constructs petroleum, chemical, petrochemical and alternative-fuels facilities and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment, water treatment facilities and process plants for the production of fine chemicals, pharmaceuticals, dyestuffs, fragrances, flavors, food additives and vitamins. Also, the E&C Group provides a broad range of environmental remediation services, together with related technical, design and regulatory services. THE ENERGY GROUP designs, manufactures and erects steam generating and auxiliary equipment for power stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized-bed and conventional boilers firing coal, oil, gas, biomass and other municipal solid waste, waste wood and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment and low-NOX burners. Site services related to these products encompass plant erection, maintenance engineering, plant upgrading and life extension and plant repowering. The Energy Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solids mechanics as well as facilities for the process and petrochemical industries.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments Data — (Continued)
The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues and operating income over the last ten years. In 2002, the E&C Group accounted for approximately 90% of the operating revenues. The geographic dispersion of these operating revenues was as follows: 44% Europe, 25% Asia, 16% Middle East, 5% South America and 10% other. The Energy Group accounted for 10% of the operating revenues of the Company. The geographic dispersion of these operating revenues was as follows: 68% North America, 14% Europe, 11% Middle East, and 7% South America.
Earnings of segments represent revenues less expenses attributable to that group or geographic area where the operating units are located. Revenues between business segments are shown in the elimination column.
No single customer represented 10% or more of operating revenues for 2002, 2001, or 2000.
Identifiable assets by group are those assets that are directly related to and support the operations of each group.
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments Data — (Continued)
Summary financial information concerning the Company’s reportable segments is shown in the following table:
| | | Total | | Engineering
and
Construction
Group | | Energy
Group | | Eliminations | |
| | |
|
| |
|
| |
|
| |
|
| |
2002
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,681,402 | | $ | 1,507,064 | | $ | 175,445 | | $ | (1,107 | ) |
Interest income(1) | | | 11,278 | | | 10,305 | | | 1,481 | | | (508 | ) |
Interest expense(1) | | | 6,686 | | | 7,182 | | | 12 | | | (508 | ) |
Loss before income taxes(2) (3) | | | (26,464 | ) | | (20,805 | ) | | (5,659 | ) | | — | |
| Income taxes/(benefits) | | | 9,529 | | | 10,049 | | | (520 | ) | | — | |
| Net loss | | | (35,993 | ) | | (30,854 | ) | | (5,139 | ) | | — | |
| Identifiable assets | | | 849,149 | | | 847,814 | | | 92,914 | | | (91,579 | ) |
| Capital expenditures | | | 7,085 | | | 6,673 | | | 412 | | | — | |
| Depreciation and amortization | | | 9,917 | | | 8,874 | | | 1,043 | | | — | |
| | | | | | | | | | | | | |
2001
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,545,752 | | $ | 1,359,564 | | $ | 186,656 | | $ | (468 | ) |
Interest income(1) | | | 12,427 | | | 11,112 | | | 1,507 | | | (372 | ) |
Interest expense(1) | | | 8,013 | | | 8,064 | | | 321 | | | (372 | ) |
Earnings/(loss) before income taxes(4) | | | 23,356 | | | 31,334 | | | (7,978 | ) | | — | |
| Income taxes/(benefits) | | | 17,417 | | | 21,302 | | | (3,885 | ) | | — | |
| Net earnings/(loss) | | | 5,939 | | | 10,032 | | | (4,093 | ) | | — | |
| Identifiable assets | | | 820,172 | | | 721,842 | | | 178,253 | | | (79,923 | ) |
| Capital expenditures | | | 8,953 | | | 7,621 | | | 1,332 | | | — | |
| Depreciation and amortization | | | 10,667 | | | 9,612 | | | 1,055 | | | — | |
| | | | | | | | | | | | | | |
2000
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,990,558 | | $ | 1,863,236 | | $ | 130,800 | | $ | (3,478 | ) |
Interest income(1) | | | 18,166 | | | 17,378 | | | 1,178 | | | (390 | ) |
Interest expense(1) | | | 13,710 | | | 13,560 | | | 540 | | | (390 | ) |
| Earnings before income taxes | | | 27,641 | | | 22,092 | | | 5,549 | | | — | |
| Income taxes/(benefits) | | | 9,592 | | | 7,480 | | | 2,112 | | | — | |
| Net earnings | | | 18,049 | | | 14,612 | | | 3,437 | | | — | |
| Identifiable assets | | | 952,651 | | | 800,818 | | | 172,934 | | | (21,101 | ) |
| Capital expenditures | | | 27,269 | | | 26,178 | | | 1,091 | | | — | |
| Depreciation and amortization | | | 13,632 | | | 12,663 | | | 969 | | | — | |
| | | | | | | | | | | | | | |
| | | |
| | (1) | Includes intercompany interest charged on outstanding intercompany borrowings. |
| | | |
| | (2) | Includes in 2002, revaluation of contract estimates and provisions for uncollectible receivables of $65,300 ($60,500 after tax): E&C Group $60,000, Energy Group $5,000. |
| | | |
| | (3) | Includes in 2002, $6,000 ($5,700 net of tax) accrual for legal settlements and development cost in the E&C Group. |
| | | |
| | (4) | Includes in 2001, contract write-downs of $35,500 ($23,100 after-tax): E&C Group $24,000, Energy Group $11,500. |
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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments Data — (Continued)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Equity earnings in unconsolidated subsidiaries were as follows: | | | | | | | | | | |
| Engineering and Construction Group | | $ | 7,334 | | $ | 4,433 | | $ | 6,719 | |
| Energy Group | | | — | | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 7,334 | | $ | 4,433 | | $ | 6,719 | |
| | |
|
| |
|
| |
|
| |
Geographic Concentration | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| United States | | $ | 7,580 | | $ | 13,438 | | $ | 17,383 | |
| Europe | | | 1,534,263 | | | 1,401,440 | | | 1,889,129 | |
| Canada | | | 139,559 | | | 130,874 | | | 84,046 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,681,402 | | $ | 1,545,752 | | $ | 1,990,558 | |
| | |
|
| |
|
| |
|
| |
Long-lived assets: | | | | | | | | | | |
| United States | | $ | 276 | | $ | (841 | ) | $ | 118 | |
| Europe | | | 124,388 | | | 105,612 | | | 118,900 | |
| Canada | | | 1,537 | | | 1,958 | | | 1,511 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 126,201 | | $ | 106,729 | | $ | 120,529 | |
| | |
|
| |
|
| |
|
| |
Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.
Operating revenues by industry segment for the three years ending December 2002 were as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Power | | $ | 281,887 | | $ | 191,702 | | $ | 186,030 | |
| Oil and gas/refinery | | | 697,024 | | | 653,888 | | | 1,115,476 | |
| Pharmaceutical | | | 383,101 | | | 431,677 | | | 270,590 | |
| Chemical | | | 154,014 | | | 174,482 | | | 309,024 | |
| Environmental | | | 50,315 | | | 6,841 | | | 33,420 | |
| Eliminations and other | | | 67,969 | | | 32,989 | | | 18,832 | |
| | |
|
| |
|
| |
|
| |
| Total Operating Revenues | | $ | 1,634,310 | | $ | 1,491,579 | | $ | 1,933,372 | |
| | |
|
| |
|
| |
|
| |
<R>
20. Security Pledged as Collateral
FWLLC issued $200,000 Notes in the public market, which bear interest at a fixed rate of 6.75% (the “6.75% Notes”). Holders of the 6.75% Notes due November 15, 2005 have a security interest in the stock and debt of FWLLC’s subsidiaries and on facilities owned by FWLLC 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. This security interest includes the stock and debt of the Company. The Term Loan and the obligations under the letter of credit facility (collectively approximately $184,700 at December 27, 2002) have priority to the 6.75% Notes in these assets while security interest of 6.75% Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.
</R>
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| |
Foster Wheeler International Corporation and Subsidiaries
Consolidated Financial Statements
For the Three Years Ended December 27, 2002 |
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Report of Independent Auditors
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive(loss)/ income, of cash flows and of shareholder’s (deficit)/equity present fairly, in all material respects, the financial position of Foster Wheeler International Corporation and its subsidiaries (the “Company”), an indirect, whollyowned subsidiary of Foster Wheeler Ltd. (the “Parent”) at December 27, 2002 and December 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming the Parent will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Parent has incurred significant losses in each of the years in two-year period ended December 27, 2002 and has a shareholder deficit of $780,939,000 at December 27, 2002. The Parent has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, the Parent received waivers for covenant violations and ultimately negotiated new credit facilities, in August 2002. The Parent was unable to comply with certain debt covenants under the new credit facility agreement and therefore obtained an amendment of such agreement. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to generate cash flows from operations, assets sales and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the Parent maintaining credit facilities and bonding capacity adequate to conduct its business. The stock and debt of the Company has been pledged as collateral to the holders of the $200,000,000 Senior Notes issued by the Parent. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 25, 2003
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Revenues: | | | | | | | | | | |
| Operating revenues | | $ | 1,634,310 | | $ | 1,491,579 | | $ | 1,933,372 | |
| Interest income (including $6,299 in 2002, $6,362 in 2001 and $10,038 in 2000 with affiliates) | | | 11,278 | | | 12,427 | | | 18,166 | |
| Other income | | | 35,814 | | | 41,746 | | | 39,020 | |
| | |
|
| |
|
| |
|
| |
| Total Revenues | | | 1,681,402 | | | 1,545,752 | | | 1,990,558 | |
| | | | | | | | | | | |
Costs and Expenses: | | | | | | | | | | |
| Cost of operating revenues | | | 1,600,628 | | | 1,421,664 | | | 1,843,619 | |
| Selling, general and administrative expenses | | | 70,296 | | | 82,565 | | | 91,991 | |
| Other deductions | | | 30,256 | | | 10,154 | | | 13,597 | |
| Interest expense (including $5,899 in 2002, $6,239 in 2001 and $10,155 in 2000 to affiliates) | | | 6,600 | | | 8,013 | | | 13,710 | |
| | |
|
| |
|
| |
|
| |
| Total Costs and Expenses | | | 1,707,780 | | | 1,522,396 | | | 1,962,917 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| (Loss)/earnings before income taxes | | | (26,378 | ) | | 23,356 | | | 27,641 | |
| Provision for income taxes | | | 9,529 | | | 17,417 | | | 9,592 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings | | | (35,907 | ) | | 5,939 | | | 18,049 | |
| Other comprehensive(loss)/income: | | | | | | | | | | |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of tax benefit of $324 in 2001) | | | — | | | (602 | ) | | — | |
| Change in net gain on derivative instruments designated as cash flow hedges (net of tax benefit of $4 in 2002 and $320 in 2001) | | | 6 | | | 596 | | | — | |
| Change in accumulated translation adjustment during the year | | | 31,503 | | | (11,633 | ) | | (18,446 | ) |
| Minimum pension liability adjustment (net of tax benefits | | | | | | | | | | |
| of $73,400 in 2002) | | | (170,303 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Comprehensive (loss)/income | | $ | (174,701 | ) | $ | (5,700 | ) | $ | (397 | ) |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
| | | December 27, 2002 | | December 28, 2001 | |
| | |
|
| |
|
| |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | $ | 172,471 | | $ | 121,054 | |
| Short-term investments | | | 41 | | | 36 | |
| Accounts and notes receivable: | | | | | | | |
| Trade | | | 259,827 | | | 306,918 | |
| Other (including $26,322 in 2002 and $24,697 in 2001 with affiliates) | | | 46,973 | | | 44,297 | |
| Intercompany notes | | | 161 | | | 7,210 | |
| Contracts in process | | | 60,423 | | | 69,972 | |
| Inventories | | | 1,445 | | | 1,136 | |
| Prepaid, deferred and refundable income taxes | | | 40,703 | | | 19,798 | |
| Prepaid expenses | | | 7,848 | | | 7,378 | |
| | |
|
| |
|
| |
| Total current assets | | | 589,892 | | | 577,799 | |
| | |
|
| |
|
| |
| Land, buildings and equipment | | | 121,907 | | | 115,452 | |
| | | | | | | | |
| Less accumulated depreciation | | | 89,754 | | | 82,881 | |
| | |
|
| |
|
| |
| Net book value | | | 32,153 | | | 32,571 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Restricted cash | | | 30,169 | | | — | |
| Notes and accounts receivable - long-term | | | 1,425 | | | 1,866 | |
| Intercompany notes receivable - long-term | | | 25,883 | | | 20,718 | |
| Investment and advances | | | 94,546 | | | 74,656 | |
| Prepaid pension cost and related benefit assets | | | — | | | 103,164 | |
| Other assets | | | 8,708 | | | 4,887 | |
| Deferred income taxes | | | 69,381 | | | 6,708 | |
| | |
|
| |
|
| |
| TOTAL ASSETS | | $ | 852,157 | | $ | 822,368 | |
| | |
|
| |
|
| |
LIABILITIES AND SHAREHOLDER’S (DEFICIT)/EQUITY | | | | | | | |
Current Liabilities: | | | | | | | |
| Current installments on long-term debt | | $ | 105 | | $ | - | |
| Bank loans | | | 13,266 | | | 14,454 | |
| Accounts payable (including $65,190 in 2002 and $50,218 in 2001 with affiliates) | | | 192,485 | | | 200,039 | |
| Accrued expenses | | | 83,138 | | | 65,140 | |
| Intercompany notes payable | | | 18,944 | | | 27,426 | |
| Estimated costs to complete long-term contracts | | | 227,092 | | | 176,626 | |
| Advance payments by customers | | | 65,492 | | | 36,258 | |
| Income taxes | | | 39,697 | | | 23,853 | |
| | |
|
| |
|
| |
| Total current liabilities | | | 640,219 | | | 543,796 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Long-term debt less current installments | | | 319 | | | — | |
| Intercompany notes payable - long-term | | | 134,372 | | | 129,283 | |
| Deferred income taxes | | | 6,638 | | | 11,791 | |
| Pension, postretirement and other employee benefits | | | 143,688 | | | 17,558 | |
| Other long-term liabilities and minority interest | | | 69,883 | | | 66,217 | |
| | |
|
| |
|
| |
| TOTAL LIABILITIES | | | 995,119 | | | 768,645 | |
| | |
|
| |
|
| |
Shareholder’s (Deficit)/Equity: | | | | | | | |
Common stock, no par value 1,000 shares authorized
25 shares issued and outstanding | | | 20 | | | 20 | |
| Capitalization of intercompany notes | | | (10,539 | ) | | 10,859 | |
| Paid-in capital | | | 2,351 | | | 2,351 | |
| Retained earnings | | | 95,930 | | | 132,423 | |
| Accumulated other comprehensive loss | | | (230,724 | ) | | (91,930 | ) |
| | |
|
| |
|
| |
| TOTAL SHAREHOLDER’S (DEFICIT)/EQUITY | | | (142,962 | ) | | 53,723 | |
| | |
|
| |
|
| |
TOTAL LIABILITIES AND SHAREHOLDER’S (DEFICIT)/EQUITY | | $ | 852,157 | | $ | 822,368 | |
| | |
|
| |
|
| |
See notes to consolidated financial statements.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S (DEFICIT)/EQUITY
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Common Stock | | | | | | | | | | |
| Balance at beginning and end of year | | $ | 20 | | $ | 20 | | $ | 20 | |
| | |
|
| |
|
| |
|
| |
Capitalization of Intercompany Notes | | | | | | | | | | |
| Balance at beginning of year | | | 10,859 | | | (9,158 | ) | | (99,168 | ) |
| Current year activity | | | (21,398 | ) | | 20,017 | | | 90,010 | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (10,539 | ) | | 10,859 | | | (9,158 | ) |
| | |
|
| |
|
| |
|
| |
Paid-in Capital | | | | | | | | | | |
| Balance at beginning and end of year | | | 2,351 | | | 2,351 | | | 2,351 | |
| | |
|
| |
|
| |
|
| |
Retained Earnings | | | | | | | | | | |
| Balance at beginning of year | | | 132,423 | | | 181,584 | | | 227,542 | |
| Net (loss)/earnings for the year | | | (35,907 | ) | | 5,939 | | | 18,049 | |
| Dividends paid | | | (586 | ) | | (55,100 | ) | | (64,007 | ) |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | 95,930 | | | 132,423 | | | 181,584 | |
| | |
|
| |
|
| |
|
| |
Accumulated Other Comprehensive Loss | | | | | | | | | | |
| Balance at beginning of year | | | (91,930 | ) | | (80,291 | ) | | (61,845 | ) |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of tax benefit of $324 in 2001) | | | — | | | (602 | ) | | — | |
| Change in net loss on derivative instruments designated as cash flow hedges (net of tax benefit of $4 in 2002 and $320 in 2001) | | | 6 | | | 596 | | | — | |
| Change in accumulated translation adjustment during the year | | | 31,503 | | | (11,633 | ) | | (18,446 | ) |
| Minimum pension liability (net of tax benefits of $73,400 in 2002) | | | (170,303 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (230,724 | ) | | (91,930 | ) | | (80,291 | ) |
| | |
|
| |
|
| |
|
| |
Total Shareholder’s (Deficit)/Equity | | $ | (142,962 | ) | $ | 53,723 | | $ | 94,506 | |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
| Net (loss)/earnings | | $ | (35,907 | ) | $ | 5,939 | | $ | 18,049 | |
| Adjustments to reconcile net (loss) / earnings to cash flows from operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 9,917 | | | 10,667 | | | 13,632 | |
| Deferred tax | | | 1,879 | | | 7,240 | | | 275 | |
| Net gain on asset sales | | | (3,506 | ) | | (11,081 | ) | | (11,655 | ) |
| Equity earnings, net of dividends | | | (9,627 | ) | | (6,621 | ) | | (8,644 | ) |
| Other noncash items | | | (6,084 | ) | | 8,764 | | | 34,299 | |
| Changes in assets and liabilities: | | | | | | | | | | |
| Receivables | | | 69,203 | | | 95,783 | | | 4,854 | |
| Contracts in process and inventories | | | 12,932 | | | 18,915 | | | (5,516 | ) |
| Accounts payable and accrued expenses | | | (3,275 | ) | | (55,222 | ) | | 10,471 | |
| Estimated costs to complete long-term contracts | | | 35,669 | | | (37,189 | ) | | (39,275 | ) |
| Advance payments by customers | | | 29,065 | | | 4,135 | | | (1,137 | ) |
| Income taxes | | | (5,024 | ) | | 13,337 | | | (22,371 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash provided/(used) by operating activities | | | 95,242 | | | 54,667 | | | (7,018 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Change in restricted cash | | | (30,169 | ) | | — | | | — | |
| Capital expenditures | | | (7,085 | ) | | (8,953 | ) | | (27,269 | ) |
| Proceeds from sale of properties | | | 793 | | | 14,825 | | | 51,567 | |
| Decrease/(increase) in investments and advances | | | 350 | | | 14,367 | | | 18,815 | |
| Decrease/(increase) in short-term investments | | | (5 | ) | | 29 | | | 726 | |
| | |
|
| |
|
| |
|
| |
| Net cash (used)/provided by investing activities | | | (36,116 | ) | | 20,268 | | | 43,839 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Capitalization of notes receivable | | | (21,398 | ) | | 20,017 | | | 90,010 | |
| Dividends paid | | | (586 | ) | | (55,100 | ) | | (64,007 | ) |
| Increase/(decrease) in notes payable to affiliates | | | 8,512 | | | (22,353 | ) | | (29,324 | ) |
| Payments of long-term debt | | | (619 | ) | | — | | | (2,199 | ) |
| Decrease/(increase) in bank loans | | | (2,133 | ) | | 2,473 | | | (24,146 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash (used)/provided by financing activities | | | (16,224 | ) | | (54,963 | ) | | (29,666 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 8,515 | | | (10,551 | ) | | 4,041 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
INCREASE IN CASH AND CASH EQUIVALENTS | | | 51,417 | | | 9,421 | | | 11,196 | |
| Cash and cash equivalents at beginning of year | | | 121,054 | | | 111,633 | | | 100,437 | |
| | |
|
| |
|
| |
|
| |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 172,471 | | $ | 121,054 | | $ | 111,633 | |
| | |
|
| |
|
| |
|
| |
| Cash paid during the year for: | | | | | | | | | | |
| Interest | | $ | 4,871 | | $ | 7,844 | | $ | 9,663 | |
| Income taxes | | $ | 6,669 | | $ | 12,527 | | $ | 29,725 | |
See notes to consolidated financial statements.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries
Foster Wheeler International Corporation and Subsidiaries (the “Company”) is a wholly owned subsidiary of Foster Wheeler International Holdings, Inc., which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company operates primarily outside of the United States with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore, Thailand, Malaysia, South Africa, and Canada.
The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and cash flows of the Company have been impacted by these transactions and relationships as discussed on notes 2, 18 and 20.
2. Liquidity and Going Concern
The accompanying 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, Foster Wheeler Ltd.’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 Foster Wheeler Ltd. maintaining credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939 at December 27, 2002. Foster Wheeler Ltd. has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, Foster Wheeler Ltd. 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 Foster Wheeler Ltd. will do so during 2003. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. Foster Wheeler Ltd.’s plans in regard to these matters are described below.
In August 2002, Foster Wheeler Ltd. 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. Foster Wheeler Ltd. retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the facility commence 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 Foster Wheeler Environmental Corporation on March 7, 2003, cumulative sales proceeds received, as defined in the agreement, approximate $75,000.
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 Foster Wheeler Ltd. 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. In the 4th quarter 2002, $11,000 of the contingency risks were favorably resolved, and additional project reserves were established for $19,000 leaving a contingency balance of $33,000.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
2. Liquidity and Going Concern — (Continued)
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, Foster Wheeler Ltd. made a prepayment of principal in the aggregate amount of $10,000.
Due to Foster Wheeler Ltd.’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 Foster Wheeler Ltd. can successfully effect any of the foregoing.
During the third quarter of 2002, Foster Wheeler Ltd. also completed a receivables financing arrangement of up to $40,000. The funding available to Foster Wheeler Ltd. is dependent on the amount and characteristics of the domestic receivables. The amount available to Foster Wheeler Ltd. fluctuates daily, but Foster Wheeler Ltd. estimates that approximately $15,000 to $20,000 will be available during 2003. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commence at the end of the first quarter of 2003 and 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. As of December 27, 2002, Foster Wheeler Ltd. had $0 borrowings outstanding under this facility.
Foster Wheeler Ltd. initiated a comprehensive plan to enhance cash generation and to improve profitability during 2002. Management’s comprehensive plan to address Foster Wheeler Ltd.’s domestic liquidity issues included generating approximately $150,000 from asset sales, collection of receivables and resolving disputed claims through the end of the first quarter 2003, and an additional $40,000 over the following six months. As of December 27, 2002, Foster Wheeler Ltd. generated approximately $60,000 through these efforts, and with the sale of the operating business of Foster Wheeler Environmental Corporation on March 7, 2003, an additional $80,000 has been generated. An additional $10,000 has also been received through more efficient working capital management. The $40,000 is still expected to be received from asset sales and claims recoveries over the course of the year 2003. 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 Foster Wheeler Ltd.’s working capital needs through the first quarter of 2004. Failure by Foster Wheeler Ltd. to achieve its forecast could have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition.
3. Summary of Significant Accounting Policies
Principles of Consolidation — The consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler International Corporation and all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.
The Company’s fiscal year is the 52- or 53- week annual accounting period ending the last Friday in December for domestic companies and December 31 for foreign companies. For domestic companies, the years 2002, 2001 and 2000 included 52 weeks.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, and contingencies, among others. At December 27, 2002, December 28, 2001 and December 29, 2000, the Company has recorded commercial claims of $0, $50,200 and $52,700 respectively. The 2002 decreases in recorded claims resulted from the collection of $6,500 and provision established for the outstanding balance of commercial claims. The Company revised its estimates in 2002 of claim revenues to reflect recent adverse recovery experience, management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company.
Revenue Recognition on Long-term Contracts — Revenues and profits on long term fixed price contracts are recorded under the percentage of completion method. Progress towards completion is measured using the cost to cost method, the efforts expended method or variations thereof. These methods are applied consistently to all contracts having similar characteristics in similar circumstances. Under the cost to cost method, revenues and profits are recognized based on the ratio that costs incurred bear to total estimated costs. Under the efforts expended method, revenue and profits are recognized based on the ratio that incurred labor hours bear to total estimated labor hours. Variations of these two methods are used on multiyear contracts that require significant engineering effort and multiple delivery of units. These methods are subject to physical verification of actual progress towards completion.
Revenues and profits on costs reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.
Contracts in progress are stated at cost increased for profits recorded on the completed efforts or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.”
The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of approximately $172,000 are maintained by foreign subsidiaries as of December 27, 2002. These 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.
Restricted Cash — Restricted cash consists of approximately $30,200 at December 27, 2002, that the Company was required to deposit to collateralize letters of credit and bank guarantees.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under Financial Accounting Standards Board (“FASB”) Statement No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific identification method. For the years ended 2002, 2001 and 2000, the investment balances and realized and unrealized gains and losses were immaterial.
Trade Accounts Receivable — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld, which might not be received within a one-year period, are indicated in Note 5. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets. Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.
Accounts and Notes Receivable Other — Accounts receivable and notes receivable other consist primarily of receivables from affiliated companies of $26,322 at December 27, 2002, and $24,697 at December 28, 2001, and foreign refundable value-added tax.
Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement was not material to the Company.
Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses the accounting for long-lived assets to be disposed of by sale and resolves significant implementation issues relating to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The provisions of this statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company’s results of operations and financial position were not affected by the initial adoption of this statement.
Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
cost method is appropriate. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates are recorded using the cost method.
Income Taxes — Income tax expense in the Company’s statements of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company’s tax return, deferred tax assets, subject to considerations about the need for a valuation allowance, are recognized for the carryforward amounts.
Provision is made for Federal income taxes which may be payable on foreign subsidiary earnings to the extent that the Company anticipates they will be remitted. Unremitted earnings of foreign subsidiaries which have been, or are intended to be, permanently reinvested (and for which no Federal income tax has been provided) aggregated $243,790 as of December 27, 2002. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.
Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Cumulative translation adjustment at beginning of year | | $ | (91,924 | ) | $ | (80,291 | ) | $ | (61,845 | ) |
| Current year foreign currency adjustment | | | 31,503 | | | (11,633 | ) | | (18,446 | ) |
| | |
|
| |
|
| |
|
| |
| Cumulative translation adjustment at end of year | | $ | (60,421 | ) | $ | (91,924 | ) | $ | (80,291 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Foreign currency transaction gains | | $ | 3,300 | | $ | 8,700 | | $ | 5,700 | |
| Foreign currency transaction gains, net of tax | | | 2,100 | | | 5,700 | | | 3,700 | |
The Company enters into foreign exchange contracts in its management of foreign currency exposures related to commercial contracts. Changes in the fair value of derivative contracts that qualify as designated cash flow hedges are deferred until the hedged forecasted transaction affects earnings. Amounts receivable (gains) or payable (losses) under foreign exchange hedges are recognized as deferred gains or losses and are included in either contracts in process or estimated costs to complete long-term contracts. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2002 an after-tax gain on derivative instruments of approximately $1,768.
Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
Stock Option Plans —Foster Wheeler Ltd. has fixed option plans which reserve shares of common stock for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of the SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Based Compensation – Transition and Disclosure.” Accordingly, no compensation cost has been recognized by the Company relating to these stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards in 2002, 2001, and 2000 consistent with the provisions of SFAS No. 123, the Company’s net (loss)/earnings would have been reduced to the pro forma amounts indicated below:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings - as reported | | $ | (35,907 | ) | $ | 5,939 | | $ | 18,049 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings - pro forma | | $ | (36,492 | ) | $ | 5,617 | | $ | 17,863 | |
| | |
|
| |
|
| |
|
| |
The assumption regarding the stock options issued in 2002, 2001, and 2000 was that 100% of such options vested in the year of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Dividend yield | | | 0.00 | % | | 1.36 | % | | 3.18 | % |
| Expected volatility | | | 83.62 | % | | 79.20 | % | | 59.20 | % |
| Risk-free interest rate | | | 2.90 | % | | 4.23 | % | | 6.46 | % |
| Expected life (years) | | | 5.0 | | | 5.0 | | | 5.0 | |
Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 5,300,000.
These plans provide that shares granted be issued from Foster Wheeler Ltd.’s authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. An option may not be exercised within one year from the date of grant and no option will be exercisable after ten years from the date of grant.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Information regarding these option plans for the years 2002, 2001, and 2000 is as follows (presented in actual number of shares):
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding, beginning of year | | | 661,933 | | $ | 17.64 | | | 508,933 | | $ | 21.42 | | | 435,183 | | $ | 23.60 | |
| Options exercised | | | — | | | | | | (24,000 | ) | | 9.56 | | | — | | | — | |
| Options granted | | | 811,090 | | | 1.64 | | | 177,000 | | | 5.69 | | | 79,000 | | | 9.00 | |
| Options cancelled or expired | | | (7,250 | ) | | 10.86 | | | — | | | — | | | (5,250 | ) | | 15.06 | |
| |
| | | | |
| | | | |
| | | | |
| Options outstanding, end of year | | | 1,465,773 | | $ | 8.83 | | | 661,933 | | $ | 17.64 | | | 508,933 | | $ | 21.42 | |
| |
| | | | |
| | | | |
| | | | |
| Option price range at end of year | | $ | 1.64 - $42.1875 | | | | | $ | 5.6875 - $42.1875 | | | | | $ | 9.00 - $42.1875 | | | | |
| Option price range for exercised shares | | | | | | | | $ | 9.00 - $13.50 | | | | | | | | | | |
| Options available for grant at end of year | | | 445,069 | | | | | | 430,180 | | | | | | 1,029,180 | | | | |
| |
| | | | |
| | | | |
| | | | |
| Weighted-average fair value of options granted during the year | | $ | 1.11 | | | | | $ | 2.80 | | | | | $ | 3.63 | | | | |
| Options exercisable at end of year | | | 654,683 | | | | | | 484,933 | | | | | | 429,933 | | | | |
| Weighted-average exercise price of exercisable options at end of year | | $ | 17.73 | | | | | $ | 22.01 | | | | | $ | 23.70 | | | | |
The following table summarizes information about fixed-price stock options outstanding as of December 27, 2002:
| | | Options Outstanding | | Options Exercisable | |
| | |
| |
| |
Range of
Exercise Prices
| | Number
Outstanding
at 12/27/02 | | Weighted-
Average
Remaining
Contractual Life | | Weighted-
Average
Exercise Price | | Number
Exercisable
at 12/27/02 | | Weighted-
Average
Exercise Price | |
| |
| |
| |
| |
| |
| |
| $29.75 | | | 61,600 | | | 3 years | | $ | 29.75 | | | 61,600 | | $ | 29.75 | |
| 42.1875 | | | 14,583 | | | 4 years | | | 42.19 | | | 14,583 | | | 42.19 | |
| 36.9375 | | | 65,000 | | | 5 years | | | 36.94 | | | 65,000 | | | 36.94 | |
| 13.00 | | | 91,000 | | | 6 years | | | 27.63 | | | 91,000 | | | 27.63 | |
| 13.50 to 15.062 | | | 191,250 | | | 7 years | | | 14.30 | | | 191,250 | | | 14.30 | |
| 9.00 | | | 58,000 | | | 8 years | | | 9.00 | | | 58,000 | | | 9.00 | |
| 5.6875 | | | 173,250 | | | 9 years | | | 5.69 | | | 173,250 | | | 5.69 | |
| 1.64 | | | 811,090 | | | 10 years | | | 1.64 | | | — | | | — | |
| |
| | | | | | | |
| | | | |
| 1.64 to 42.1875 | | | 1,465,773 | | | | | | | | | 654,683 | | | | |
| |
| | | | | | | |
| | | | |
Recent Accounting Developments — In June 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds previous statements regarding the extinguishment of debt and amends SFAS No. 13, “Accounting for Leases” to eliminate an inconsistency between the required accounting for sale/leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale/leaseback transactions. The provisions of SFAS 145 related to the extinguishment of debt are to be applied to fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to the amendment of SFAS 13 are effective for transactions occurring after May 15, 2002. The adoption of this new standard will not impact the Company.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires liabilities associated with an exit or disposal activity be recognized at fair value when the liability is incurred. This contrasts with existing accounting requirements, under which liabilities for exit or disposal activities are recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, although early adoption is permitted. The Company implemented SFAS 146 in the fourth quarter of 2002 and there was no impact on the Company.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. FIN 45 also incorporates, without change, the guidance in FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded.
This Interpretation does not apply to certain guarantee contracts and the provisions related to recognizing a liability at inception for the fair value of the guarantor’s obligation do not apply to the following:
b. Guarantees that are accounted for as derivatives
c. Guarantees that represent contingent consideration in a business combination
d. Guarantees for which the guarantor’s obligations would be reported as an equity item (rather than a liability)
e. An original lessee’s guarantee of lease payments when that lessee remains secondarily liable in conjunction with being relieved from being the primary obligor (that is, the principal debtor) under a lease restructuring
f. Guarantees issued between either parents and their subsidiaries or corporations under common control
g. A parent’s guarantee of a subsidiary’s debt to a third party, and a subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent.
However, the guarantees described in (a)-(g) above are subject to the disclosure requirements.
The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company in its 2002 consolidated financial statements has implemented the disclosure requirements of this interpretation.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS 123 to require prominent disclosures, in both interim and annual financial statements, about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
provisions of this standard relating to the fair value measurements do not affect the Company as it accounts for stock-based employee compensation under the provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” as permitted under SFAS 123. The Company in its 2002 consolidated financial statements has implemented the disclosure requirements of this standard.
4. Research and Development
For the years 2002, 2001, and 2000, approximately $500, $1,800 and $2,000 respectively, were spent on Company-sponsored research activities. During the same periods, approximately $2,300, $2,400 and $3,100, respectively, were spent on customer-sponsored research activities.
5. Accounts and Notes Receivable - Trade
The following tabulation shows the components of trade accounts and notes receivable:
| | 2002 | | 2001 | |
| | |
|
| |
|
| |
| From long-term contracts: | | | | | | | |
| Amounts billed due within one year | | $ | 163,060 | | $ | 178,273 | |
| Retention - Billed: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 10,233 | |
| 2003 | | | 18,574 | | | 2,243 | |
| 2004 | | | 5,702 | | | — | |
| | |
|
| |
|
| |
| Total billed | | | 24,276 | | | 12,476 | |
| | |
|
| |
|
| |
| Retention - Unbilled: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 109,610 | |
| 2003 | | | 86,497 | | | 9,537 | |
| 2006 | | | 4 | | | — | |
| | |
|
| |
|
| |
| Total unbilled | | | 86,501 | | | 119,147 | |
| | |
|
| |
|
| |
| Total retentions | | | 110,777 | | | 131,623 | |
| | |
|
| |
|
| |
| Total receivables from long-term contracts | | | 273,837 | | | 309,896 | |
| Other trade accounts and notes receivable | | | 389 | | | 10 | |
| | |
|
| |
|
| |
| Gross Trade Accounts and Notes Receivable | | | 274,226 | | | 309,906 | |
| Less, allowance for doubtful accounts | | | 14,399 | | | 2,988 | |
| | |
|
| |
|
| |
| Net Trade Accounts and Notes Receivable | | $ | 259,827 | | $ | 306,918 | |
| | |
|
| |
|
| |
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.
Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
5. Accounts and Notes Receivable - Trade — (Continued)
Changes in the allowance for doubtful accounts during the periods ended December 2002, 2001 and 2000 are presented below.
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Balance at beginning of year | | $ | 2,988 | | $ | 3,347 | | $ | 1,354 | |
| Additions charged to expense | | | 19,019 | | | 1,207 | | | 708 | |
| (Deductions)/amounts recovered | | | (7,608 | ) | | (1,566 | ) | | 1,285 | |
| | |
|
| |
|
| |
|
| |
Balance at end of year | | $ | 14,399 | | $ | 2,988 | | $ | 3,347 | |
| | |
|
| |
|
| |
|
| |
The additions charged to expense are included in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
6. Contracts in Process and Inventories
The following tabulation shows the elements included in contract in process as related to long-term contracts:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Contracts in Process | | | | | | | |
| Costs plus accrued profits less earned revenues | | | | | | | |
| on contracts currently in process | | $ | 60,423 | | $ | 74,259 | |
| Less, progress payments | | | — | | | 4,287 | |
| | |
|
| |
|
| |
| Net | | $ | 60,423 | | $ | 69,972 | |
| | |
|
| |
|
| |
Costs of inventories are shown below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Inventories | | | | | | | |
| Materials and supplies | | $ | 1,222 | | $ | 804 | |
| Finished goods | | | 223 | | | 332 | |
| | |
|
| |
|
| |
| | $ | 1,445 | | $ | 1,136 | |
| | |
|
| |
|
| |
7. Land, Buildings and Equipment
Land, buildings and equipment are stated at cost and are set forth below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Land and land improvements | | $ | 328 | | $ | 290 | |
| Buildings | | | 21,831 | | | 23,385 | |
| Equipment | | | 99,681 | | | 91,517 | |
| Construction in progress | | | 67 | | | 260 | |
| | |
|
| |
|
| |
| | $ | 121,907 | | $ | 115,452 | |
| | |
|
| |
|
| |
Depreciation expense for the years 2002, 2001, and 2000 was $9,770, $10,613, and $13,597, respectively.
8. Advances, Investments and Equity Interests
The Company owns a non-controlling equity interest in two energy projects and one waste-to-energy project; all are located in Italy. Two of the projects are each 42% owned while the third is 49% owned by the
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
8. Advances, Investments and Equity Interests — (Continued)
Company. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.
| | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Balance Sheet Data: | | | | | | | |
| Current assets | | $ | 79,569 | | $ | 74,404 | |
| Other assets (primarily buildings and equipment) | | | 344,993 | | | 311,584 | |
| Current liabilities | | | 19,429 | | | 11,137 | |
| Other liabilities (primarily long-term debt) | | | 344,148 | | | 329,030 | |
| | |
|
| |
|
| |
| Net assets | | $ | 60,985 | | $ | 45,821 | |
| | |
|
| |
|
| |
| | | | | | | | |
For the year ended | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| | | | | | | |
| Total revenues | | $ | 168,421 | | $ | 156,639 | |
| Income before taxes | | | 31,013 | | | 21,290 | |
| Net earnings | | $ | 17,303 | | $ | 11,627 | |
As of December 27, 2002, the Company’s share of the net earnings and investment in the equity affiliates totaled $7,334 and $25,447, respectively. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $1,400 per year in total for the three projects.
The undistributed retained earnings of the Company’s equity investees amounted to $17,000 and $12,000 at December 27, 2002 and December 28, 2001.
Additionally, at December 27, 2002 the Company holds investments in unconsolidated affiliates of $47,958 and made advances of $21,141 to its third- party equity investees.
9. Bank Loans
The approximate weighted average interest rates on borrowings outstanding at the end of 2002 and 2001 were 4.14% and 4.49%, respectively.
The Company had unused lines of credit for short-term bank borrowings of $1,541 at the end of 2002.
Interest costs incurred in 2002, 2001, and 2000 were $702, $1,774 and $3,554, respectively.
10. Income Taxes
The components of (loss)/earnings before income taxes for the years 2002, 2001 and 2000 were taxed under the following jurisdictions:
| | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Domestic | | $ | 13,847 | | $ | 7,212 | | $ | (23,228 | ) |
| Foreign | | | (40,225 | ) | | 16,144 | | | 50,869 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | (26,378 | ) | | $23,356 | | | $27,641 | |
| | |
|
| |
|
| |
|
| |
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
10. Income Taxes — (Continued)
The provision/(benefit) for income taxes on those (loss)/earnings was as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Current tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | $ | 1,646 | | $ | 213 | | $ | 22 | |
| Foreign | | | 10,471 | | | 14,382 | | | 16,005 | |
| | |
|
| |
|
| |
|
| |
| Total current | | | 12,117 | | | 14,595 | | | 16,027 | |
| | |
|
| |
|
| |
|
| |
| Deferred tax (benefit)/expense: | | | | | | | | | | |
| Domestic | | | — | | | — | | | — | |
| Foreign | | | (2,588 | ) | | 2,822 | | | (6,435 | ) |
| | |
|
| |
|
| |
|
| |
| Total deferred | | | (2,588 | ) | | 2,822 | | | (6,435 | ) |
| | |
|
| |
|
| |
|
| |
| Total provision for income taxes | | $ | 9,529 | | $ | 17,417 | | $ | 9,592 | |
| | |
|
| |
|
| |
|
| |
Deferred tax liabilities (assets) consist of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Net operating loss carryforwards | | $ | (29,146 | ) | $ | (27,177 | ) | $ | (24,244 | ) |
| Valuation allowance | | | 36,324 | | | 21,970 | | | 18,617 | |
| Fixed assets and operating leases | | | (27,605 | ) | | (19,973 | ) | | (20,046 | ) |
| Pension | | | (38,603 | ) | | 29,742 | | | 28,485 | |
| Other | | | (644 | ) | | (1,596 | ) | | (910 | ) |
| Difference between book and tax recognition of income | | | 580 | | | 157 | | | (224 | ) |
| Tax credit carryforwards | | | (5,097 | ) | | (535 | ) | | (2,365 | ) |
| Contract and bonus reserve | | | (17,500 | ) | | (10,036 | ) | | (9,583 | ) |
| | |
|
| |
|
| |
|
| |
| Net deferred tax assets | | $ | (81,691 | ) | $ | (7,448 | ) | $ | (10,270 | ) |
| | |
|
| |
|
| |
|
| |
Tax credit carryforwards were generated in foreign subsidiaries and are not subject to expiration. As reflected above, the Company has recorded various deferred tax assets. Realization is dependent on generating sufficient taxable income. Management believes that it is more likely than not that the remaining net deferred tax assets (after consideration of the valuation allowance) will be realized through future earnings and/or tax planning strategies. The amount of the deferred tax assets considered realizable, however, could change in the near future if estimates of future taxable income during the carryforward period are changed. The valuation allowance increased by $14,354 and $3,353 in 2002 and 2001, respectively. Such increase is required under FASB 109, “Accounting for Income Taxes,” when there is an evidence of losses from domestic and foreign operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided in the current year do not begin expiring until 2020 and beyond, based on the current tax laws.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
10. Income Taxes — (Continued)
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to (loss)/earnings before income taxes, as a result of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Tax provision/(benefit) at U.S.statutory rate | | | (35.0 | %) | | 35.0 | % | | 35.0 | % |
| Permanent differences/non-deductible expenses | | | 94.7 | | | 6.3 | | | 13.9 | |
| AMT | | | 4.6 | | | 0.9 | | | — | |
| Valuation allowance | | | 54.7 | | | 14.4 | | | 0.5 | |
| Foreign rate differential | | | (6.1 | ) | | 16.9 | | | (1.5 | ) |
| Foreign tax credit utilized | | | (81.1 | ) | | — | | | — | |
| Fixed assets | | | — | | | — | | | (14.2 | ) |
| Other | | | 4.3 | | | 1.1 | | | 1.0 | |
| | |
|
| |
|
| |
|
| |
| | | 36.1 | % | | 74.6 | % | | 34.7 | % |
| | |
|
| |
|
| |
|
| |
11. Pensions, Postretirement and Other Employee Benefits
Pension Benefits — The Company’s subsidiaries in the United Kingdom and Canada have pension plan which cover all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation. At December 27, 2002, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $243,721 pre-tax, resulting in an after-tax charge to Other Comprehensive (Loss)/ Income of $170,303. As of December 27, 2001, the Company had prepaid costs of $103,164. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
The following chart contains the disclosures for pension benefits for the years 2002, 2001 and 2000.
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Projected Benefit Obligation (PBO) | | | | | | | |
| PBO at beginning of period | | $ | 352,316 | | $ | 330,017 | |
| Service cost | | | 12,374 | | | 11,248 | |
| Interest cost | | | 20,502 | | | 18,356 | |
| Plan participants contributions | | | 5,690 | | | 4,004 | |
| Plan amendments | | | 3,091 | | | 1,535 | |
| Actuarial loss | | | 73,212 | | | 4,209 | |
| Benefits paid | | | (16,810 | ) | | (16,303 | ) |
| Special termination benefits/other | | | (1,291 | ) | | (432 | ) |
| Foreign currency exchange rate changes | | | 38,649 | | | (318 | ) |
| | |
|
| |
|
| |
| PBO at end of period | | | 487,733 | | | 352,316 | |
| | |
|
| |
|
| |
Plan Assets | | | | | | | |
| Fair value of plan assets at beginning of period | | | 324,106 | | | 358,034 | |
| Actual return on plan assets | | | (45,489 | ) | | (24,093 | ) |
| Employer contributions | | | 24,757 | | | 6,897 | |
| Plan participant contributions | | | 5,690 | | | 4,004 | |
| Benefits paid | | | (16,810 | ) | | (16,303 | ) |
| Other | | | (8,805 | ) | | (416 | ) |
| Foreign currency exchange rate changes | | | 26,827 | | | (4,017 | ) |
| | |
|
| |
|
| |
| Fair value of plan assets at end of period | | | 310,276 | | | 324,106 | |
| | |
|
| |
|
| |
Funded Status | | | | | | | |
| Funded Status | | | (177,457 | ) | | (28,210 | ) |
| Unrecognized net actuarial loss/(gain) | | | 286,824 | | | 121,292 | |
| Unrecognized prior service cost | | | 11,305 | | | 10,082 | |
| Adjustment for the minimum liability | | | (243,721 | ) | | — | |
| | |
|
| |
|
| |
| Prepaid (accrued) benefit cost | | | (123,049 | ) | | 103,164 | |
| | |
|
| |
|
| |
| | | | | | | |
| | | | | | | | |
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Net Periodic Benefit Cost | | | | | | | | | | |
| Service cost | | $ | 12,374 | | $ | 11,248 | | $ | 12,140 | |
| Interest cost | | | 20,502 | | | 18,356 | | | 18,852 | |
| Expected return on plan assets | | | (25,757 | ) | | (31,311 | ) | | (33,497 | ) |
| Amortization of transition asset | | | 63 | | | 64 | | | 74 | |
| Amortization of prior service cost | | | 1,352 | | | 1,029 | | | 1,594 | |
| Recognized actuarial loss/(gain) other | | | 8,340 | | | 2,243 | | | (377 | ) |
| | |
|
| |
|
| |
|
| |
| Total SFAS No. 87 net periodic pension cost | | $ | 16,874 | | $ | 1,629 | | $ | (1,214 | ) |
| | |
|
| |
|
| |
|
| |
Weighted-Average Assumptions | | | | | | | | | | |
| Discount rate | | | 5.75 | % | | 5.75 | % | | 5.75 | % |
| Long-term rate of return | | | 8.00 | % | | 9.00 | % | | 9.00 | % |
| Salary scale | | | 4.00 | % | | 4.00 | % | | 4.00 | % |
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee for each year of the employee’s service, payable when the employee leaves the Company. In 2002, 2001 and 2000, the Company recorded an expense of approximately $3,300, $3,200, and $3,400, respectively. A liability of $20,639 in 2002 and $17,558 in 2001 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.
12. Sale/leaseback Transactions
The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $3,197, $3,080, and $2,777 for the years ended 2002, 2001, and 2000, respectively. As of December 27, 2002 and December 28, 2001, the balance of the deferred gains was $69,540, and $65,627, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.
13. Operating Leases
The Company and certain of its subsidiaries are obligated under other operating lease agreements primarily for office space. Rental expense for these leases totaled $16,084 in 2002, $16,481 in 2001, and $17,458 in 2000. Future minimum rental commitments on non- cancelable leases are as follows:
Fiscal year: | | | | |
| 2003 | | $ | 15,148 | |
| 2004 | | | 15,014 | |
| 2005 | | | 14,853 | |
| 2006 | | | 12,786 | |
| 2007 | | | 11,855 | |
| Thereafter | | | 146,594 | |
| | |
|
| |
| | $ | 216,250 | |
| | |
|
| |
14. Derivative Financial Instruments
The Company’s activities expose it to risks related to the effect of changes in the foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 27, 2002 a $2,721 pre-tax net gain on derivative instruments which is recorded as a reduction in cost of operating revenues on the consolidated statement of operations and comprehensive(loss)/ income. The Company is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. As of December 27, 2002, approximately $104,089 was owed to the Company by counterparties and $26,059 was owed by the Company to counterparties. A $6 net of tax loss was recorded in other comprehensive income as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
14. Derivative Financial Instruments — (Continued)
The maximum term over which the Company is hedging exposure to the variability of cash flows is twenty-four months.
A reconciliation of current period changes, net of applicable income taxes, in accumulated other comprehensive income relating to derivatives qualifying as cash flow hedges are as follows:
| Balance as of December 28, 2001 | | $ | (6 | ) |
| Reclassification to earnings | | | 6 | |
| | |
|
| |
| Balance at December 27, 2002 | | $ | — | |
| | |
|
| |
15. Warranty Reserves
The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.
| Balance as of December 28, 2001 | | $ | 18,100 | |
| Accruals | | | 13,100 | |
| Settlements | | | (1,500 | ) |
| Adjustments to provisions | | | (4,000 | ) |
| | |
|
| |
| Balance as of December 27, 2002 | | $ | 25,700 | |
| | |
|
| |
16. Litigation and Uncertainties
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 or plant construction and seeking resulting alleged damages. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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 material charges against assets or earnings materially in excess of amounts previously provided in the accounts. During 2002, approximately $5,000 was accrued related to exposures. This charge was recorded in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty.
17. Financial Instruments and Risk Management
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values:
Cash and Short-term Investments — All investments are considered available for sale and the carrying amount approximates fair value because of the short-term maturity of these instruments.
Long-term Debt — The fair value of the Company’s third-party long-term debt (including current installments) is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
17. Financial Instruments and Risk Management — (Continued)
Foreign Currency Contracts — The fair values of these financial instruments (used for hedging purposes) are estimated by obtaining quotes from brokers. The Company is exposed to market risks from fluctuations in foreign exchange rates. Financial instruments are utilized by the Company to reduce this risk. The Company does not hold or issue financial instruments for trading purposes. The Company is exposed to credit loss in the event of nonperformance by the counterparties. All of these financial instruments are with significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s.
Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:
| | 2002 | | 2001 | |
| | |
| |
| |
| | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value | |
| | |
|
| |
|
| |
|
| |
|
| |
Nonderivatives: | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 172,512 | | $ | 172,512 | | $ | 121,090 | | $ | 121,090 | |
| Restricted cash | | | 30,169 | | | 30,169 | | | — | | | — | |
| Third-party long-term debt | | | 424 | | | 424 | | | — | | | — | |
| Intercompany notes receivable - current | | | 161 | | | — | | | 7,210 | | | — | |
| Intercompany notes receivable - long-term | | | 25,883 | | | — | | | 20,718 | | | — | |
| Intercompany notes payable - current | | | 18,944 | | | — | | | 27,426 | | | — | |
| Intercompany notes payable - long-term | | | 134,372 | | | — | | | 129,283 | | | — | |
Derivatives: | | | | | | | | | | | | | |
| Foreign currency contracts | | | 2,721 | | | 2,721 | | | (10 | ) | | (10 | ) |
In the ordinary course of business, the Company is contingently liable for performance under letters of credit and bank guarantees totaling $263,654 and $200,444 as of December 27, 2002 and December 28, 2001, respectively. In the Company’s past experience, no material claims have been made against these financial instruments. Management of the Company does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero.
As of December 27, 2002, the Company had $130,148 of foreign currency contracts outstanding. These foreign currency 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 currencies or other currencies for which they have payment obligations to third parties.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and trade receivables. The Company places its cash equivalents with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. As of December 27, 2002 and December 28, 2001, the Company had no significant concentrations of credit risk.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
18. Related Party Transactions
The Company enters into long-term contracts as a subcontractor and/or performs subcontract work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive (loss)/income for 2002, 2001 and 2000 related to these contracts and intercompany borrowings is the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Operating revenues | | $ | 12,014 | | $ | 16,632 | | $ | 13,950 | |
| Cost of operating revenues | | | 25,965 | | | 46,284 | | | 55,625 | |
| Interest income | | | 6,299 | | | 6,362 | | | 10,038 | |
| Interest expense | | | 5,899 | | | 6,239 | | | 10,155 | |
Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $24,199, $15,925 and $19,666 in 2002, 2001 and 2000, respectively.
Included in the consolidated balance sheet for 2002 and 2001 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Accounts and notes receivable - other | | $ | 26,322 | | $ | 24,697 | |
| Intercompany notes receivable | | | 26,044 | | | 27,928 | |
| Accounts payable | | | 65,190 | | | 50,218 | |
| Intercompany notes payable | | | 153,316 | | | 156,709 | |
Also reflected in the consolidated balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s (deficit)/equity for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s (Deficit)/Equity and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $10,539 and an increase of $10,859 at December 27, 2002, and December 28, 2001, respectively.
Additionally, at December 27, 2002 the Company holds investments in unconsolidated affiliates of $47,433 at cost.
All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 27, 2002, December 28, 2001, and December 29, 2000.
19. Business Segments — Data
The business of the Company and its subsidiaries falls within two business segments. THE ENGINEERING AND CONSTRUCTION (“E&C”) GROUP designs, engineers and constructs petroleum, chemical, petrochemical and alternative-fuels facilities and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment, water treatment facilities and process plants for the production of fine chemicals, pharmaceuticals, dyestuffs, fragrances, flavors, food additives and vitamins. Also, the E&C Group provides a broad range of environmental remediation services, together with related technical, design and regulatory services. THE ENERGY GROUP designs, manufactures and erects steam generating and auxiliary equipment for power stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized-bed and conventional boilers firing coal, oil, gas, biomass and other municipal solid waste, waste wood and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment and low-NOX burners. Site services
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments — Data — (Continued)
related to these products encompass plant erection, maintenance engineering, plant upgrading and life extension and plant repowering. The Energy Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solids mechanics as well as facilities for the process and petrochemical industries.
The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues and operating income over the last ten years. In 2002, the E&C Group accounted for approximately 90% of the operating revenues. The geographic dispersion of these operating revenues was as follows: 44% Europe, 25% Asia, 16% Middle East, 5% South America and 10% other. The Energy Group accounted for 10% of the operating revenues of the Company. The geographic dispersion of these operating revenues was as follows: 68% North America, 14% Europe,11% Middle East, and 7% South America.
Earnings of segments represent revenues less expenses attributable to that group or geographic area where the operating units are located. Revenues between business segments are shown in the elimination column.
No single customer represented 10% or more of operating revenues for 2002, 2001, or 2000.
Identifiable assets by group are those assets that are directly related to and support the operations of each group.
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments — Data — (Continued)
Summary financial information concerning the Company’s reportable segments is shown in the following table:
| | | Total | | Engineering
and
Construction
Group | | Energy Group | | Eliminations | |
| | |
|
| |
|
| |
|
| |
|
| |
2002
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,681,402 | | $ | 1,507,064 | | $ | 175,445 | | $ | (1,107 | ) |
Interest income(1) | | | 11,278 | | | 10,305 | | | 1,481 | | | (508 | ) |
Interest expense(1) | | | 6,600 | | | 7,096 | | | 12 | | | (508 | ) |
Loss before income taxes(2) (3) | | | (26,378 | ) | | (20,719 | ) | | (5,659 | ) | | — | |
| Income taxes/(benefits) | | | 9,529 | | | 10,049 | | | (520 | ) | | — | |
| Net loss | | | (35,907 | ) | | (30,768 | ) | | (5,139 | ) | | — | |
| Identifiable assets | | | 851,633 | | | 850,298 | | | 92,914 | | | (91,579 | ) |
| Capital expenditures | | | 7,085 | | | 6,673 | | | 412 | | | — | |
| Depreciation and amortization | | | 9,917 | | | 8,874 | | | 1,043 | | | — | |
| | | | | | | | | | | | | | |
2001
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,545,752 | | $ | 1,359,564 | | $ | 186,656 | | $ | (468 | ) |
Interest income(1) | | | 12,427 | | | 11,112 | | | 1,507 | | | (372 | ) |
Interest expense(1) | | | 8,013 | | | 8,064 | | | 321 | | | (372 | ) |
(Loss)/earnings before income taxes(4) | | | 23,356 | | | 31,334 | | | (7,978 | ) | | — | |
| Income taxes/(benefits) | | | 17,417 | | | 21,302 | | | (3,885 | ) | | — | |
| Net (loss)/earnings | | | 5,939 | | | 10,032 | | | (4,093 | ) | | — | |
| Identifiable assets | | | 821,844 | | | 723,514 | | | 178,253 | | | (79,923 | ) |
| Capital expenditures | | | 8,953 | | | 7,621 | | | 1,332 | | | — | |
| Depreciation and amortization | | | 10,667 | | | 9,612 | | | 1,055 | | | — | |
| | | | | | | | | | | | | | |
2000
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,990,558 | | $ | 1,863,236 | | $ | 130,800 | | $ | (3,478 | ) |
Interest income(1) | | | 18,166 | | | 17,378 | | | 1,178 | | | (390 | ) |
Interest expense(1) | | | 13,710 | | | 13,560 | | | 540 | | | (390 | ) |
| Earnings before income taxes | | | 27,641 | | | 22,092 | | | 5,549 | | | — | |
| Income taxes/(benefits) | | | 9,592 | | | 7,480 | | | 2,112 | | | — | |
| Net earnings | | | 18,049 | | | 14,612 | | | 3,437 | | | — | |
| Identifiable assets | | | 952,651 | | | 800,818 | | | 172,934 | | | (21,101 | ) |
| Capital expenditures | | | 27,269 | | | 26,178 | | | 1,091 | | | — | |
| Depreciation and amortization | | | 13,632 | | | 12,663 | | | 969 | | | — | |
| | | | | | | | | | | | | | |
| | | |
| | (1) | Includes intercompany interest charged on outstanding intercompany borrowings. |
| | | |
| | (2) | Includes in 2002, revaluation of contract estimates and provisions for uncollectible receivables of $65,300 ($60,500 after tax): E&C Group $60,000, Energy Group $5,000. |
| | | |
| | (3) | Includes in 2002, $6,000 ($5,700 net of tax) accrual for legal settlements and development cost in the E&C Group. |
| | | |
| | (4) | Includes in 2001, contract write-downs of $35,500 ($23,100 after-tax): E&C Group $24,000, Energy Group $11,500. |
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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
19. Business Segments — Data — (Continued)
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Equity earnings in unconsolidated subsidiaries were as follows: | | | | | | | | | | |
| Engineering and Construction Group | | $ | 7,334 | | $ | 4,433 | | $ | 6,719 | |
| Energy Group | | | — | | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 7,334 | | $ | 4,433 | | $ | 6,719 | |
| | |
|
| |
|
| |
|
| |
Geographic Concentration | | | | | | | | | | |
Revenues: | | | | | | | | | | |
| United States | | $ | 7,580 | | $ | 13,438 | | $ | 17,383 | |
| Europe | | | 1,534,263 | | | 1,401,440 | | | 1,889,129 | |
| Canada | | | 139,559 | | | 130,874 | | | 84,046 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,681,402 | | $ | 1,545,752 | | $ | 1,990,558 | |
| | |
|
| |
|
| |
|
| |
Long-lived assets: | | | | | | | | | | |
| United States | | $ | 276 | | $ | (841 | ) | $ | 118 | |
| Europe | | | 124,388 | | | 105,612 | | | 118,900 | |
| Canada | | | 1,537 | | | 1,958 | | | 1,511 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 126,201 | | $ | 106,729 | | $ | 120,529 | |
| | |
|
| |
|
| |
|
| |
Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.
Operating revenues by industry segment for the three years ending December 2002 were as follows:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Power | | $ | 281,887 | | $ | 191,702 | | $ | 186,030 | |
| Oil and gas/refinery | | | 697,024 | | | 653,888 | | | 1,115,476 | |
| Pharmaceutical | | | 383,101 | | | 431,677 | | | 270,590 | |
| Chemical | | | 154,014 | | | 174,482 | | | 309,024 | |
| Environmental | | | 50,315 | | | 6,841 | | | 33,420 | |
| Eliminations and other | | | 67,969 | | | 32,989 | | | 18,832 | |
| | |
|
| |
|
| |
|
| |
| Total Operating Revenues | | $ | 1,634,310 | | $ | 1,491,579 | | $ | 1,933,372 | |
| | |
|
| |
|
| |
|
| |
20. Security Pledged as Collateral
Foster Wheeler LLC (“FWLLC”) issued $200,000 Notes in the public market, which bear interest at a fixed rate of 6.75% (the “6.75% Notes”). Holders of the 6.75% Notes due November 15, 2005 have a security interest in the stock and debt of FWLLC’s subsidiaries and on facilities owned by FWLLC 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. This security interest includes the stock and debt of the Company. The Term Loan and the obligations under the letter of credit facility (collectively approximately $184,700 at December 27, 2002) have priority to the 6.75% Notes in these assets while security interest of 6.75% Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.
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| |
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Consolidated Financial Statements
For the three years ended December 31, 2002 |
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| Report of Independent Auditors |
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive (loss)/income, of cash flows and of shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler Europe Limited and its subsidiaries (the “Company”), an indirect, wholly owned subsidiary of Foster Wheeler Ltd. (the “Parent”) at December 31, 2002 and December 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939,000 at December 27, 2002. The Parent has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, the Parent received waivers for covenant violations and ultimately negotiated new credit facilities, in August 2002. The Parent was unable to comply with certain debt covenants under the new credit facility agreement and therefore obtained an amendment of such agreement. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to generate cash flows from operations, assets sales and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the Parent maintaining credit facilities and bonding capacity adequate to conduct its business. The stock and debt of the Company has been pledged as collateral to the holders of the $200,000,000 Senior Notes issued by the Parent. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 25, 2003
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Foster Wheeler Europe Limited and Subsidiaries
Consolidated Statement of Operations and Comprehensive (Loss)/Income
(in thousands of dollars)
| | | For the Year Ended December 31, | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Revenues: | | | | | | | | | | |
| Operating revenues | | $ | 1,421,443 | | $ | 1,218,999 | | $ | 1,682,492 | |
| Interest income (including $7,084 in 2002, $6,370 in 2001 and $6,376 in 2000 with affiliates) | | | 11,674 | | | 11,567 | | | 13,759 | |
| Other income | | | 25,663 | | | 29,906 | | | 33,332 | |
| | |
|
| |
|
| |
|
| |
| Total Revenues | | | 1,458,780 | | | 1,260,472 | | | 1,729,583 | |
| | |
|
| |
|
| |
|
| |
Costs and Expenses: | | | | | | | | | | |
| Cost of operating revenues | | | 1,399,219 | | | 1,152,513 | | | 1,615,088 | |
| Selling, general and administrative expenses | | | 63,804 | | | 61,312 | | | 64,413 | |
| Other deductions | | | 22,004 | | | 3,959 | | | 5,108 | |
| Minority interest | | | — | | | (19 | ) | | 5 | |
| Interest expense (including $22,558 in 2002, $24,951 in 2001 and $4,505 in 2000 with affiliates) | | | 23,248 | | | 26,406 | | | 7,693 | |
| | |
|
| |
|
| |
|
| |
| Total Costs and Expenses | | | 1,508,275 | | | 1,244,171 | | | 1,692,307 | |
| | |
|
| |
|
| |
|
| |
| (Loss)/earnings before income taxes | | | (49,495 | ) | | 16,301 | | | 37,276 | |
| (Benefit)/provision for income taxes | | | (923 | ) | | 17,595 | | | 4,918 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings | | | (48,572 | ) | | (1,294 | ) | | 32,358 | |
| | |
|
| |
|
| |
|
| |
| Other comprehensive income/(loss): | | | | | | | | | | |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of taxes of $364) | | | — | | | (674 | ) | | — | |
| Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $22 in 2002 and $342 in 2001) | | | 42 | | | 632 | | | — | |
| Change in accumulated translation adjustment during the year | | | 43,945 | | | (12,154 | ) | | (18,768 | ) |
| Minimum pension liability adjustment (net of tax benefits of $71,305 in 2002) | | | (166,380 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Comprehensive (loss)/income | | $ | (170,965 | ) | $ | (13,490 | ) | $ | 13,590 | |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler Europe Limited and Subsidiaries
Consolidated Balance Sheet
(in thousands of dollars)
| | | December 31,
| |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | $ | 146,447 | | $ | 86,730 | |
| Short-term investments | | | 41 | | | 36 | |
| Accounts and notes receivable: | | | | | | | |
| Trade | | | 228,022 | | | 253,240 | |
| Other (including $21,186 in 2002 and $29,477 in 2001 with affiliates) | | | 35,973 | | | 44,237 | |
| Intercompany notes | | | 4,310 | | | 25,561 | |
| Contracts in process | | | 56,828 | | | 54,258 | |
| Inventories | | | 1,445 | | | 1,136 | |
| Prepaid, deferred and refundable income taxes | | | 39,285 | | | 19,050 | |
| Prepaid expenses | | | 6,750 | | | 5,500 | |
| | |
|
| |
|
| |
| Total current assets | | | 519,101 | | | 489,748 | |
| | |
|
| |
|
| |
| Land, buildings and equipment | | | 112,979 | | | 106,555 | |
| Less accumulated depreciation | | | 83,778 | | | 77,909 | |
| | |
|
| |
|
| |
| Net book value | | | 29,201 | | | 28,646 | |
| | |
|
| |
|
| |
| Restricted cash | | | 30,169 | | | — | |
| Notes and accounts receivable—long-term | | | 1,425 | | | 1,753 | |
| Intercompany notes receivable—long-term | | | — | | | 20,718 | |
| Investment and advances | | | 93,626 | | | 74,588 | |
| Prepaid pension cost and related benefit assets | | | — | | | 97,753 | |
| Other assets | | | 8,668 | | | 4,866 | |
| Deferred income taxes | | | 66,799 | | | 4,808 | |
| | |
|
| |
|
| |
| TOTAL ASSETS | | $ | 748,989 | | $ | 722,880 | |
| | |
|
| |
|
| |
LIABILITIES AND SHAREHOLDER’S DEFICIT | | | | | | | |
Current Liabilities: | | | | | | | |
| Current installments on long-term debt | | $ | 105 | | $ | — | |
| Bank loans | | | 13,266 | | | 14,450 | |
| Accounts payable (including $66,545 in 2002 and $47,431 in 2001 with affiliates) | | | 180,234 | | | 169,950 | |
| Accrued expenses | | | 80,820 | | | 57,216 | |
| Intercompany notes payable | | | 13,606 | | | 17,351 | |
| Estimated costs to complete long-term contracts | | | 201,024 | | | 143,652 | |
| Advance payments by customers | | | 51,544 | | | 18,956 | |
| Income taxes | | | 31,260 | | | 21,362 | |
| | |
|
| |
|
| |
| Total current liabilities | | | 571,859 | | | 442,937 | |
| | |
|
| |
|
| |
| Long-term debt less current installments | | | 319 | | | — | |
| Intercompany notes payable—long-term | | | 309,795 | | | 373,400 | |
| Deferred income taxes | | | 5,281 | | | 11,765 | |
| Pension, postretirement and other employee benefits | | | 141,540 | | | 16,853 | |
| Other long-term liabilities and minority interest | | | 69,884 | | | 66,219 | |
| | |
|
| |
|
| |
| TOTAL LIABILITIES | | | 1,098,678 | | | 911,174 | |
| | |
|
| |
|
| |
Shareholder’s Deficit | | | | | | | |
Common Stock—$1,456 par value; authorized 10,000,000
shares; issued 5,000,000 | | | 7,280 | | | 7,280 | |
| Capitalization of intercompany notes receivable | | | (41,259 | ) | | (50,829 | ) |
| Accumulated deficit | | | (107,983 | ) | | (59,411 | ) |
| Accumulated other comprehensive loss | | | (207,727 | ) | | (85,334 | ) |
| | |
|
| |
|
| |
| TOTAL SHAREHOLDER’S DEFICIT | | | (349,689 | ) | | (188,294 | ) |
| | |
|
| |
|
| |
| TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT | | $ | 748,989 | | $ | 722,880 | |
| | |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler Europe Limited and Subsidiaries
Consolidated Statement of Changes in Shareholder’s Deficit
(in thousands of dollars)
| | | December 31, | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Common Stock | | | | | | | | | | |
| Balance at beginning and end of year | | $ | 7,280 | | $ | 7,280 | | $ | 7,280 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Capitalization of Intercompany Notes Receivable | | | | | | | | | | |
| Balance at beginning of year | | | (50,829 | ) | | (10,081 | ) | | (34,345 | ) |
| Current year activity | | | 9,570 | | | (40,748 | ) | | 24,264 | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (41,259 | ) | | (50,829 | ) | | (10,081 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Accumulated Deficit | | | | | | | | | | |
| Balance at beginning of year | | | (59,411 | ) | | (58,117 | ) | | (90,475 | ) |
| Net (loss)/earnings for the year | | | (48,572 | ) | | (1,294 | ) | | 32,358 | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (107,983 | ) | | (59,411 | ) | | (58,117 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Accumulated Other Comprehensive Loss | | | | | | | | | | |
| Balance at beginning of year | | | (85,334 | ) | | (73,138 | ) | | (54,370 | ) |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of taxes of $364 in 2001) | | | — | | | (674 | ) | | — | |
| Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $22 in 2002 and $342 in 2001) | | | 42 | | | 632 | | | — | |
| Change in accumulated translation adjustment during the year | | | 43,945 | | | (12,154 | ) | | (18,768 | ) |
| Minimum pension liability adjustment (net of tax benefits of $71,305 in 2002) | | | (166,380 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
| Balance at end of year | | | (207,727 | ) | | (85,334 | ) | | (73,138 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Total Shareholder’s Deficit | | $ | (349,689 | ) | $ | (188,294 | ) | $ | (134,056 | ) |
| | |
|
| |
|
| |
|
| |
See notes to consolidated financial statements.
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Foster Wheeler Europe Limited and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands of dollars)
| | | For the Year Ended December 31, | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
| Net (loss)/earnings | | | (48,572 | ) | $ | (1,294 | ) | $ | 32,358 | |
| Adjustments to reconcile net (loss)/earnings to cash flows from operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 8,786 | | | 9,460 | | | 12,472 | |
| Deferred tax | | | 491 | | | 2,240 | | | (2,077 | ) |
| Net gain on asset sales | | | (3,506 | ) | | (11,043 | ) | | (11,644 | ) |
| Equity earnings, net of dividends | | | (9,608 | ) | | (6,410 | ) | | (8,689 | ) |
| Other noncash items | | | 9,287 | | | (7,295 | ) | | 4,462 | |
| Changes in assets and liabilities: | | | | | | | | | | |
| Receivables | | | 63,423 | | | 69,336 | | | 12,866 | |
| Contracts in process and inventories | | | 2,041 | | | 19,277 | | | 696 | |
| Accounts payable and accrued expenses | | | 16,254 | | | (13,748 | ) | | (11,542 | ) |
| Estimated costs to complete long-term contracts | | | 42,368 | | | (30,623 | ) | | (28,479 | ) |
| Advance payments by customers | | | 31,274 | | | (17,998 | ) | | (622 | ) |
| Income taxes | | | (10,060 | ) | | 5,421 | | | (10,526 | ) |
| Other assets and liabilities | | | (7,458 | ) | | (4,503 | ) | | (716 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash provided/(used) by operating activities | | | 94,720 | | | 12,820 | | | (11,441 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Change in restricted cash | | | (30,169 | ) | | — | | | — | |
| Capital expenditures | | | (6,954 | ) | | (7,618 | ) | | (26,486 | ) |
| Proceeds from sale of assets | | | 768 | | | 14,805 | | | 51,537 | |
| Decrease in investments and advances | | | 6,357 | | | 14,377 | | | 12,676 | |
| (Increase)/decrease in short-term investments | | | (6 | ) | | 29 | | | 727 | |
| | |
|
| |
|
| |
|
| |
| Net cash (used)/provided by investing activities | | | (30,004 | ) | | 21,593 | | | 38,454 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Capitalization of intercompany notes receivable | | | 9,570 | | | (40,748 | ) | | 24,264 | |
| Change in notes payable to affiliates | | | (22,009 | ) | | (2,337 | ) | | (11,215 | ) |
| Payments of long-term debt | | | (619 | ) | | — | | | (2,199 | ) |
| (Decrease)/increase in bank loans | | | (2,122 | ) | | 5,231 | | | (24,237 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash used by financing activities | | | (15,180 | ) | | (37,854 | ) | | (13,387 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 10,181 | | | (9,119 | ) | | 6,463 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | | | 59,717 | | | (12,560 | ) | | 20,089 | |
| Cash and cash equivalents at beginning of year | | | 86,730 | | | 99,290 | | | 79,201 | |
| | |
|
| |
|
| |
|
| |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 146,447 | | $ | 86,730 | | $ | 99,290 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | |
| Interest | | $ | 4,252 | | $ | 6,036 | | $ | 6,562 | |
| Income taxes | | $ | 2,655 | | $ | 7,325 | | $ | 14,544 | |
See notes to consolidated financial statements.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands of dollars)
1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries
Foster Wheeler Europe Limited (the “Company”) is a wholly-owned subsidiary of Foster Wheeler International Corporation which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to provide design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company principally operates under one segment, primarily outside of the United States with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore and South Africa.
The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and the cash flows of the Company have been impacted by these transactions and relationships as discussed in Notes 2 and 18.
The functional currency of the Company is the Pound Sterling and the reporting currency is the U.S. dollar.
2. Liquidity and Going Concern
The accompanying 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, Foster Wheeler Ltd.’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 Foster Wheeler Ltd. maintaining credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939 at December 27, 2002. Foster Wheeler Ltd. has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, Foster Wheeler Ltd. 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 Foster Wheeler Ltd. will do so during 2003. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. Foster Wheeler Ltd.’s plans in regard to these matters are described below.
In August 2002, Foster Wheeler Ltd. 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. Foster Wheeler Ltd. retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the facility commence at the end of the first quarter 2003 and include a senior leverage ratio and a minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) level as described in the agreement, as amended. With the sale of Foster Wheeler Environmental Corporation on March 7, 2003, cumulative sales proceeds received, as defined in the agreement, approximate $75,000.
Amendment No. 1 to the Credit Agreement, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by Foster Wheeler Ltd. 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. In the
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
2. Liquidity and Going Concern — (Continued)
4th quarter 2002, $11,000 of the contingency risks were favorably resolved, and additional project reserves were established for $19,000 leaving a contingency balance of $33,000.
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, Foster Wheeler Ltd. made a prepayment of principal in the aggregate amount of $10,000.
Due to Foster Wheeler Ltd.’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 Foster Wheeler Ltd. can successfully effect any of the foregoing.
During the third quarter of 2002, Foster Wheeler Ltd. also completed a receivables financing arrangement of up to $40,000. The funding available to Foster Wheeler Ltd. is dependent on the amount and characteristics of the domestic receivables. The amount available to Foster Wheeler Ltd. fluctuates daily, but Foster Wheeler Ltd. estimates that approximately $15,000 to $20,000 will be available during 2003. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commence at the end of the first quarter of 2003 and 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. As of December 27, 2002, Foster Wheeler Ltd. had $0 borrowings outstanding under this facility.
Foster Wheeler Ltd. initiated a comprehensive plan to enhance cash generation and to improve profitability during 2002. Management’s comprehensive plan to address Foster Wheeler Ltd.’s domestic liquidity issues included generating approximately $150,000 from asset sales, collection of receivables and resolving disputed claims through the end of the first quarter 2003, and an additional $40,000 over the following six months. As of December 27, 2002, Foster Wheeler Ltd. generated approximately $60,000 through these efforts, and with the sale of the operating business of Foster Wheeler Environmental Corporation on March 7, 2003, an additional $80,000 has been generated. An additional $10,000 has also been received through more efficient working capital management. The $40,000 is still expected to be received from asset sales and claims recoveries over the course of the year 2003. 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 Foster Wheeler Ltd.’s working capital needs through the first quarter of 2004. Failure by Foster Wheeler Ltd. to achieve its forecast could have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition.
3. Summary of Significant Accounting Policies
Principles of Consolidation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler Europe Limited and all significant subsidiary companies. All significant intercompany transactions and balances have been eliminated.
The Company’s fiscal year ends on December 31.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes and contingencies, among others. At December 31, 2002, 2001, and 2000, the Company recorded commercial claims of $0, $50,200 and $52,700 respectively. The decreases in recorded claims resulted from the collection of $6,500 in 2002 and a 2002 provision established for the outstanding balance of commercial claims. The Company revised its estimates in 2002 of claim revenues to reflect recent adverse recovery experience, management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company.
Revenue Recognition on Long-term Contracts — Revenues and profits on long term fixed price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using the cost-to-cost method, the efforts-expended method or variations thereof. These methods are applied consistently to all contracts having similar characteristics in similar circumstances. Under the cost-to-cost method, revenues and profits are recognized based on the ratio that costs incurred bear to total estimated costs. Under the efforts-expended method, revenue and profits are recognized based on the ratio that incurred labor hours bear to total estimated labor hours. Variations of these two methods are used on multiyear contracts that require significant engineering effort and multiple delivery of units. These methods are subject to physical verification of actual progress towards completion.
Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.
Contracts in progress are stated at cost increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.”
The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. The Company requires 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 its parent.
Restricted Cash — Restricted cash consists of approximately $30,000 at December 31, 2002, that the Company was required to deposit to collateralize letters of credit and bank guarantees.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific identification method. For the years ended December 31, 2002, 2001 and 2000, the investment balances and realized and unrealized gains and losses were immaterial.
Trade Accounts Receivable — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld, which might not be received within a one-year period, are indicated in Note 5. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets. Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.
Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliated companies of $21,186 at December 31, 2002, and $29,477 at December 31, 2001, and foreign refundable value-added tax.
Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement was not material to the Company.
Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses the accounting for long-lived assets to be disposed of by sale and resolves significant implementation issues relating to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The provisions of this statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company’s results of operations and financial position were not affected by the initial adoption of this statement.
Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
cost method is appropriate. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates are recorded using the cost method.
Income Taxes — Income tax expense in the Company's statements of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Cumulative translation adjustment at beginning of year | | $ | (85,292 | ) | $ | (73,138 | ) | $ | (54,370 | ) |
| Current year foreign currency adjustment | | | 43,945 | | | (12,154 | ) | | (18,768 | ) |
| | |
|
| |
|
| |
|
| |
| Cumulative translation adjustment at end of year | | $ | (41,347 | ) | $ | (85,292 | ) | $ | (73,138 | ) |
| | |
|
| |
|
| |
|
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
|
| Foreign currency transaction (loss)/gain | | $ | (1,600 | ) | $ | 2,651 | | $ | 4,837 | |
| Foreign currency transaction (loss)/gain, net of tax | | | (1,040 | ) | | 1,723 | | | 3,144 | |
The Company enters into foreign exchange contracts in its management of foreign currency exposures related to commercial contracts. Changes in the fair value of derivative contracts that qualify as designated cash flow hedges are deferred until the hedged forecasted transaction affects earnings. Amounts receivable (gains) or payable (losses) under foreign exchange hedges are recognized as deferred gains or losses and are included in either contracts in process or estimated costs to complete long-term contracts. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 31, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2002 an after-tax gain on derivative instruments of approximately $1,732.
Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
Stock Option Plans — Foster Wheeler Ltd. has two fixed option plans which reserve shares of common stock for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of the SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock Based Compensation – Transition and Disclosure.” Accordingly, no compensation cost has been recognized by the Company relating to these stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards in 2002, 2001, and 2000 consistent with the provisions of SFAS No. 123, the Company’s net earnings would have been reduced to the pro forma amounts indicated below:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings - as reported | | $ | (48,572 | ) | $ | (1,294 | ) | $ | 32,358 | |
| | |
|
| |
|
| |
|
| |
| Net (loss)/earnings - pro forma | | $ | (49,157 | ) | $ | (1,597 | ) | $ | 32,183 | |
| | |
|
| |
|
| |
|
| |
The assumption regarding the stock options issued in 2002, 2001, and 2000 was that 100% of such options vested in the year of grant.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Dividend yield | | | 0.00 | % | | 1.36 | % | | 3.18 | % |
| Expected volatility | | | 83.62 | % | | 79.20 | % | | 59.20 | % |
| Risk-free interest rate | | | 2.90 | % | | 4.23 | % | | 6.46 | % |
| Expected life (years) | | | 5.0 | | | 5.0 | | | 5.0 | |
Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 5,300,000.
These plans provide that shares granted be issued from Foster Wheeler Ltd.’s authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. An option may not be exercised within one year from the date of grant and no option will be exercisable after ten years from the date of grant.
Information as of and for the years ended December 31, 2002, 2001 and 2000 relating to options granted to Company personnel and options available for grant is as follows (presented in actual number of shares):
| | | 2002 | | 2001 | | 2000 | |
| | |
| |
| |
| |
| | | | | Weighted | | | | Weighted | | | | Weighted | |
| | | | | Average | | | | Average | | | | Average | |
| | | | | Exercise | | | | Exercise | | | | Exercise | |
| | | Shares | | Price | | Shares | | Price | | Shares | | Price | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding, beginning of year | | | 623,233 | | $ | 17.75 | | | 480,983 | | $ | 21.51 | | | 412,233 | | $ | 23.67 | |
| Options exercised | | | — | | | | | | (24,000 | ) | | 9.56 | | | — | | | — | |
| Options granted | | | 811,090 | | | 1.64 | | | 166,250 | | | 5.69 | | | 74,000 | | | 9.00 | |
| Options cancelled or expired | | | (6,000 | ) | | 9.98 | | | — | | | — | | | (5,250 | ) | | 15.06 | |
| |
| | | | |
| | | | |
| | | | |
Options outstanding, end of
year | | | 1,428,323 | | $ | 8.63 | | | 623,233 | | $ | 17.75 | | | 480,983 | | $ | 21.51 | |
| |
| | | | |
| | | | |
| | | | |
| Option price range at end of year | | $ | 1.64 - $42.1875 | | | | | $ | 5.6875 - $42.1875 | | | | | $ | 9.00 - $42.1875 | | | | |
| Option price range for exercised shares | | | | | | | | $ | 9.00 - $13.50 | | | | | | | | | | |
| Options available for grant at end of year | | | 445,069 | | | | | | 430,180 | | | | | | 1,029,180 | | | | |
| |
| | | | |
| | | | |
| | | | |
| Weighted-average fair value of options granted during the year | | $ | 1.11 | | | | | $ | 2.80 | | | | | $ | 3.63 | | | | |
| Options exercisable at end of year | | | 617,233 | | | | | | 456,983 | | | | | | 406,983 | | | | |
| Weighted-average of exercisable options at end of year | | $ | 17.82 | | | | | $ | 22.13 | | | | | $ | 23.78 | | | | |
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
The following table summarizes information about fixed-price stock options outstanding as of December 31, 2002:
| | | Options Outstanding | | Options Exercisable | |
| | |
| |
| |
| Range of Exercise Prices | | Number
Outstanding
at 12/31/02 | | Weighted-
Average
Remaining
Contractual
Life | | Weighted-
Average
Exercise
Price | | Number
Exercisable
at 12/31/02 | | Weighted-
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| $29.75 | | | 59,900 | | | 3 years | | $ | 29.75 | | | 59,900 | | $ | 29.75 | |
| 42.1875 | | | 14,583 | | | 4 years | | | 42.19 | | | 14,583 | | | 42.19 | |
| 36.9375 | | | 61,000 | | | 5 years | | | 36.94 | | | 61,000 | | | 36.94 | |
| 27.625 | | | 86,000 | | | 6 years | | | 27.63 | | | 86,000 | | | 27.63 | |
| 13.50 to 15.0625 | | | 179,750 | | | 7 years | | | 14.30 | | | 179,750 | | | 14.30 | |
| 9.00 | | | 53,000 | | | 8 years | | | 9.00 | | | 53,000 | | | 9.00 | |
| 5.6878 | | | 163,000 | | | 9 years | | | 5.69 | | | 163,000 | | | 5.69 | |
| 1.64 | | | 811,090 | | | 10 years | | | 1.64 | | | — | | | — | |
| |
| | | | | | | |
| | | | |
| | | | 1,428,323 | | | | | | | | | 617,233 | | | | |
| | |
| | | | | | | |
| | | | |
Recent Accounting Developments —In June 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds previous statements regarding the extinguishment of debt and amends SFAS No. 13, “Accounting for Leases” to eliminate an inconsistency between the required accounting for sale/leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale/leaseback transactions. The provisions of SFAS 145 related to the extinguishment of debt are to be applied to fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to the amendment of SFAS 13 are effective for transactions occurring after May 15, 2002. The adoption of this new standard will not impact the Company.
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires liabilities associated with an exit or disposal activity be recognized at fair value when the liability is incurred. This contrasts with existing accounting requirements, under which liabilities for exit or disposal activities are recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, although early adoption is permitted. The Company implemented SFAS 146 in the fourth quarter of 2002 and there was no impact on the Company.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. FIN 45 also incorporates, without change, the guidance in FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded.
This Interpretation does not apply to certain guarantee contracts and the provisions related to recognizing a liability at inception for the fair value of the guarantor’s obligation do not apply to the following:
b. Guarantees that are accounted for as derivatives
c. Guarantees that represent contingent consideration in a business combination
</R>
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
d. Guarantees for which the guarantor’s obligations would be reported as an equity item (rather than a liability)
e. An original lessee’s guarantee of lease payments when that lessee remains secondarily liable in conjunction with being relieved from being the primary obligor (that is, the principal debtor) under a lease restructuring
f. Guarantees issued between either parents and their subsidiaries or corporations under common control
g. A parent’s guarantee of a subsidiary’s debt to a third party, and a subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent.
However, the guarantees described in (a)-(g) above are subject to the disclosure requirements.
The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company in its 2002 consolidated financial statements has implemented the disclosure requirements of this interpretation.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS 123 to require prominent disclosures, in both interim and annual financial statements, about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The provisions of this standard relating to the fair value measurements do not affect the Company as it accounts for stock-based employee compensation under the provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” as permitted under SFAS 123. The Company in its 2002 financial statements has implemented the disclosure requirements of this standard.
4. Research and Development
For the years 2002, 2001, and 2000, approximately $0, $300 and $400, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $2,300, $2,400 and $3,100, respectively, were spent on customer-sponsored research activities.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
5. Accounts and Notes Receivable - Trade
The following tabulation shows the components of trade accounts and notes receivable:
At December 31, | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| From long-term contracts: | | | | | | | |
| Amounts billed due within one year | | $ | 122,459 | | $ | 125,582 | |
| Retention - Billed: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 7,230 | |
| 2003 | | | 18,574 | | | 2,243 | |
| 2004 | | | 5,702 | | | — | |
| | |
|
| |
|
| |
| Total billed | | | 24,276 | | | 9,473 | |
| | |
|
| |
|
| |
| Retention - Unbilled: | | | | | | | |
| Estimated to be due in: | | | | | | | |
| 2002 | | | — | | | 109,610 | |
| 2003 | | | 84,626 | | | 9,537 | |
| 2006 | | | 4 | | | — | |
| | |
|
| |
|
| |
| Total unbilled | | | 84,630 | | | 119,147 | |
| | |
|
| |
|
| |
| Total retentions | | | 108,906 | | | 128,620 | |
| | |
|
| |
|
| |
| Gross Trade Accounts and Notes Receivable | | | 231,365 | | | 254,202 | |
| Less allowance for doubtful accounts | | | 3,343 | | | 962 | |
| | |
|
| |
|
| |
| Net Trade Accounts and Notes Receivable | | $ | 228,022 | | $ | 253,240 | |
| | |
|
| |
|
| |
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.
Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.
Changes in the allowance for doubtful accounts during the periods ended December 31, 2000 through 2002 are presented below.
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Balance at beginning of year | | $ | 962 | | $ | 2,426 | | $ | 701 | |
| Additions charged to expense | | | 9,874 | | | 153 | | | 228 | |
| (Deductions)/amounts recovered | | | (7,493 | ) | | (1,617 | ) | | 1,497 | |
| | |
|
| |
|
| |
|
| |
Balance at end of year | | $ | 3,343 | | $ | 962 | | $ | 2,426 | |
| | |
|
| |
|
| |
|
| |
The additions charged to expense are included in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
6. Contracts in Process and Inventories
The following tabulation shows the elements included in contract in process as related to long-term contracts:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Contracts in Process | | | | | | | |
| Costs plus accrued profits less earned revenues on contracts currently in process | | $ | 56,828 | | $ | 58,545 | |
| Less progress payments | | | — | | | 4,287 | |
| | |
|
| |
|
| |
| Net | | $ | 56,828 | | $ | 54,258 | |
| | |
|
| |
|
| |
Costs of inventories are shown below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Inventories | | | | | | | |
| Materials and supplies | | $ | 1,222 | | $ | 804 | |
| Finished goods | | | 223 | | | 332 | |
| | |
|
| |
|
| |
| | $ | 1,445 | | $ | 1,136 | |
| | |
|
| |
|
| |
7. Land, Buildings and Equipment
Land, buildings and equipment are stated at cost and are set forth below:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Land and land improvements | | $ | 328 | | $ | 290 | |
| Buildings | | | 21,373 | | | 22,927 | |
| Equipment | | | 91,211 | | | 83,079 | |
| Construction in progress | | | 67 | | | 259 | |
| | |
|
| |
|
| |
| | $ | 112,979 | | $ | 106,555 | |
| | |
|
| |
|
| |
Depreciation expense for the years 2002, 2001, and 2000 was $8,639, $9,427, and $12,438, respectively.
8. Advances, Investments and Equity Interests
The Company owns a non-controlling equity interest in two energy projects and one waste-to-energy project; all are located in Italy. Two of the projects are each 42% owned while the third is 49% owned by the Company. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.
At December 31, | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Balance Sheet Data: | | | | | | | |
| Current assets | | $ | 79,569 | | $ | 74,404 | |
| Other assets (primarily buildings and equipment) | | | 344,993 | | | 311,584 | |
| Current liabilities | | | 19,429 | | | 11,137 | |
| Other liabilities (primarily long-term debt) | | | 344,148 | | | 329,030 | |
| | |
|
| |
|
| |
| Net assets | | $ | 60,985 | | $ | 45,821 | |
| | |
|
| |
|
| |
| | | | | | | | |
For the year ended December 31, | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Total revenues | | $ | 168,421 | | $ | 156,639 | |
| Income before taxes | | | 31,013 | | | 21,290 | |
| Net earnings | | $ | 17,303 | | $ | 11,627 | |
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
8. Advances, Investments and Equity Interests — (Continued)
As of December 31, 2002, the Company’s share of the net earnings and investment in the equity affiliates totaled $7,334 and $25,447, respectively. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $1,400 per year in total for the three projects.
The undistributed retained earnings of the Company’s equity investees amounted to approximately $17,000 and $12,000 at December 31, 2002 and 2001, respectively.
Additionally, at December 31, 2002, the Company holds investments in unconsolidated affiliates of $47,038 at cost and has made advances of $21,141 to its third-party equity investees.
9. Bank Loans
The approximate weighted average interest rates on borrowings outstanding at the end of 2002 and 2001 were 4.14% and 4.49%, respectively.
The Company had unused lines of credit for short-term bank borrowings of $1,541 at the end of 2002.
Interest costs incurred on bank loans in 2002, 2001, and 2000 were $690, $1,455 and $3,188, respectively.
10. Income Taxes
The Company’s (losses)/earnings before income taxes for the years 2002, 2001 and 2000 were taxed under foreign jurisdictions.
The provision for income taxes on those earnings was as follows:
| | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Current tax expense | | $ | 2,357 | | $ | 12,591 | | $ | 11,662 | |
| Deferred tax (benefit)/expense | | | (3,280 | ) | | 5,004 | | | (6,744 | ) |
| | |
|
| |
|
| |
|
| |
| Total (benefit)/provision for income taxes | | $ | (923 | ) | $ | 17,595 | | $ | 4,918 | |
| | |
|
| |
|
| |
|
| |
Deferred tax (assets) liabilities consist of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Net operating loss carryforwards | | $ | (29,146 | ) | $ | (24,566 | ) | $ | (18,085 | ) |
| Valuation allowance | | | 32,483 | | | 15,447 | | | 8,285 | |
| Fixed assets and operating leases | | | (27,605 | ) | | (19,973 | ) | | (20,046 | ) |
| Pension | | | (36,490 | ) | | 29,742 | | | 28,485 | |
| Other | | | (1,714 | ) | | (1,549 | ) | | (878 | ) |
| Difference between book and tax recognition of income | | | 930 | | | 157 | | | (224 | ) |
| Tax credit carryforwards | | | (5,097 | ) | | (535 | ) | | (2,365 | ) |
| Contract and bonus reserve | | | (13,601 | ) | | (4,297 | ) | | (5,750 | ) |
| | |
|
| |
|
| |
|
| |
| Net deferred tax (assets) liabilities | | $ | (80,240 | ) | $ | (5,574 | ) | $ | (10,578 | ) |
| | |
|
| |
|
| |
|
| |
Tax credit carryforwards were generated in foreign subsidiaries and are not subject to expiration. As reflected above, the Company has recorded various deferred tax (assets)/liabilities. Realization is dependent on generating sufficient taxable income. Management believes that it is more likely than not that the remaining net deferred tax assets (after consideration of the valuation allowance) will be realized through future earnings and/or tax planning strategies. The amount of the deferred tax assets considered realizable, however, could change in the near future if estimates of future taxable income during the carryforward period
228
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
10. Income Taxes — (Continued)
<R>
are changed. The valuation allowance increased by $17,036 and $7,162 in 2002 and 2001, respectively. Such increase was required under FASB 109, “Accounting for Income Taxes,” as there was evidence of losses in certain foreign tax jurisdictions in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided in the current year do not begin expiring until 2020 and beyond, based on the current tax laws.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to (loss)/earnings before income taxes, as a result of the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Tax provision/(benefit) at U.S. statutory rate | | | -35.0 | % | | 35.0 | % | | 35.0 | % |
| Non-deductable expenses / other | | | 0.4 | % | | 10.9 | % | | 2.7 | % |
| Fixed assets | | | 0.0 | % | | 0.0 | % | | -10.5 | % |
| Valuation allowance | | | 34.6 | % | | 43.9 | % | | -13.7 | % |
| Foreign rate differential | | | -3.2 | % | | 16.7 | % | | -1.1 | % |
| Other | | | 1.3 | % | | 1.4 | % | | 0.8 | % |
| | |
|
| |
|
| |
|
| |
| | | -1.9 | % | | 107.9 | % | | 13.2 | % |
| | |
|
| |
|
| |
|
| |
11. Pensions, Postretirement and Other Employee Benefits
Pension Benefits — The Company’s subsidiary in the United Kingdom has a pension plan which covers all full-time employees. Under the plan, retirement benefits are primarily a function of both years of service and level of compensation. At December 31, 2002, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $237,685 pretax, resulting in an after-tax charge to other comprehensive (loss)/income of $166,380. As of December 31, 2001, the Company had prepaid pension costs of $97,753. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
The following chart contains the disclosures for pension benefits for the years 2002, 2001 and 2000.
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
Projected Benefit Obligation (PBO) | | | | | | | |
| PBO at beginning of period | | $ | 337,389 | | $ | 314,036 | |
| Service cost | | | 12,161 | | | 11,018 | |
| Interest cost | | | 19,408 | | | 17,330 | |
| Plan participants contributions | | | 5,690 | | | 4,004 | |
| Plan amendments | | | 2,940 | | | 1,535 | |
| Actuarial loss | | | 71,727 | | | 3,046 | |
| Benefits paid | | | (15,570 | ) | | (14,981 | ) |
| Special termination benefits/other | | | (975 | ) | | 375 | |
| Foreign currency exchange rate changes | | | 37,601 | | | 1,026 | |
| | |
|
| |
|
| |
| PBO at end of period | | | 470,371 | | | 337,389 | |
| | |
|
| |
|
| |
Plan Assets | | | | | | | |
| Fair value of plan assets at beginning of period | | | 307,053 | | | 337,447 | |
| Actual return on plan assets | | | (44,892 | ) | | (26,398 | ) |
| Employer contributions | | | 24,757 | | | 7,119 | |
| Plan participant contributions | | | 5,690 | | | 4,004 | |
| Benefits paid | | | (15,570 | ) | | (14,981 | ) |
| Other | | | (8,488 | ) | | 375 | |
| Foreign currency exchange rate changes | | | 26,424 | | | (513 | ) |
| | |
|
| |
|
| |
| Fair value of plan assets at end of period | | | 294,974 | | | 307,053 | |
| | |
|
| |
|
| |
Funded Status | | | | | | | |
| Funded Status | | | (175,397 | ) | | (30,336 | ) |
| Unrecognized net actuarial loss/(gain) | | | 281,116 | | | 118,881 | |
| Unrecognized prior service cost | | | 10,334 | | | 9,208 | |
| Adjustment for the minimum liability | | | (237,685 | ) | | — | |
| | |
|
| |
|
| |
| Prepaid (accrued) benefit cost | | $ | (121,632 | ) | $ | 97,753 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | Pension Benefits | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Net Periodic Benefit Cost | | | | | | | | | | |
| Service cost | | $ | 12,161 | | $ | 11,018 | | $ | 11,838 | |
| Interest cost | | | 19,408 | | | 17,330 | | | 17,692 | |
| Expected return on plan assets | | | (24,261 | ) | | (29,604 | ) | | (31,775 | ) |
| Amortization of prior service cost | | | 1,339 | | | 1,029 | | | 1,594 | |
| Recognized actuarial loss/(gain) other | | | 8,280 | | | 2,240 | | | 22 | |
| | |
|
| |
|
| |
|
| |
| Total SFAS No. 87 net periodic pension cost | | $ | 16,927 | | $ | 2,013 | | $ | (629 | ) |
| | |
|
| |
|
| |
|
| |
Assumptions | | | | | | | | | | |
| Discount rate | | | 5.75 | % | | 5.75 | % | | 5.75 | % |
| Long-term rate of return | | | 8.00 | % | | 9.00 | % | | 9.00 | % |
| Salary scale | | | 4.00 | % | | 4.00 | % | | 4.00 | % |
Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government-mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
11. Pensions, Postretirement and Other Employee Benefits — (Continued)
for each year of the employee’s service, payable when the employee leaves the Company. In 2002, 2001 and 2000, the Company recorded an expense of approximately $3,300, $3,200, and $3,400, respectively. A liability of $19,908 in 2002 and $16,853 in 2001 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.
12. Sale/leaseback Transactions
The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $3,197, $3,080, and $2,777 for the years ended December 31, 2002, 2001, and 2000, respectively. As of December 31, 2002 and December 31, 2001, the balance of the deferred gains was $69,540, and $65,627, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.
13. Operating Leases
The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases totaled $15,416 in 2002, $16,212 in 2001, and $17,234 in 2000. Future minimum rental commitments on non- cancelable leases are as follows:
| | | | | |
Fiscal year: | | | | |
| 2003 | | $ | 14,580 | |
| 2004 | | | 14,898 | |
| 2005 | | | 14,737 | |
| 2006 | | | 12,693 | |
| 2007 | | | 11,855 | |
| Thereafter | | | 146,594 | |
| | |
|
| |
| | $ | 215,357 | |
| | |
|
| |
14. Derivative Financial Instruments
The Company’s activities expose it to risks related to the effect of changes in the foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 31, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2002 a $3,105 pretax net gain on derivative instruments which is recorded as a reduction in cost of operating revenues on the consolidated statement of operations and comprehensive (loss)/income. The Company is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. As of December 31, 2002, approximately $103,521 was owed to the Company by counterparties and $26,059 was owed by the Company to counterparties. A $42 net of tax loss was recorded in other comprehensive income as of December 31, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
14. Derivative Financial Instruments — (Continued)
The maximum term over which the Company is hedging exposure to the variability of cash flows is twenty-four months.
A reconciliation of current period changes, net of applicable income taxes, in accumulated other comprehensive income relating to derivatives qualifying as cash flow hedges are as follows:
| | | | | |
| Balance as of December 31, 2001 | | $ | (42 | ) |
| Reclassification to earnings | | | 42 | |
| | |
|
| |
| Balance at December 31, 2002 | | $ | — | |
| | |
|
| |
15. Warranty Reserves
The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.
| | | | | |
| Balance as of December 31, 2001 | | $ | 13,800 | |
| Accruals | | | 10,400 | |
| Settlements | | | (900 | ) |
| Adjustments to provisions | | | (3,400 | ) |
| | |
|
| |
| Balance as of December 31, 2002 | | $ | 19,900 | |
| | |
|
| |
16. Litigation and Uncertainties
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 or plant construction and seeking resulting alleged damages. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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 material charges against assets or earnings materially in excess of amounts previously provided in the accounts. During 2002, approximately $5,000 was accrued related to estimated exposures. This charge was recorded in other deductions on the consolidated statement of operations and comprehensive (loss)/income.
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty.
17. Financial Instruments and Risk Management
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values:
Cash and Short-term Investments — All investments are considered available for sale and the carrying amount approximates fair value because of the short-term maturity of these instruments.
Long-term Debt — The fair value of the Company’s third-party long-term debt (including current installments) is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
17. Financial Instruments and Risk Management — (Continued)
Foreign Currency Contracts — The fair values of these financial instruments (used for hedging purposes) are estimated by obtaining quotes from brokers. The Company is exposed to market risks from fluctuations in foreign exchange rates. Financial instruments are utilized by the Company to reduce this risk. The Company does not hold or issue financial instruments for trading purposes. The Company is exposed to credit loss in the event of nonperformance by the counterparties. All of these financial instruments are with significant financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s.
Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:
| | | 2002 | | 2001 | |
| | |
| |
| |
| | | Carrying | | | | Carrying | | | | |
| | | Amount | | Fair Value | | Amount | | Fair Value | |
| | |
|
| |
|
| |
|
| |
|
| |
Nonderivatives: | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 146,488 | | $ | 146,488 | | $ | 86,766 | | $ | 86,766 | |
| Restricted cash | | | 30,169 | | | 30,169 | | | — | | | — | |
| Third-party long-term debt | | | 424 | | | 424 | | | — | | | — | |
| Intercompany notes payable - current | | | 13,606 | | | — | | | 17,351 | | | — | |
| Intercompany notes payable - long-term | | | 309,795 | | | — | | | 373,400 | | | — | |
Derivatives: | | | | | | | | | | | | | |
| Foreign currency contracts | | | 3,105 | | | 3,105 | | | (64 | ) | | (64 | ) |
In the ordinary course of business, the Company is contingently liable for performance under letters of credit and bank guarantees totaling $258,745 and $196,415 as of December 31, 2002 and December 31, 2001, respectively. In the Company’s past experience, no material claims have been made against these financial instruments. Management of the Company does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero.
As of December 31, 2002, the Company had $129,580 of foreign currency contracts outstanding. These foreign currency 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 currencies or other currencies for which they have payment obligations to third parties.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and trade receivables. The Company places its cash equivalents with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. As of December 31, 2002 and 2001, the Company had no significant concentrations of credit risk.
18. Related Party Transactions
The Company enters into long-term contracts as a subcontractor and/or performs subcontracting work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive (loss)/income for 2002, 2001 and 2000 related to these contracts and intercompany borrowings is the following:
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
| Operating revenues | | $ | 10,069 | | $ | 19,385 | | $ | 7,860 | |
| Cost of operating revenues | | | 5,436 | | | 6,332 | | | 41,045 | |
| Interest income | | | 7,084 | | | 6,370 | | | 6,376 | |
| Interest expense | | | 22,558 | | | 24,951 | | | 4,505 | |
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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(in thousands of dollars)
18. Related Party Transactions — (Continued)
Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $21,071, $12,371 and $17,789 in 2002, 2001 and 2000, respectively.
Included in the consolidated balance sheet for 2002 and 2001 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Accounts and notes receivable - other | | $ | 21,186 | | $ | 29,477 | |
| Intercompany notes receivable | | | 4,310 | | | 46,279 | |
| Accounts payable | | | 66,545 | | | 47,431 | |
| Intercompany notes payable | | | 323,401 | | | 390,751 | |
Also reflected in the balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s deficit for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s Deficit and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $41,259 and $50,829 at December 31, 2002 and 2001, respectively.
Additionally, at December 31, 2002, the Company holds investments in unconsolidated affiliates of $47,038 at cost.
The Company purchased the investments in its subsidiaries from its parent, Foster Wheeler International Corporation. As the transfer of ownership occurred between entities under common control, the difference between the purchase price and the net equity of these subsidiaries of $250,291 was charged to paid-in capital in the amount of $86,886 and to accumulated deficit in the amount of $163,405, as the Company’s paid-in capital could not absorb the full amount of the excess purchase price.
All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 27, 2002, December 28, 2001, and December 29, 2000.
19. Security Pledged as Collateral
Foster Wheeler LLC (“FWLLC”) issued $200,000 Notes in the public market, which bear interest at a fixed rate of 6.75% (the “6.75% Notes”). Holders of the 6.75% Notes due November 15, 2005 have a security interest in the stock and debt of FWLLC’s subsidiaries and on facilities owned by FWLLC 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. This security interest includes the stock and debt of the Company. The Term Loan and the obligations under the letter of credit facility (collectively approximately $184,700 at December 27, 2002) have priority to the 6.75% Notes in these assets while security interest of 6.75% Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.
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| |
FW NETHERLANDS C.V. AND SUBSIDIARIES
Consolidated Financial Statements
For the Years Ended December 31, 2002 |
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Report of Independent Auditors
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of earnings and comprehensive income, of cash flows and of changes in partners’ capital present fairly, in all material respects, the financial position of FW Netherlands C.V. and subsidiaries (the “Partnership”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”) at December 31, 2002 and December 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, effective December 29, 2001, the Partnership adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”
The accompanying financial statements have been prepared assuming the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939,000 at December 27, 2002. The Parent has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, the Parent received waivers for covenant violations and ultimately negotiated new credit facilities, in August 2002. The Parent was unable to comply with certain debt covenants under the new credit facility agreement and therefore obtained an amendment of such agreement. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to generate cash flows from operations, assets sales and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the Parent maintaining credit facilities and bonding capacity adequate to conduct its business. The partnership interests of the Partnership have been pledged as collateral to the holders of the $200,000,000 Senior Notes issued by the Parent. These matters raise substantial doubt about the Partnership’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 25, 2003
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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands of dollars)
| | | For the Years Ended December 31, | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
Revenues: | | | | | | | | | | |
| Operating revenues (including $68,027 in 2002, $58,447 in 2001 and $40,065 in 2000 with affiliates) | | $ | 436,202 | | $ | 282,767 | | $ | 238,769 | |
| Other income (including interest income of $3,737 in 2002, $1,602 in 2001 and $1,726 in 2000) | | | 5,145 | | | 4,398 | | | 7,041 | |
| | |
|
| |
|
| |
|
| |
| Total Revenues and Other Income | | | 441,347 | | | 287,165 | | | 245,810 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Costs and Expenses: | | | | | | | | | | |
| Cost of operating revenues | | | 384,710 | | | 256,529 | | | 215,255 | |
| Selling, general and administrative expenses (including royalty and management fees of $8,245 in 2002, $4,649 in 2001 and $2,334 in 2000) | | | 28,469 | | | 23,326 | | | 22,817 | |
| Other deductions | | | 4,273 | | | 4,666 | | | 4,453 | |
| Minority interest | | | — | | | 889 | | | — | |
| Interest expense (including $3,500 in each of the years 2002, 2001 and 2000 with affiliates) | | | 3,621 | | | 3,734 | | | 4,265 | |
| | |
|
| |
|
| |
|
| |
| Total Costs and Expenses | | | 421,073 | | | 289,144 | | | 246,790 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Earnings/(loss) before income taxes | | | 20,274 | | | (1,979 | ) | | (980 | ) |
| Provision for income taxes | | | 7,979 | | | 1,397 | | | 1,326 | |
| | |
|
| |
|
| |
|
| |
| Net earnings/(loss) to be allocated to partners | | | 12,295 | | | (3,376 | ) | | (2,306 | ) |
| | |
|
| |
|
| |
|
| |
| Other comprehensive income/(loss): | | | | | | | | | | |
| Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges (net of tax of $1,811 in 2001) | | | — | | | 3,363 | | | — | |
| Change in net loss on derivative instruments designated as cash flow hedges (net of tax of $140 in 2002, and ($1,960) in 2001) | | | 276 | | | (3,639 | ) | | — | |
| Change in accumulated translation adjustment during the year | | | 6,408 | | | (3,220 | ) | | (4,488 | ) |
| | |
|
| |
|
| |
|
| |
| Comprehensive income/(loss) | | $ | 18,979 | | $ | (6,872 | ) | $ | (6,794 | ) |
| | |
|
| |
|
| |
|
| |
See notes to financial statements.
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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
| | | December 31, | |
| | |
| |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | $ | 83,840 | | $ | 26,049 | |
| Short-term investments | | | 230 | | | 235 | |
| Accounts and notes receivable: | | | | | | | |
| Trade | | | 66,367 | | | 40,938 | |
| Other (including $11,822 in 2002 and $9,147 in 2001 from affiliates) | | | 12,812 | | | 9,331 | |
| Contracts in process | | | 35,334 | | | 68,055 | |
| Inventories | | | 3,982 | | | 3,059 | |
| Prepaid and refundable income taxes | | | 507 | | | 2,418 | |
| Prepaid expenses | | | 6,580 | | | 8,811 | |
| | |
|
| |
|
| |
| Total current assets | | | 209,652 | | | 158,896 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Land, buildings and equipment | | | 51,997 | | | 33,148 | |
| Less accumulated depreciation | | | 15,424 | | | 12,712 | |
| | |
|
| |
|
| |
| Net book value | | | 36,573 | | | 20,436 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Restricted cash | | | 22,081 | | | — | |
| Notes and accounts receivable - long-term | | | 267 | | | 180 | |
| Intercompany notes receivable - long-term | | | 1,165 | | | 934 | |
| Investment and advances | | | 6,272 | | | 1,295 | |
| Goodwill, net | | | 47,786 | | | 47,182 | |
| Other intangible assets, net | | | 13,635 | | | 12,672 | |
| Other assets | | | 17 | | | 17 | |
| Deferred income taxes | | | 662 | | | 1,227 | |
| | |
|
| |
|
| |
| TOTAL ASSETS | | $ | 338,110 | | $ | 242,839 | |
| | |
|
| |
|
| |
LIABILITIES AND PARTNERS’ CAPITAL | | | | | | | |
Current Liabilities: | | | | | | | |
| Current installments on long-term debt and capital lease obligation | | $ | 307 | | $ | 68 | |
| Bank loans | | | — | | | 3,190 | |
| Accounts payable and accrued expenses (including $12,523 in 2002 and $10,866 in 2001 with affiliates) | | | 68,562 | | | 44,214 | |
| Accrued expenses | | | 19,248 | | | 31,558 | |
| Intercompany notes payable | | | 39 | | | — | |
| Estimated costs to complete long-term contracts | | | 133,239 | | | 61,684 | |
| Advance payments by customers | | | 478 | | | 11,592 | |
| Income taxes | | | 1,257 | | | 920 | |
| | |
|
| |
|
| |
| Total current liabilities | | | 223,130 | | | 153,226 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Long-term debt, less current installments | | | 175 | | | 229 | |
| Capital lease obligation | | | 14,559 | | | — | |
| Intercompany notes payable - long-term | | | 40,000 | | | 40,000 | |
| Deferred income taxes | | | 3,295 | | | 3,044 | |
| Other long-term liabilities and minority interest | | | 4,124 | | | 5,292 | |
| | |
|
| |
|
| |
| TOTAL LIABILITIES | | | 285,283 | | | 201,791 | |
| | |
|
| |
|
| |
| | | | | | | | |
Partners’ Capital: | | | | | | | |
| TOTAL PARTNERS’ CAPITAL | | | 52,827 | | | 41,048 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | |
|
| |
|
| |
TOTAL LIABILITIES AND PARTNERS’ CAPITAL | | $ | 338,110 | | $ | 242,839 | |
| | |
|
| |
|
| |
See notes to financial statements.
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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
(in thousands of dollars)
| | | Accumulated
Earnings/(Loss) | | Contributed
Capital | | Accumulated
Translation
Adjustment | | Capitalization
of
Intercompany
Notes
Receivable | | Other | | Total | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance at December 31, 1999 | | $ | 15,398 | | $ | 75,312 | | $ | (21,571 | ) | $ | (10,032 | ) | $ | — | | $ | 59,107 | |
| Allocation of net loss to Partners | | | (2,306 | ) | | | | | | | | | | | | | | (2,306 | ) |
| Capitalization of intercompany notes receivable | | | | | | | | | | | | 2,881 | | | | | | 2,881 | |
| Change in translation adjustment | | | | | | | | | (4,488 | ) | | | | | | | | (4,488 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2000 | | | 13,092 | | | 75,312 | | | (26,059 | ) | | (7,151 | ) | | — | | | 55,194 | |
| | | | | | | | | | | | | | | | | | | | |
| Allocation of net loss to Partners | | | (3,376 | ) | | | | | | | | | | | | | | (3,376 | ) |
| Capitalization of intercompany notes receivable | | | | | | | | | | | | (7,274 | ) | | | | | (7,274 | ) |
| Cumulative effect on prior years of change in accounting principle for derivative instruments designated as cash flow hedges | | | | | | | | | | | | | | | 3,363 | | | | |
| Change in net loss on derivative instruments designated as cash flow hedges | | | | | | | | | | | | | | | (3,639 | ) | | (3,639 | ) |
| Change in translation adjustment | | | | | | | | | (3,220 | ) | | | | | | | | (3,220 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2001 | | | 9,716 | | | 75,312 | | | (29,279 | ) | | (14,425 | ) | | (276 | ) | | 41,048 | |
| | | | | | | | | | | | | | | | | | | | |
| Allocation of net earnings to Partners | | | 12,295 | | | | | | | | | | | | | | | 12,295 | |
| Capitalization of intercompany notes receivable | | | | | | | | | | | | (7,200 | ) | | | | | (7,200 | ) |
| Derivative instruments | | | | | | | | | | | | | | | 276 | | | 276 | |
| Change in translation adjustment | | | | | | | | | 6,408 | | | | | | | | | 6,408 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002 | | $ | 22,011 | | $ | 75,312 | | $ | (22,871 | ) | $ | (21,625 | ) | $ | — | | $ | 52,827 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
See notes to financial statements.
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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
| | | For the Years Ended December 31, | |
| | |
| |
| | | 2002 | | 2001 | | 2000 | |
| | |
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
| Net earnings/(loss) | | $ | 12,295 | | $ | (3,376 | ) | $ | (2,306 | ) |
| Adjustments to reconcile net earnings/(loss) to cash flows from operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 4,210 | | | 4,492 | | | 4,763 | |
| Deferred tax | | | 430 | | | (1,324 | ) | | 1,110 | |
| Loss(gain) on asset sale | | | 631 | | | (1 | ) | | (2,826 | ) |
| Other noncash items | | | (2,819 | ) | | 1,574 | | | 1,790 | |
| Changes in assets and liabilities: | | | | | | | | | | |
| Receivables | | | (19,092 | ) | | (19,288 | ) | | 11,568 | |
| Contracts in process and inventories | | | 39,882 | | | (7,819 | ) | | (27,194 | ) |
| Accounts payable and accrued expenses | | | 4,008 | | | 22,918 | | | 7,990 | |
| Estimated costs to complete long-term contracts | | | 53,936 | | | 25,248 | | | (3,495 | ) |
| Advance payments by customers | | | (14,961 | ) | | (9,632 | ) | | 17,936 | |
| Income taxes | | | 2,432 | | | (747 | ) | | (1,010 | ) |
| Other assets and liabilities | | | 1,161 | | | 2,431 | | | (4,398 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash provided by operating activities | | | 82,113 | | | 14,476 | | | 3,928 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Change in restricted cash | | | (22,081 | ) | | — | | | — | |
| Capital expenditures | | | (3,670 | ) | | (2,061 | ) | | (2,135 | ) |
| Proceeds from sale of assets | | | 1,102 | | | 404 | | | 4,571 | |
| Increase in investments and advances | | | (5,298 | ) | | (849 | ) | | (605 | ) |
| Decrease/(increase) in short-term investments | | | 98 | | | 111 | | | (367 | ) |
| | |
|
| |
|
| |
|
| |
| Net cash (used)/provided by investing activities | | | (29,849 | ) | | (2,395 | ) | | 1,464 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| (Return of equity to) infusion from Parent | | | (7,200 | ) | | (7,274 | ) | | 2,881 | |
| (Increase)/decrease in loan to affiliates | | | 2,245 | | | (565 | ) | | (1,158 | ) |
| Proceeds from long-term debt | | | 139 | | | | | | 668 | |
| Bank loans | | | (3,245 | ) | | (1,208 | ) | | (9,187 | ) |
| | |
|
| |
|
| |
|
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| Net cash used by financing activities | | | (8,061 | ) | | (9,047 | ) | | (6,796 | ) |
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| Effect of exchange rate changes on cash and cash equivalents | | | 13,588 | | | (1,416 | ) | | (1,449 | ) |
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INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | | | 57,791 | | | 1,618 | | | (2,853 | ) |
| Cash and cash equivalents at beginning of year | | | 26,049 | | | 24,431 | | | 27,284 | |
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CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 83,840 | | $ | 26,049 | | $ | 24,431 | |
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| Cash paid during the year for: | | | | | | | | | | |
| Interest | | $ | 64 | | $ | 1,189 | | $ | 746 | |
| Income taxes | | $ | 5,000 | | $ | 1,668 | | $ | 601 | |
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NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | |
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| | In December, 2002 the Company entered into a lease transaction for an office building in Finland. The transaction qualified as a capitalized lease (Note 14). |
See notes to financial statements.
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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(in thousands of dollars)
1. Description of Business
FW Netherlands C.V., a limited liability partnership registered in the Netherlands, and Subsidiaries, collectively referred to herein as the “Partnership,”, is owned by Foster Wheeler Power Group, Inc. (90%) and Foster Wheeler Energy Corporation (10%), which are indirectly wholly-owned by Foster Wheeler Ltd. The principal operations of the Partnership are to design, manufacture and erect steam generating and auxiliary equipment for power stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized-bed and conventional boilers firing coal, oil, gas, biomass and other municipal solid waste, waste wood and low-BTU gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment and low-NOX burners. Site services related to these products encompass plant erection, maintenance engineering, plant upgrading and life extension, and plant repowering. The Partnership also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering, and solids mechanics. The Partnership principally operates under one segment, primarily in Finland and Poland.
The Partnership has transactions and relationships with Foster Wheeler and its affiliates. The financial position, results of operations, and cash flows of the Partnership have been impacted by these transactions and relationships as discussed in Notes 2, 9 and 18.
2. Liquidity and Going Concern
The accompanying 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, Foster Wheeler Ltd.’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 Foster Wheeler Ltd. maintaining credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and has a shareholder deficit of $780,939 at December 27, 2002. Foster Wheeler Ltd. has substantial debt obligations, and during 2002, it was unable to comply with certain debt covenants under the previous revolving credit agreement. Accordingly, Foster Wheeler Ltd. 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 Foster Wheeler Ltd. will do so during 2003. These matters raise substantial doubt about Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd.’s plans in regard to these matters are described below.
In August 2002, Foster Wheeler Ltd. 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. Foster Wheeler Ltd. retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the facility commence 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 Foster Wheeler Environmental Corporation on March 7, 2003, cumulative sales proceeds received, as defined in the agreement, approximate $75,000.
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 Foster Wheeler Ltd. in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific
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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
2. Liquidity and Going Concern — (Continued)
contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. In the 4th quarter 2002, $11,000 of the contingency risks were favorably resolved, and additional project reserves were established for $19,000 leaving a contingency balance of $33,000.
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, Foster Wheeler Ltd. made a prepayment of principal in the aggregate amount of $10,000.
Due to Foster Wheeler Ltd.’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 Foster Wheeler Ltd. can successfully effect any of the foregoing.
During the third quarter of 2002, Foster Wheeler Ltd. also completed a receivables financing arrangement of up to $40,000. The funding available to Foster Wheeler Ltd. is dependent on the amount and characteristics of the domestic receivables. The amount available to Foster Wheeler Ltd. fluctuates daily, but Foster Wheeler Ltd. estimates that approximately $15,000 to $20,000 will be available during 2003. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commence at the end of the first quarter of 2003 and 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. As of December 27, 2002, Foster Wheeler Ltd. had $0 borrowings outstanding under this facility.
Foster Wheeler Ltd. initiated a comprehensive plan to enhance cash generation and to improve profitability during 2002. Management’s comprehensive plan to address Foster Wheeler Ltd.’s domestic liquidity issues included generating approximately $150,000 from asset sales, collection of receivables and resolving disputed claims through the end of the first quarter 2003, and an additional $40,000 over the following six months. As of December 27, 2002, Foster Wheeler Ltd. generated approximately $60,000 through these efforts, and with the sale of the operating business of Foster Wheeler Environmental Corporation on March 7, 2003, an additional $80,000 has been generated. An additional $10,000 has also been received through more efficient working capital management. The $40,000 is still expected to be received from asset sales and claims recoveries over the course of the year 2003. 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 Foster Wheeler Ltd.’s working capital needs through the first quarter of 2004. Failure by Foster Wheeler Ltd. to achieve its forecast could have a material adverse effect on Foster Wheeler Ltd.’s and the Partnership’s financial condition.
3. Summary of Significant Accounting Policies
Principles of Consolidation — The consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America and include the accounts of all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates
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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, and contingencies, among others.
Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using the cost-to-cost method, the efforts-expended method or variations thereof. These methods are applied consistently to all contracts having similar characteristics in similar circumstances. Under the cost-to-cost method, revenues and profits are recognized based on the ratio that costs incurred bear to total estimated costs. Under the efforts-expended method, revenue and profits are recognized based on the ratio that incurred labor hours bear to total estimated labor hours. Variations of these two methods are used on multiyear contracts that require significant engineering effort and multiple delivery of units. These methods are subject to physical verification of actual progress towards completion.
Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Partnership includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Partnership is responsible for the engineering specifications and procurement for such costs.
Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long term contracts.”
The Partnership has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Partnership records claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings.
Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. One of the Partnership’s subsidiaries has entered into several bonding arrangements with various financial institutions which include covenants that may restrict the ability of the subsidiary to pay dividends to its parent company. The most restrictive of these covenants require the subsidiary to maintain at least a 30% equity ratio and to limit dividend payments so as
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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
not to exceed 75% of statutory earnings. The subsidiary has maintained compliance with the covenants. See Note 19.
Restricted Cash — At December 31, 2002, restricted cash consisted of $22,081 that was required to collateralize letters of credit and bank guarantees.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific identification method. For the years ended 2002, 2001 and 2000, there were no realized gains or losses and unrealized gains and losses were immaterial.
Trade Accounts Receivable — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld, which might not be received within a one-year period, are indicated in Note 5. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets. Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within our various served markets and general economic trends are also evaluated when considering the necessity of a provision.
Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliates of $11,822 at December 31, 2002, and $9,147 at December 31, 2001.
Land, Buildings and Equipment — Land, buildings and equipment are stated at cost. Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 25 years for buildings and from 3 to 20 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this new statement did not impact the Partnership.
Effective January 1, 2002, the Partnership adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This statement addresses the accounting for long-lived assets to be disposed of by sale and resolves significant implementation issues relating to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” The provisions of this statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Partnership’s results of operations and financial position were not affected by the initial adoption of this statement.
Investments and Advances — The Partnership uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Partnership does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Partnership’s significant investments in affiliates are
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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
3. Summary of Significant Accounting Policies — (Continued)
recorded using the equity method. Investments and advances also include certificates of deposits with maturities in excess of twelve months, totaling $5,207 at December 31, 2002.
Income Taxes — FW Netherlands C.V. is not subject to income taxes. The taxable income or loss applicable to the operation of the Partnership is includable in the income tax return of the partners. Income tax expense in the Partnership’s statement of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions.
Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Foreign Currency — FW Netherlands C.V.’s functional and reporting currency is the U.S. dollar. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates and income and expenses and cash flows at monthly weighted- average rates.
