UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
 | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 26, 2003
OR
 | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from .......... to ..........
Commission file number 001-31305
FOSTER WHEELER LTD.
(Exact Name of Registrant as Specified in its Charter)
BERMUDA | 22-3802649 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Perryville Corporate Park, Clinton, New Jersey | 08809-4000 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(908) 730-4000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| (Title of Each Class) | (Name of Each Exchange on which Registered) | |
Foster Wheeler Ltd. Common Stock, $1.00 par value | Over-the-Counter Bulletin Board | |
FW Preferred Capital Trust I | Over-the-Counter Bulletin Board | |
9.00% Preferred Securities, Series I (Guaranteed by Foster Wheeler LLC) |
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No
As of June 27, 2003, 40,771,560 shares of the Registrant’s Common Shares were issued and outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant on such date was approximately $86,238,763 (based on the last price on that date of $2.12 per share), assuming for these purposes, but without conceding, that all executive officers and directors are affiliates of the Registrant.
List hereunder the following documents, if incorporated by reference, and the Part of the Form 10-K into which the document is incorporated:
| DOCUMENTS INCORPORATED BY REFERENCE: None |
FOSTER WHEELER LTD.
2003 Form 10-K/A Annual Report
This Form 10-K/A amends the Registrant’s annual report on Form 10-K for the year ended December 26, 2003 as filed on March 12, 2004 to modify certain disclosures within Part II, Item 9A, “Controls and Procedures.” No attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the original Form 10-K except to conform to the comments of the Securities and Exchange Commission staff set out in their letters to the Registrant dated April 21, 2004 and May 28, 2004, and such other changes as required by applicable law.
Table of Contents
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth in this Report. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement” for further information.
1
PART I
ITEM 1. BUSINESS
General Development of Business:
Foster Wheeler Ltd. was incorporated under the laws of Bermuda in 2001. Effective May 25, 2001, Foster Wheeler Corporation, which was originally incorporated under the laws of the State of New York in 1900, underwent a reorganization pursuant to which shareholders received one share of Foster Wheeler Ltd. for each share of Foster Wheeler Corporation they owned. Foster Wheeler Ltd. is incorporated under the laws of Bermuda and is essentially a holding company that owns the stock of various subsidiary companies. Except as the context otherwise requires, the terms “Foster Wheeler” or the “Company,” as used herein, include Foster Wheeler Ltd. and its direct and indirect subsidiaries.
This Form 10-K/A is hereinafter referred to as “Form 10-K.”
Recent Developments
(amounts in thousands of dollars)
As part of its debt restructuring plan, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005. The S-4 is expected to be amended and filed after this Form 10-K is filed.
On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company is offering a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that the Company will complete the exchange offer on acceptable terms, or at all.
Financial Information About Industry Segments:
See Note 23 to the consolidated financial statements in this Form 10-K.
Narrative Description of Business:
(amounts in thousands of dollars)
The business of the Company falls within two business groups. The Engineering and Construction Group (the “E & C Group”) designs, engineers, and constructs petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical, natural gas liquefaction (LNG) facilities, LNG receiving terminals, and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment and water treatment facilities. The E & C Group provides direct technical and management services, and purchases equipment, materials and services from third party vendors and subcontractors. The group has industry leading technology in delayed coking, solvent de-asphalting, and hydrogen production. The E & C Group also provides environmental remediation services, together with related technical, design and regulatory services; however, the domestic U.S. environmental remediation business was sold in 2003. 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 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 full plant construction, 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 builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries. The Energy Group generates revenues from
2
construction and operating activities pursuant to long-term sale of project outputs (i.e., electricity contracts), operating and maintenance agreements and from returns on its equity positions.
Foster Wheeler markets its services and products through a worldwide staff of sales and marketing personnel, and through a network of sales representatives. The Company’s businesses are not seasonal nor are they dependent on a limited group of customers. No single customer accounted for ten percent or more of Foster Wheeler’s consolidated revenues in fiscal 2003, 2002 or 2001.
The materials used in Foster Wheeler’s manufacturing and construction operations are obtained from both domestic and foreign sources. Materials, which consist mainly of steel products and manufactured items, are heavily dependent on foreign sources, particularly for overseas projects.
On November 25, 2002, President Bush signed the National Security Act that, in part, imposed new regulations pertaining to the importation of goods into the U.S. This Act is now managed under the Department of Homeland Security. As a frequent importer of project materials, the Company has reviewed its procedures involving importation and export of material into and out of the U.S., Canada and Mexico. To date, record keeping as required by the government has been updated, and new powers of attorney have been issued to the Company’s customs brokers in order to properly control all documentation and manage imports/exports efficiently and within compliance with the new regulations. The Company’s import bonds have been updated and consolidated; reducing the number of bonds the Company must carry. HTS Codes for imported materials have been reviewed and updated in order to ensure that correct duties, where applicable, are paid. Where appropriate, corrections have been made to prior entries resulting in refunds to the Company. The Company continues to monitor changes published by the Department of Homeland Security in order to maintain a current position with all regulations and requirements.
Foster Wheeler owns and licenses patents, trademarks and know-how, which are used in each of its business groups. The life cycle of the patents and trademarks are of varying durations. Neither business group is materially dependent on any particular or related patent or trademark. Foster Wheeler has granted licenses to companies throughout the world to manufacture stationary steam generators and related equipment and certain of its other products. Principal licensees are located in Japan and China.
For the most part, Foster Wheeler’s products are custom designed and manufactured, and are not produced for inventory. Clients often make a down payment at the time a contract is executed and continue to make progress payments until the contract is completed and the work has been accepted as meeting contract guarantees. Generally, contracts are awarded on the basis of price, delivery schedule, performance and service.
Foster Wheeler’s unfilled orders by business segment as of December 26, 2003 and December 27, 2002 are detailed below.
| 2003 | 2002 | ||||||||||
| Engineering and Construction Group | $ | 1,342,700 | $ | 4,018,000 | * | ||||||
| Energy Group | 946,000 | 1,436,300 | |||||||||
| Corporate and Financial Services (including eliminations) | (3,300 | ) | (8,400 | ) | |||||||
| $ | 2,285,400 | $ | 5,445,900 | * | |||||||
Unfilled orders of projects at December 26, 2003 and December 27, 2002 consisted of:
| 2003 | 2002 | ||||||||||
| Signed contracts | $ | 2,273,900 | * | $ | 5,312,900 | * | |||||
| Letters of intent and contracts awarded but not finalized | 11,500 | 133,000 | |||||||||
| $ | 2,285,400 | * | $ | 5,445,900 | * | ||||||
*The decline in backlog includes a reduction of approximately $1,800,000 related to the sale of certain assets of Foster Wheeler Environmental Corporation (“Environmental”) in 2003.
3
The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of unfilled orders is not necessarily indicative of the future earnings of the Company related to the performance of such work. The E & C Group frequently purchases materials, equipment, and third party services at cost for clients on a cash neutral/reimbursable basis. Such amounts are recorded both as revenues and cost of operating revenues, with no profit recognized. Although unfilled orders represent only business that is considered firm, there can be no assurance that cancellations or scope adjustments will not occur. The Company cannot predict with certainty the portion of unfilled orders that will be performed, or the timing of the projects’ execution, because of factors outside of the Company’s control. These factors include client mandated changes to project scope and schedule or project cancellations.
Refer to Part II, Item 7 for a discussion of the changes in unfilled orders for the periods presented.
Many companies compete in the engineering and construction business. Management of the Company estimates, based on an industry publication “Engineering News-Record” that Foster Wheeler is among the twenty largest of the many large and small companies engaged in designing, engineering and constructing petroleum refineries, petrochemical, chemical and pharmaceutical facilities. Neither Foster Wheeler nor any other single company contributes a large percentage of the total design, engineering and construction business servicing the global businesses previously noted. Many companies also compete in the global energy business.
Foster Wheeler and its domestic subsidiaries are subject to certain Federal, state and local environmental, occupational health and product safety laws. Foster Wheeler believes all its operations are in material compliance with such laws and does not anticipate any material capital expenditures or adverse effect on earnings or cash flows in maintaining compliance with such laws. In addition, management believes that the Company is in material compliance with similar laws and regulations in the non-U.S. countries in which it operates.
Foster Wheeler employed 6,661 full-time employees at December 26, 2003. The following table indicates the number of full-time employees in each of its business groups on the dates indicated. Common services performed prior to 2002 by Corporate and Financial Services (“C & F”) on behalf of the E & C and Energy Groups were estimated allocations.
| December 26, 2003 | December 27, 2002 | December 28, 2001 | |||||||||||||
| Engineering and Construction | 4,500 | 6,136 | * | 7,216 | * | ||||||||||
| Energy Group | 2,091 | 2,744 | 3,156 | ||||||||||||
| Corporate and Financial Services | 70 | 65 | 22 | ||||||||||||
| 6,661 | 8,945 | 10,394 | |||||||||||||
*Includes 1,122 for 2002 and 1,223 for 2001, for Environmental, who were terminated when certain assets of which were sold in 2003.
Risk Factors of the Business:
(amounts in thousands of dollars)
The following discussion of risks relating to the Company’s business should be read carefully in connection with evaluating the Company’s business, prospects and the forward-looking statements contained in this Report on Form 10-K and oral statements made by representatives of the Company from time to time. Any of the following risks could materially adversely affect the Company’s business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made. For additional information regarding forward-looking statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement.”
The Company’s business is subject to a number of risks and uncertainties, including those described below.
Foster Wheeler Ltd.’s financial statements are prepared on a going concern basis, but the Company may not be able to continue as a going concern.
The consolidated financial statements of Foster Wheeler Ltd., for the fiscal year ended December 26, 2003, are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities
4
in the normal course of business. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the 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 our maintaining credit facilities and bonding capacity adequate to conduct our business. The Company incurred significant losses in each of the years in the three-year period ended December 26, 2003 and had a shareholder deficit of approximately $872,400 at December 26, 2003. The Company has substantial debt obligations and during 2002 was unable to comply with certain debt covenants under its previous revolving credit agreement. Accordingly, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the Company amended the new agreement to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 31, 2003, if incurred. In March 2003, the Company again amended the agreement to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, income taxes, depreciation and amortization and senior debt ratio. The Company may not be able to comply with the terms of the senior secured credit agreement, as amended, and other debt agreements during 2004 or thereafter. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Foster Wheeler might not be able to implement its financial restructuring plan and might not be able to restructure its indebtedness in a manner that would allow Foster Wheeler to remain a going concern.
The Company’s planned restructuring contemplates, in part, a debt for equity exchange offer. The Company may not be able to complete the components of the restructuring plan on acceptable terms, or at all. If the Company does not complete the restructuring plan, there will continue to be substantial doubt about the Company’s ability to continue as a going concern. Even if the Company completes the restructuring plan, the Company may be left with too much debt and too few assets to survive. If the Company is successful in the restructuring plan, the Company will have to continue to improve its business operations, including its contracting and execution process, to achieve its forecast and continue as a going concern. Even if the Company successfully completes the proposed exchange offer, the Company may not be able to continue as a going concern.
Foster Wheeler’s U.S. operations, which include the corporate center, are cash-flow negative and the ability to repatriate funds from the non-U.S. subsidiaries is restricted by a number of factors. Accordingly, the Company is limited in its ability to use these funds for working capital purposes, to repay debt or to satisfy other obligations, which could limit the Company’s ability to continue as a going concern.
The Company’s U.S. operations, which include the corporate center, are cash-flow negative and are expected to continue to generate negative cash flow due to a number of factors. These factors include costs related to the litigation and settlement of asbestos related claims, interest on indebtedness, obligations to fund U.S. pension plans and other expenses related to corporate overhead. As of December 26, 2003, Foster Wheeler Ltd. and Foster Wheeler LLC had aggregate indebtedness of $1,000,000, all of which must be funded from distributions from subsidiaries of Foster Wheeler LLC. As of December 26, 2003, the Company had cash, cash equivalents, short-term investments and restricted cash of approximately $430,200, of which approximately $366,700 was held by the non-U.S. subsidiaries. The Company will require cash distributions from its non-U.S. subsidiaries to meet an anticipated $61,000 of the U.S. operations’ minimum working capital needs in 2004. There are significant legal and contractual restrictions on the ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities and for other general corporate purposes. In addition, certain of the non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization provisions in their jurisdictions of organization that restrict the amount of funds that the subsidiary may distribute. Distributions in excess of these specified amounts would cause the Company to violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries to fund its working capital requirements, to repay debt or to satisfy other obligations of the U.S. operations, which could limit the Company’s ability to continue as a going concern. The Company may not be able to continue as a going concern even if the Company successfully completes the exchange offer.
5
If the Company is unable to successfully address the material weaknesses in its internal controls, its ability to report its financial results on a timely and accurate basis may be adversely affected.
During 2003, the Company’s financial reporting requirements increased significantly in connection with its 2002 10-K filing. The increased financial reporting stemmed from the SEC requirements relating to the security interest granted to the holders of the 2005 notes in August 2002, and from the financial reporting requirements relating to the proposed exchange offer and restructuring process. Nine additional sets of audited financial statements for subsidiary companies, including three year comparable results, were required for 2002 and the first nine months of 2003. The Company’s permanent corporate accounting staff was not structured to address this increased workload under the deadlines required so the Company hired temporary professional personnel to assist with the process. Because the temporary personnel were unfamiliar with the Company’s operations, this led to audit adjustments deemed material in relation to the size of the subsidiaries in the financial reporting process. The external auditors notified the audit committee of the Company’s board of directors on December 16, 2003 that they believed the insufficient staffing levels in the corporate accounting department represented a “material weakness” in the preparation of the subsidiary financial statements, but noted that this did not constitute a material weakness for the Company’s consolidated financial statements. The Company has assigned the highest priority to the assessment of this material weakness and is working together with the audit committee to resolve the issue. The insufficient staffing levels in the corporate accounting department were specifically related to the preparation of the subsidiary financial statements required under Rule 3-16 and not related to the preparation of Foster Wheeler Ltd.’s consolidated financial statements. Foster Wheeler Ltd. made the noted audit adjustments and the financial statements as filed were properly stated. In the second quarter 2004, the Company augmented its initial hires with three permanent senior financial personnel. Directors of Corporate Accounting and SEC Reporting, and a Manager of Financial Planning & Analysis were hired. The two directors each have significant public accounting experience and previously worked at public companies. Both hold active CPA licenses. The manager is assisting in the financial planning and analysis area. Additionally, the Company is seeking to hire two additional permanent accounting staff level personnel to replace two of the consultants hired in 2003. The consultancy personnel hired for the initial preparation of the subsidiary financial statements remain with the Company. If these actions are not successful in addressing these material weaknesses, the Company’s ability to report its financial results on a timely and accurate basis may be adversely affected.
On March 3, 2004, the Company’s external auditors notified the audit committee of the Company’s board of directors that they believed the Company’s lack of a formal process for senior financial management to review assumptions and check calculations on a timely basis relating to the Company’s asbestos liability and asset balances represented a “material weakness” in the internal controls for the preparation of the consolidated financial statements for 2003. In connection with the preparation of the 2003 consolidated financial statements, the Company submitted its calculations and assumptions relating to asbestos liability and related assets to the external auditors without them being reviewed by senior management. As a result, the external auditors noted a proposed change in an assumption used to calculate the liability that had not been approved by senior management and also noted a mechanical error in calculating the number of open claims. In response, the Company corrected the mechanical error in its calculation and determined not to make the proposed change in the assumption. Estimating the Company’s obligations arising from asbestos litigation, and the amounts of related insurance recoveries is a complex process involving many different assumptions about future events extending well into the future. These assumptions are developed by management together with its internal and external asbestos litigation team based on historical data regarding asbestos claims made against the Company, recoveries sought and settlement and trial resolution data. As these factors vary over any given period, the assumptions about future periods used to calculate the Company’s asbestos liabilites are adjusted correspondingly. In their March 3, 2004 letter, the external auditors recommended that the assumptions and calculations prepared by members of the Company’s asbestos litigation team be reviewed carefully by the Company’s chief accounting officer and that all significant assumptions and estimates, including changes thereof, be approved by the Company’s chief financial and chief executive officers prior to the asbestos calculations being submitted to the external auditor for review. The Company agreed with these suggestions and have adopted them both in connection with the 2003 audit and going forward. If these actions are not successful in addressing these material weaknesses, the Company’s ability to report its financial results on a timely and accurate basis may be adversely affected.
The Company has taken a series of actions it believes will address the material weaknesses described above. In the second quarter of 2004, the Company has hired additional permanent staff to address the identified material weaknesses, but believes additional time must pass in order for the additional staff to become fully trained and integrated into the Company’s operations and to evidence that the additional staff and controls are performing as intended. If the Company is unable to successfully address the identified material weaknesses in its internal controls, its ability to report financial results on a timely and accurate basis may be adversely affected.
Foster Wheeler’s international operations involve risks that may limit or disrupt operations, limit repatriation of earnings, increase foreign taxation or otherwise have a material adverse effect on the business and results of operations.
The Company has substantial international operations that are conducted through foreign and domestic subsidiaries, as well as through agreements with foreign joint venture partners. The international operations accounted for approximately 76% of our fiscal year 2003 operating revenues and substantially all of the operating cash flow. The Company has international operations throughout the world, including operations in Europe, the Middle East, Asia and South America. The foreign operations are subject to risks that could materially adversely affect the business and results of operations, including:
| • | uncertain political, legal and economic environments; | |
| • | potential incompatibility with foreign joint venture partners; | |
| • | foreign currency controls and fluctuations; | |
| • | energy prices; | |
| • | terrorist attacks against facilities owned or operated by U.S. companies; | |
| • | war and civil disturbances; and | |
| • | labor problems. |
Because of these risks, the international operations may be limited, or disrupted; may be restricted in moving funds; may lose contract rights; foreign taxation may be increased; or may be limited in repatriating earnings. In addition, in some cases, applicable law and joint venture or other agreements may provide that each joint venture partner is jointly and severally liable for all liabilities of the venture. These events and liabilities could have a material adverse effect on the Company’s business and results of operations.
Foster Wheeler’s high levels of debt and significant interest payment obligations could limit the funds the Company has available for working capital, capital expenditures, dividend payments, acquisitions and other business purposes which could adversely impact the business.
The Company has debt in the form of secured bank loans, other debt securities that have been sold to investors and the Robbins bonds. As of December 26, 2003, Foster Wheeler Ltd.’s total consolidated debt amounted to approximately $1,000,000, $137,200 of which was comprised of limited recourse project debt of special purpose subsidiaries. This debt includes $128,200 of debt under the Senior Credit Facility, $200,000 of debt under the Senior Notes, $210,000 of convertible notes, $175,000 of Preferred Trust Securities and $113,300 of Robbins bonds. In addition, the Senior Credit Facility requires the Company either to repay $100,000 of indebtedness thereunder by March 31, 2004 or, in the alternative, pay a fee of up to approximately $14,000 and increase the annual interest rate on the borrowings thereunder by an additional 0.5% per quarter until the Company has repaid $100,000 of indebtedness thereunder. The Company will likely not have sufficient funds available to pay any of this long-term debt upon maturity.
Over the last five years, the Company has been required to allocate a significant portion of its earnings to pay interest on debt. After paying interest on debt, the Company has fewer funds available for working capital, capital expenditures, acquisitions and other business purposes. This could limit the Company’s ability to respond to changing market conditions, limit the ability to expand through acquisitions, increase the vulnerability to adverse economic and industry conditions and place the Company at a competitive disadvantage compared to competitors that have less indebtedness. In addition, certain of the Company’s borrowings are at variable rates of interest that expose the Company to the risk of a rise in interest rates. Based on the rates in effect in 2003, the debt service payment obligations under the currently outstanding debt for 2003 totaled approximately $100,000 and will be about the same for 2004. If the interest rate on the variable rate debt were to increase by one percentage point, the annual debt service payment obligations would increase by $1,500.
6
Foster Wheeler’s various debt agreements impose significant operating and financial restrictions, which may prevent the Company from capitalizing on business opportunities and taking some corporate actions which could materially adversely affect the Company’s business.
The Company’s various debt agreements impose significant operating and financial restrictions on the Company. These restrictions limit the ability to incur indebtedness, pay dividends or make other distributions, make investments and sell assets. Failure to comply with these covenants may allow lenders to elect to accelerate the repayment dates with respect to such debt. The Company would not be able to repay such indebtedness, if accelerated and as a consequence may be unable to continue operating as a going concern. The failure to repay such amounts under the senior secured credit agreement and indentures would have a material adverse effect on the Company’s financial condition and operations and result in defaults under the terms of the Company’s other indebtedness.
Foster Wheeler faces severe restrictions on the ability to obtain new letters of credit, bank guarantees and performance bonds from banks and surety on the same terms as the Company has historically. If the Company is unable to obtain letters of credit, bank guarantees, or performance bonds on reasonable terms, the business would be materially adversely affected.
It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. The Company has traditionally obtained letters of credit or bank guarantees from the banks, or performance bonds from a surety on an unsecured basis. Due to the financial condition and current credit ratings, as well as changes in the bank and surety markets, the Company is now required in certain circumstances to provide collateral to banks and the surety to obtain new letters of credit, bank guarantees and performance bonds. If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees, and performance bonds, the ability to enter into new contracts could be materially limited.
Providing security to obtain letters of credit, bank guarantees and performance bonds increases the Company’s working capital needs and limits the ability to provide bonds, guarantees, and letters of credit, and to repatriate funds or pay dividends. The Company may not be able to continue obtaining new letters of credit, bank guarantees, and performance bonds on either a secured or an unsecured basis in sufficient quantities to match the business requirements. As the senior secured credit agreement matures in April 2005, after April 2004, the Company will no longer have the ability to obtain one-year letters of credit. If the Company’s financial condition further deteriorates, the Company may also be required to provide cash collateral or other security to maintain existing letters of credit, bank guarantees and performance bonds. If this occurs, the ability to perform under existing contracts may be adversely affected.
Foster Wheeler’s current and future lump-sum, or fixed price, contracts and other shared risk contracts may result in significant losses if costs are greater than anticipated.
Many of the contracts are lump-sum contracts and other shared risk contracts that are inherently risky because the Company agrees to the selling price of the project at the time the Company enters the contracts. The selling price is based on estimates of the ultimate cost of the contract and the Company assumes substantially all of the risks associated with completing the project, as well as the post-completion warranty obligations. In 2003 and 2002, the Company took charges of approximately $30,800 and $216,700 respectively, relating to underestimated costs and post-completion warranty obligations primarily on lump-sum contracts.
The Company also assumes the project’s technical risk, meaning that the Company must tailor products and systems to satisfy the technical requirements of a project even though, at the time the project is awarded, the Company may not have previously produced such a product or system. The revenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to changes in a variety of factors, including but not limited to:
| • | unanticipated technical problems with the equipment being supplied or developed by the Company, which may require that the Company spend its own money to remedy the problem; | |
| • | changes in the costs of components, materials or labor; | |
| • | difficulties in obtaining required governmental permits or approvals; | |
7
| • | changes in local laws and regulations; | |
| • | changes in local labor conditions; | |
| • | project modifications creating unanticipated costs; | |
| • | delays caused by local weather conditions; and | |
| • | the Company’s suppliers’ or subcontractors’ failure to perform. |
These risks are exacerbated if the duration of the project is long-term because there is an increased risk that the circumstances upon which the Company based its original bid will change in a manner that increases its costs. In addition, the Company sometimes bears the risk of delays caused by unexpected conditions or events. Long-term, fixed price projects often make the Company subject to penalties if portions of the project are not completed in accordance with agreed-upon time limits. Therefore, significant losses can result from performing large, long-term projects on a lump-sum basis. These losses may be material and could negatively impact the business, financial condition and results of operations.
Foster Wheeler may be unable to successfully implement its performance improvement plan which could negatively impact its results of operations.
In order to mitigate future charges due to underestimated costs on lump-sum contracts and to otherwise reduce operating costs, in March 2002 the Company undertook, and is continuing to implement, a series of management performance enhancements. This plan may not be successful and the Company may record significant charges and its operating costs may increase in the future.
Foster Wheeler plans to expand the operations of its engineering and construction group which could negatively impact the group’s performance and bonding capacity.
The Company plans to expand the operations of its engineering and construction group to increase the size and number of lump-sum turnkey contracts, sometimes in countries where the Company has limited previous experience. The Company may bid for and enter into such contracts through partnerships or joint ventures with third parties that have greater bonding capacity than the Company. This would increase the Company’s ability to bid for the contracts. Entering into these partnerships or joint ventures will expose the Company to credit and performance risks of those third party partners which could have a negative impact on the business and results of operations if these parties fail to perform under the arrangements.
Foster Wheeler has high working capital requirements and will be required to refinance some of its indebtedness in the near term and may have difficulty obtaining financing which would have a negative impact on its financial condition.
The Company’s business requires a significant amount of working capital and the U.S. operations, including the corporate center are, and are expected to continue to be, cash-flow negative in the near future. In many cases, significant amounts of working capital are required to finance the purchase of materials and performance of engineering, construction and other work on projects before payment is received from customers. In some cases, the Company is contractually obligated to its customers to fund working capital on its projects. Moreover, the Company may need to incur additional indebtedness in the future to satisfy its working capital needs. In addition, the Senior Credit Facility and any Senior Notes not exchanged and which remain outstanding after the debt exchange offer described under the section titled “Recent Developments” mature in April 2005 and November 2005, respectively, will need to be repaid or refinanced. As a result, the Company is subject to risks associated with debt financing, including increased interest expense, insufficient cash flow to meet required payments on the debt, inability to meet credit facility covenants and inability to refinance or repay debt as it becomes due.
The Company’s working capital requirements may increase if the Company is required to give its customers more favorable payment terms under contracts to compete successfully for certain projects. These terms may include reduced advance payments, and payment schedules that are less favorable. In addition, the working capital requirements have increased in recent years because the Company has had to advance funds to complete projects under lump-sum contracts and have been involved in lengthy arbitration or litigation proceedings to recover these amounts. All of these factors may result, or have resulted, in increases in the amount of contracts in process
8
and receivables and short-term borrowings. Continued increases in working capital requirements would have a material adverse effect on the Company’s financial condition and results of operations.
Projects included in the Company’s backlog may be delayed or cancelled which could materially harm its cash flow position, revenues and earnings.
The dollar amount of backlog does not necessarily indicate future earnings related to the performance of that work. Backlog refers to expected future revenues under signed contracts, contracts awarded but not finalized and letters of intent which management has determined are likely to be performed. Backlog projects represent only business that is considered firm, although cancellations or scope adjustments may occur. Due to changes in project scope and schedule, the Company cannot predict with certainty when or if backlog will be performed. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed. Any delay, cancellation or payment default could materially harm the Company’s cash flow position, revenues and/or earnings.
Backlog at the end of 2003 declined 58% as compared to the year 2002. This decline is primarily attributable to the sale of assets of Environmental and the completion of several large projects that were booked into backlog in 2002 and executed in 2003. Backlog may continue to decline.
The cost of Foster Wheeler’s current and future asbestos claims could be substantially higher than the Company had estimated, which could materially adversely affect our financial condition.
Some of the Company’s subsidiaries are named as defendants in numerous lawsuits and out-of-court administrative claims pending in the United States in which the plaintiffs claim damages for bodily injury or death arising from exposure to asbestos in connection with work performed and heat exchange devices assembled, installed and/or sold by those subsidiaries. The Company expects these subsidiaries to be named as defendants in similar suits and claims brought in the future. For purposes of the Company’s financial statements, the Company has estimated the indemnity payments and defense costs to be incurred in resolving pending and forecasted claims through year end 2018. Although we believe our estimates are reasonable, the actual number of future claims brought against us and the cost of resolving these claims could be substantially higher than the estimates. Some of the factors that may result in the costs of these claims being higher than current estimates include:
| • | the rate at which new claims are filed; | |
| • | the number of new claimants; | |
| • | changes in the mix of diseases alleged to be suffered by the claimants, such as type of cancer, asbestosis or other illness; | |
| • | increases in legal fees or other defense costs associated with these claims; | |
| • | increases in indemnity payments as a result of more expensive medical treatments for asbestos related diseases; | |
| • | bankruptcies of other asbestos defendants, causing a reduction in the number of available solvent defendants and thereby increasing the number of claims and the size of demands against our subsidiaries; | |
| • | adverse jury verdicts requiring us to pay damages in amounts greater than we expect to pay in settlement; | |
| • | changes in legislative or judicial standards which make successful defense of claims against our subsidiaries more difficult; or | |
| • | enactment of legislation requiring us to contribute amounts to a national settlement trust in excess of our expected net liability, after insurance, in the tort system. |
The total liability recorded on the balance sheet is based on estimated indemnity payments and defense costs expected to be incurred through year end 2018. 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 the indemnity payments and defense costs which might be incurred after 2018. The
9
forecast contemplates new claims requiring indemnity will decline from year to year. Failure of future claims to decline as the Company expects will result in the aggregate liability for asbestos claims being higher than estimated.
The forecast is based on a curvilinear regression model, which employs the statistical analysis of our historical claims data to generate a trend line for future claims. Although the Company believes this forecast method is reasonable, other forecast methods that attempt to estimate the population of living persons who could claim they were exposed to asbestos at worksites where the Company’s subsidiaries performed work or sold equipment, could also be used and might project higher numbers of future claims than forecast.
All of these factors could cause the actual claims, indemnity payments and defense costs to exceed estimates. The Company periodically updates its forecasts to take into consideration recent claims experience and other developments, such as legislation, that may affect our estimates of future asbestos related costs. The announcement of increases to asbestos reserves as a result of revised forecasts, adverse jury verdicts or other negative developments involving asbestos litigation may cause the value or trading prices of the Company’s securities to decrease significantly. These negative developments could cause the Company to default under covenants in our indebtedness relating to judgments against the Company and material adverse changes, cause the Company’s credit ratings to be downgraded, restrict the Company’s access to the capital markets and otherwise have a material adverse effect on the Company’s financial condition, results of operations, cash flows and liquidity.
The amount and timing of insurance recoveries of the Company’s asbestos related costs is uncertain. The failure to obtain insurance recoveries would cause a material adverse effect on the Company’s financial condition.
The Company believes that substantially all of its subsidiaries liability and defense costs for asbestos claims will be covered by insurance. The balance sheet as of December 26, 2003, includes as an asset an aggregate of approximately $555,400 in probable insurance recoveries relating to a liability for pending and expected future asbestos claims through year end 2018. Under an interim funding agreement in place with a number of our insurers from 1993 through June 12, 2001, these insurers paid a substantial portion of the costs incurred prior to 2002, and a portion of the costs incurred in connection with resolving asbestos claims during 2002 and 2003. The interim funding agreement was terminated in 2003. On February 13, 2001, litigation was commenced against the Company’s subsidiaries by certain insurers that were parties to the interim funding agreement seeking to recover from other insurers amounts previously paid by them under the interim funding agreement and to adjudicate their rights and responsibilities under the subsidiaries’ insurance policies.
As a result of the termination of the interim funding agreement, we have had to cover a substantial portion of the settlement payments and defense costs out of working capital. However, the Company’s subsidiaries recently entered into several settlement agreements calling for insurers to make lump sum payments, as well as payments over time, for use by the subsidiaries to fund asbestos related indemnity and defense costs. Some of those settlements also reimbursed the subsidiaries for portions of the out of pocket costs. The Company is in the process of negotiating additional settlements in order to minimize the amount of future costs the Company will be required to fund out of working capital. If the subsidiaries can not achieve settlements in amounts necessary to cover its future costs, the subsidiaries will continue to fund a portion of future costs out of pocket, which will reduce cash flow and working capital and will adversely affect liquidity.
Although the Company continues to believe that insurers eventually will reimburse its subsidiaries for substantially all of the their prior asbestos related costs, and to pay substantially all such future costs, their ability ultimately to recover a substantial portion of future asbestos related costs from insurance is dependent on successful resolution of outstanding coverage issues related to our insurance policies. These issues include:
| • | disputes regarding allocations of liabilities among the subsidiaries and the insurers; | |
| • | the effect of deductibles and policy limits on available insurance coverage; and | |
| • | the characterization of asbestos claims brought against the subsidiaries as product related or non-product related. |
An adverse outcome in the insurance litigation on these coverage issues could materially limit our insurance recoveries.
In addition, even if these coverage issues are resolved in a manner favorable to us, we may not be able to collect all of the amounts due under our insurance policies. Our recoveries will be limited by insolvencies among our insurers. We are aware of at least two of our significant insurers which are currently insolvent, and other insurers
10
may become insolvent in the future. Our insurers may also fail to reimburse amounts owed to us on a timely basis. If we do not receive timely payment from our insurers, we may be unable to make required payments under settlement agreements with asbestos plaintiffs or to fund amounts required to be posted with the court in order to appeal trial judgments. If we are unable to file such appeals, the Company’s subsidiaries may be ordered to pay large damage awards arising from adverse jury verdicts, and such awards may exceed our available cash. Any failure to realize expected insurance recoveries, and any delays in receiving from our insurers amounts owed to the subsidiaries, will reduce cash flow and adversely affect liquidity and could have a material adverse effect on the Company’s financial condition.
Claims made by Foster Wheeler against project owners for payment have increased over the last few years and failure by the Company to recover adequately on future claims could have a material adverse effect upon the Company’s financial condition, results of operations and cash flows.
Project claims increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for additional costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise from changes in the initial scope of work or from owner caused delays. These claims are often subject to lengthy arbitration or litigation proceedings. The costs associated with these changes or owner caused delays include additional direct costs, such as labor and material costs associated with the performance of the additional work, as well as indirect costs that may arise due to delays in the completion of the project, such as increased labor costs resulting from changes in labor markets. The Company has used significant additional working capital in projects with cost overruns pending the resolution of the relevant project claims. Project claims may continue in the future.
In 2002, the Company reduced its estimates of claim recoveries to reflect recent adverse experience due to management’s desire to monetize claims, and poor economic conditions. As of December 26, 2003, the Company had $0 of outstanding claims. In 2002, the Company recorded approximately $136,200 in pretax contract related charges as a result of claims reassessment. Management continues to pursue claims, but may not recover the full amount of these claims, and any future recoveries of these claims, if any, will be reflected as gains in the consolidated statement of operations. In 2003, the Company recorded a net gain related to contract claims of $1,500.
The Company also faces a number of counterclaims brought against us by certain project owners in connection with several of the project claims described above. If the Company is found liable for any of these counterclaims, the Company would have to incur write downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.
Because operations are concentrated in four particular industries, Foster Wheeler may be adversely impacted by economic or other developments in these industries.
The Company derives a significant amount of revenues from services provided to corporations that are concentrated in four industries: power, oil and gas, pharmaceuticals and chemical/petrochemical. Unfavorable economic or other developments in one or more of these industries could adversely affect the Company’s customers and could have a material adverse effect on financial condition and results of operations.
Foster Wheeler’s failure to successfully manage geographically diverse operations could impair its ability to react quickly to changing business and market conditions and comply with industry standards and procedures.
The Company operates in more than 55 countries around the world, with approximately 5,400, or 81%, of its employees located outside of the United States. In order to manage our day-to-day operations, management must overcome cultural and language barriers and assimilate different business practices. In addition, the Company is required to create compensation programs, employment policies and other administrative programs that comply with the laws of multiple countries. Failure to successfully manage geographically diverse operations could impair the Company’s ability to react quickly to changing business and market conditions and comply with industry standards and procedures.
11
Foster Wheeler may lose business to competitors who have greater financial resources.
The Company is engaged in highly competitive businesses in which customer contracts are often awarded through bidding processes based on price and the acceptance of certain risks. The Company competes with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. Some competitors have greater financial and other resources than Foster Wheeler and may have significantly more favorable leverage ratios. Because financial strength is a factor in deciding whether to grant a contract in the business, the Company’s competitors’ more favorable leverage ratios give them a competitive advantage and could prevent the Company from obtaining contracts for which the Company has bid.
A failure by Foster Wheeler to attract and retain qualified personnel, joint venture partners, advisors and subcontractors could have an adverse effect on the Company.
The ability to attract and retain qualified engineers and other professional personnel, as well as joint venture partners, advisors and subcontractors, will be an important factor in determining future success. The market for these professionals, joint venture partners, advisors and subcontractors is competitive, and the Company may not be successful in efforts to attract and retain these professionals, joint venture partners, advisors and subcontractors. In addition, success depends in part on ability to attract and retain skilled laborers. Failure to attract or retain these workers could have a material adverse effect on the Company’s business and results of operations.
Foster Wheeler is subject to various environmental laws and regulations in the countries in which it operates. If the Company fails to comply with these laws and regulations, the Company may have to incur significant costs and penalties that could adversely affect its liquidity or financial condition.
Operations are subject to U.S., European and other laws and regulations governing the generation, management, and use of regulated materials, the discharge of materials into the environment, the remediation of environmental contamination, or otherwise relating to environmental protection. These laws include U.S. Federal statutes, such as the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the Clean Water Act, the Clean Air Act and similar state and local laws, and European laws and regulations including those promulgated under the Integrated Pollution Prevention and Control Directive issued by the European Union in 1996, and the 1991 directive dealing with waste and hazardous waste and laws and regulations similar to those in other countries in which the Company operates. Both the E & C Group and Energy Group make use of and produce as wastes or byproducts substances that are considered to be hazardous under the laws and regulations referred to above. The Company may be subject to liabilities for environmental contamination as an owner or operator of a facility or as a generator of hazardous substances without regard to negligence or fault, and the Company is subject to additional liabilities if the Company does not comply with applicable laws regulating such hazardous substances, and, in either case, such liabilities can be substantial.
The Company may be subject to significant costs, fines and penalties and/or compliance orders if the Company does not comply with environmental laws and regulations including those referred to above. Some environmental laws, including CERCLA, provide for joint and several strict liabilities for remediation of releases of hazardous substances, which could result in a liability for environmental damage without regard to negligence or fault. These laws and regulations and common laws principles could expose the Company to liability arising out of the conduct of current and past operations or conditions, including those associated with formerly owned or operated properties caused by the Company or others, or for acts by the Company or others which were in compliance with all applicable laws at the time the acts were performed. In some cases, the Company has assumed contractual indemnification obligations for environmental liabilities associated with some formerly owned properties. Additionally, the Company may be subject to claims alleging personal injury, property damage or natural resource damages as a result of alleged exposure to or contamination by hazardous substances. The ongoing costs of complying with existing environmental laws and regulations can be substantial. Changes in the environmental laws and regulations, remediation obligations, enforcement actions or claims for damages to persons, property, natural resources or the environment, could result in material costs and liabilities.
12
Foster Wheeler Ltd. has anti-takeover provisions in its bye-laws that may discourage a change of control.
Foster Wheeler Ltd.’s bye-laws contain provisions that could make it more difficult for a third party to acquire it without the consent of its board of directors. These provisions provide for:
| • | The board of directors to be divided into three classes serving staggered three-year terms. Directors can be removed from office only for cause, by the affirmative vote of the holders of two-thirds of the issued shares generally entitled to vote. The board of directors does not have the power to remove directors. Vacancies on the board of directors may only be filled by the remaining directors. Each of these provisions can delay a shareholder from obtaining majority representation on the board of directors. | |
| • | Any amendment to the bye-law limiting the removal of directors to be approved by the board of directors and the affirmative vote of the holders of three-quarters of the issued shares entitled to vote at general meetings. | |
| • | The board of directors to consist of not less than three nor more than twenty persons, the exact number to be set from time to time by a majority of the whole board of directors. Accordingly, the board of directors, and not the shareholders, has the authority to determine the number of directors and could delay any shareholder from obtaining majority representation on the board of directors by enlarging the board of directors and filling the new vacancies with its own nominees until a general meeting at which directors are to be appointed. | |
| • | Restrictions on the time period in which directors may be nominated. A shareholder notice to nominate an individual for election as a director must be received not less than 120 calendar days in advance of Foster Wheeler Ltd.’s proxy statement released to shareholders in connection with the previous year’s annual meeting. | |
| • | Restrictions on the time period in which shareholder proposals may be submitted. To be timely for inclusion in Foster Wheeler Ltd.’s proxy statement, a shareholder’s notice for a shareholder proposal must be received not less than 120 days prior to the first anniversary of the date on which Foster Wheeler Ltd. first mailed its proxy materials for the preceding year’s annual general meeting. To be timely for consideration at the annual meeting of shareholders, a shareholder’s notice must be received no less than 45 days prior to the first anniversary of the date on which Foster Wheeler Ltd. first mailed its proxy materials for the preceding year’s annual meeting. | |
| • | The board of directors to determine the powers, preferences and rights of preference shares and to issue the preference shares without shareholder approval. The board of directors could authorize the issuance of preference shares with terms and conditions that could discourage a takeover or other transaction that holders of some or a majority of the common shares might believe to be in their best interests or in which holders might receive a premium for their shares over the then market price of the shares. | |
| • | A general prohibition on “business combinations” between Foster Wheeler Ltd. and an “interested member.” Specifically, “business combinations” between an interested member and Foster Wheeler Ltd. are prohibited for a period of five years after the time the interested member acquires 20% or more of the outstanding voting shares, unless the business combination or the transaction resulting in the person becoming an interested member is approved by the board of directors prior to the date the interested member acquires 20% or more of the outstanding voting shares. |
| “Business combinations” is defined broadly to include amalgamations or consolidations with Foster Wheeler Ltd. or its subsidiaries, sales or other dispositions of assets having an aggregate value of 10% or more of the aggregate market value of the consolidated assets, aggregate market value of all outstanding shares, consolidated earning power or consolidated net income of Foster Wheeler Ltd., adoption of a plan or proposal for liquidation and most transactions that would increase the interested member’s proportionate share ownership in Foster Wheeler Ltd. |
13
| “Interested member” is defined as a person who, together with any affiliates and/or associates of that person, beneficially owns, directly or indirectly, 20% or more of the issued voting shares of Foster Wheeler Ltd. |
| • | Any matter submitted to the shareholders at a meeting called on the requisition of shareholders holding not less than one-tenth of the paid-up voting shares of Foster Wheeler Ltd. to be approved by the affirmative vote of all of the shares eligible to vote at such meeting. |
These provisions could make it more difficult for a third party to acquire Foster Wheeler Ltd., even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
Financial Information about Foreign and Domestic Operations and Export Sales:
See Note 23 to the consolidated financial statements in this Form 10-K.
Available Information
The Company’s website address is www.fwc.com. You may obtain free electronic copies of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports at the investor relations website, www.fwc.com, under the heading “Investor Relations” by selecting the heading “SEC Filings.” These reports are available on the Company’s investor relations website as soon as reasonably practicable after electronically filing the reports with the SEC. The information disclosed on this website is not incorporated herein and does not form a part of this Report on Form 10-K.
14
ITEM 2. PROPERTIES
The following chart provides the location and general use made of each of the Company’s properties as of December 26, 2003, as well as the business segment in which each property is grouped.
| Company (Business Segment*) and Location | Use | Land Area | Building Square Feet | Lease Expires(6) | ||||||
| Foster Wheeler Realty Services, Inc. (C & F) | ||||||||||
| Union Township, New Jersey | Undeveloped | 203.8 acres | — | |||||||
| General office & engineering | 29.4 acres | 294,000 | 2022 | |||||||
| General office & engineering | 21.0 acres | 292,000 | ||||||||
| Storage and reproduction facilities | 10.8 acres | 30,400 | ||||||||
| Livingston, New Jersey | Research center | 6.7 acres | 51,355 | |||||||
| Bedminster, New Jersey | Office | 10.7 acres | 135,000 | (1 | )(2) | |||||
| Bridgewater, New Jersey | Undeveloped | 21.9 acres | (5) | — | ||||||
| Foster Wheeler Energy Corporation (E) | ||||||||||
| Dansville, New York | Manufacturing & offices | 82.4 acres | 513,786 | |||||||
| Foster Wheeler Energy Services, Inc. (E) | ||||||||||
| San Diego, California | General offices | — | 12,673 | 2005 | ||||||
| Foster Wheeler USA Corporation (E & C) | ||||||||||
| Houston, Texas | Office & engineering | — | 107,890 | 2013 | ||||||
| Aiken, South Carolina | Office & engineering | — | 15,000 | 2007 | ||||||
| Foster Wheeler Iberia, S.A. (E & C)/(E) | ||||||||||
| Madrid, Spain | Office & engineering | 5.5 acres | 110,000 | 2015 | ||||||
| Foster Wheeler Energia, S.A. (E) | ||||||||||
| Tarragona, Spain | Manufacturing & office | 25.6 acres | 77,794 | |||||||
| Foster Wheeler France, S.A. (E & C) | ||||||||||
| Paris, France | Office & engineering | — | 80,000 | 2006 | ||||||
| Paris, France | Archive storage space | — | 12,985 | 2006 | ||||||
| Foster Wheeler International Corporation (Thailand Branch) (E & C) | ||||||||||
| Sriracha, Thailand | Office & engineering | — | 60,000 | 2014 | ||||||
| Foster Wheeler Constructors, Inc. (E) | ||||||||||
| McGregor, Texas | Storage facilities | 15.0 acres | 24,000 | |||||||
| Foster Wheeler Limited (United Kingdom) (E & C) | ||||||||||
| Glasgow, Scotland | Office & engineering | 2.3 acres | 28,798 | |||||||
| Reading, England | Office & engineering | — | 55,440 | (1 | ) | 2006/2009 | ||||
| Reading, England | Office & engineering | 14.0 acres | 365,521 | 2024 | ||||||
| Reading, England | Undeveloped | 12.0 acres | — | |||||||
| Teeside, England | Office & engineering | — | 18,100 | 2004/2014 | ||||||
| Foster Wheeler Limited (Canada) (E) | ||||||||||
| Niagara-On-The-Lake, Ontario | Office & engineering | — | 37,614 | 2008 | ||||||
| Foster Wheeler Andina, S.A. (E & C) | ||||||||||
| Bogota, Colombia | Office & engineering | 2.3 acres | 26,000 | |||||||
| Foster Wheeler Power Machinery Company Limited (E) | ||||||||||
| Xinhui, Guangdong, China | Manufacturing & office | 30.0 acres | 279,677 | (3 | ) | 2045 | ||||
| Foster Wheeler Italiana, S.p.A. (E & C) | ||||||||||
| Milan, Italy (via S. Caboto,1) | Office & engineering | — | 161,400 | 2007 | ||||||
| Milan, Italy (via S. Caboto,7) | Office & engineering | — | 121,870 | 2008 | (1) | |||||
15
| Company (Business Segment*) and Location | Use | Land Area | Building Square Feet | Lease Expires(6) | ||||||
| Foster Wheeler Birlesik Insaat ve Muhendislik A.S. (E & C) | ||||||||||
| Istanbul, Turkey | Office & engineering | — | 26,000 | 2004 | ||||||
| Foster Wheeler Eastern Private Limited (E & C) | ||||||||||
| Singapore | Office & engineering | — | 29,196 | 2005 | ||||||
| Foster Wheeler Power Systems, Inc. (E) | ||||||||||
| Martinez, California | Cogeneration plant | 6.4 acres | — | |||||||
| Camden, New Jersey | Waste-to-energy plant | 18.0 acres | — | 2011 | ||||||
| Talcahuano, Chile | Cogeneration plant-facility site | 21.0 acres | — | 2028 | ||||||
| Foster Wheeler Energia OY (E) | ||||||||||
| Varkaus, Finland | Manufacturing & offices | 29.2 acres | 369,365 | |||||||
| Office | — | 100,645 | 2031 | |||||||
| Karhula, Finland | Research center | 12.8 acres | 15,100 | 2095 | ||||||
| Office and laboratory | 57,986 | 2095 | ||||||||
| Helsinki, Finland | Office | — | 13,904 | 2005 | ||||||
| Kouvola, Finland | Undeveloped | 1.9 acres | — | |||||||
| Office | 1.5 acres | — | 2032 | |||||||
| Norrkoping, Sweden | Manufacturing & offices | — | 26,000 | 2004 | ||||||
| Foster Wheeler Energy FAKOP Ltd. (E) | ||||||||||
| Sosnowiec, Poland | Manufacturing & offices | 25.7 acres | 270,411 | (4 | ) | |||||
| * | Designation of Business Segments: | E & C – Engineering & Construction Group | |
| E – Energy Group | |||
| C & F – Corporate & Financial Services |
(1) Portion or entire facility leased or subleased to third parties.
(2) 50% ownership interest.
(3) 52% ownership interest.
(4) 53% ownership interest.
(5) 75% ownership interest.
(6) Represents leases in which Foster Wheeler is the lessee.
Locations of less than 10,000 square feet are not listed. Except as noted above, the properties set forth are owned in fee. All or part of the listed properties may be leased or subleased to other affiliates. All properties are in good condition and adequate for their intended use.
16
ITEM 3. LEGAL PROCEEDINGS
Some of the Company’s U.S. subsidiaries, along with many other companies, are codefendants in numerous asbestos related lawsuits and administrative 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 the work allegedly performed by the Company’s subsidiaries during the 1970’s and prior. As of December 26, 2003, the Company has determined that subsidiaries are named defendants in lawsuits involving approximately 59,800 plaintiffs. Claims by approximately 24,500 of those plaintiffs have been stayed or placed on inactive dockets by courts. The Company’s subsidiaries also are respondents in approximately 111,100 open administrative claims. The total number of open cases involves approximately 170,900 claimants.
All of the open administrative claims have been filed under blanket administrative agreements the Company has with various law firms representing claimants and do not specify monetary damages sought. Based on management’s analysis of open lawsuits, approximately 81% do not specify the monetary damages sought or merely recite that the amount of monetary damages sought meets or exceeds the required jurisdictional minimum in the jurisdiction in which suit is filed. Approximately 8% request damages ranging from $10,000 to $50,000; approximately 7% request damages ranging from $50,000 to $1,000,000; approximately 3% request damages ranging from $1,000,000 to $10,000,000; and the remaining 1% request damages ranging from $10,000,000 to, in a very small number of cases, $50,000,000.
In all cases, requests for monetary damages are asserted against multiple named defendants, typically ranging from 25 to 250, in a single complaint.
As indicated by the foregoing summary, modern pleading practice permits considerable variation in the assertion of monetary damages. This variability, together with the actual experience of resolving hundreds of thousands of claims over an extended period, demonstrates that damages requested in any particular lawsuit or complaint bears little or no relevance to merits or disposition value of a particular case. Rather, the amount potentially recoverable by a specific plaintiff or group of plaintiffs is determined by other factors such as product identification or lack thereof, the severity of the disease alleged, specific defenses available to certain defendants, other potential causative factors and the specific jurisdiction in which the claim is made. Since 1993, the Company has resolved 29% of all claims asserted against it with no payment. Of the remaining 71%, approximately half were resolved administratively for settlements ranging from $500-$100,000 each. The overall average indemnity cost per closed claim since 1993 was approximately $1,200 and the overall average combined indemnity and defense cost per closed claim since 1993 was approximately $1,800. The other half is pending final resolution.
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, 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 Country 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.
The Company’s project claims have increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise from changes in the initial scope of work or from owner-caused delays. These claims are often subject to lengthy arbitration or litigation proceedings. The costs associated with these changes or owner-caused delays include additional direct costs, such as labor and material costs associated with the performance of the additional works, as well as indirect costs that may arise due to delays in the completion of the project, such as increased labor costs resulting from changes in labor markets. The Company has used significant additional working capital in projects with cost
17
overruns pending the resolution of the relevant project claims. The Company cannot assure that project claims will not continue in the future.
The Company established a provision for the balance of outstanding commercial claims as of December 27, 2002 to bring the net book value of such claims to $0. At that time, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. The Company continues to pursue these claims, but there can be no assurance that it will recover the full amount of the claims, or anything at all.
The Company also faces a number of counterclaims brought against it by certain project owners in connection with several of the project claims described above. If the Company were found liable for any of these counterclaims, it would have to incur write-downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.
For additional information on the asbestos claims and other material litigation affecting the Company, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies” and Note 20 to the consolidated financial statements in this Form 10-K.
Under U.S. Federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Clean Water Act and the Clean Air Act, and similar state laws, the current owner or operator of real property and the past owners or operators of real property (if disposal took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or remediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person (an “off-site facility”). Liability at such off-site facilities is typically allocated among all of the viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site, and other factors.
The Company currently owns and operates industrial facilities and has also transferred its interests in industrial facilities that it formerly owned or operated. It is likely that as a result of its current or former operations, such facilities have been impacted by hazardous substances. The Company is not aware of any conditions at its currently owned facilities in the United States that it expects will cause the Company to incur material costs.
The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities, which may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be material. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.
The Company has been notified that it was a potentially responsible party (a “PRP”) under CERCLA or similar state laws at three off-site facilities. At each of these sites, the Company’s liability should be substantially less than the total site remediation costs because the percentage of waste attributable to the Company compared to that attributable to all other PRPs is low. The Company does not believe that its share of cleanup obligations at any of the off-site facilities as to which it has received a notice of potential liability will exceed $0.5 million in the aggregate.
A San Francisco, California jury returned a verdict on March 26, 2002 finding Foster Wheeler liable for $10.6 million in the case of Todak vs. Foster Wheeler Corporation. The case was brought against Foster Wheeler, 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 case has been amicably resolved by the parties and the appeal of the verdict has been dismissed. The terms of the settlement are confidential. The Company’s financial obligation was covered 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 had been pending for over 19 years. A judgment was entered in this case on
18
November 29, 1999 awarding plaintiffs compensatory and punitive damages plus prejudgment interest in an amount yet to be calculated. This amended final judgment in the amount of $54.3 million includes such interest for the period beginning in 1983 when the lawsuit was filed through entry of judgment. Post-judgment interest will accrue at a rate of 5.471 percent per annum from November 29, 1999. The management of Tray, Inc. believed that the Court’s decision contained numerous factual and legal errors subject to reversal on appeal. Tray, Inc. filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. On April 7, 2003, Tray, Inc. filed for bankruptcy. In the third quarter of 2003, the parties amicably resolved the case. Management assessed the liability associated with the legal proceeding and determined that the previously recorded provision in the financial statements for the liability was adequate to address the terms of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company’s common stock is quoted on the Over-the-Counter Bulletin Board. The number of shareholders of record as of December 26, 2003 was 5,857.
| Three Months Ended | |||||||||||||
| 2003 | March 28 | June 27 | Sept. 26 | Dec. 26 | |||||||||
| Cash dividends per share | — | — | — | — | |||||||||
| Stock prices: | |||||||||||||
| High | $ | 1.87 | $ | 3.00 | $ | 2.24 | $ | 1.38 | |||||
| Low | $ | 0.85 | $ | 1.20 | $ | 1.07 | $ | 0.75 | |||||
| Three Months Ended | |||||||||||||
| 2002 | March 29 | June 28 | Sept. 27 | Dec. 27 | |||||||||
| Cash dividends per share | — | — | — | — | |||||||||
| Stock prices: | |||||||||||||
| High | $ | 5.39 | $ | 3.75 | $ | 2.35 | $ | 1.90 | |||||
| Low | $ | 1.60 | $ | 1.30 | $ | 1.35 | $ | 1.00 | |||||
On March 18, 2003, the Company received a formal notice from the New York Stock Exchange (“NYSE”) indicating the Company was below the continued listing criteria of a total capitalization of not less that $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. On November 14, 2003, the NYSE determined to de-list the Company based on the Company’s inability to meet the NYSE’s minimum shareholders’ equity requirements of positive $50,000. The Company’s common stock and 9% FW Preferred Capital Trust I securities are quoted on the Over-the Counter Bulletin Board (“OTCBB”) and the Company’s new ticker symbols are FWLRF.OB and FWLRP.OB, respectively.
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company being de-listed, this exemption is no longer available. The Company obtained the consent of the BMA to transfers between non-residents so long as the Company’s shares continue to be quoted on the OTCBB. The Company believes that this consent will continue to be available.
The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during 2003 and does not expect to pay dividends on the common shares for the foreseeable future.
20
ITEM 6. SELECTED FINANCIAL DATA
COMPARATIVE FINANCIAL STATISTICS
(in thousands, except per share amounts)
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
| Statement of Operations Data: | ||||||||||||||||
| Revenues | $ | 3,801,308 | $ | 3,574,537 | $ | 3,392,474 | $ | 3,969,355 | $ | 3,944,074 | ||||||
| (Loss)/earnings before income taxes | (109,637 | )(1) | (360,062 | )(2) | (212,965 | )(4) | 52,166 | (194,288 | )(6) | |||||||
| Provision/(benefit) for income taxes | 47,426 | 14,657 | 123,395 | (5) | 15,179 | (48,208 | ) | |||||||||
| (Loss)/earnings prior to cumulative effect of a change in accounting principle | (157,063 | ) | (374,719 | ) | (336,360 | ) | 36,987 | (146,080 | ) | |||||||
| Cumulative effect of a change in accounting principle for goodwill, net of $0 tax | — | (150,500 | )(3) | — | — | — | ||||||||||
| Net (loss)/earnings | (157,063 | ) | (525,219 | ) | (336,360 | ) | 36,987 | (146,080 | ) | |||||||
| (Loss)/earning per share: Basic and diluted: Net (loss)/earnings prior to cumulative effect of a change in accounting principle | $ | (3.83 | ) | $ | (9.15 | ) | $ | (8.23 | ) | $ | 0.91 | $ | (3.59 | ) | ||
| Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill | — | $ | (3.67 | ) | — | — | — | |||||||||
| Net(Loss)/earnings per share: | ||||||||||||||||
| Basic and diluted | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) | $ | .91 | $ | (3.59 | ) | ||
| Shares outstanding: | ||||||||||||||||
| Weighted-average number of basic shares outstanding | 41,045 | 40,957 | 40,876 | 40,798 | 40,742 | |||||||||||
| Effect of stock options | * | * | * | 7 | * | |||||||||||
| Total weighted-average number of diluted shares | 41,045 | 40,957 | 40,876 | 40,805 | 40,742 | |||||||||||
| Balance Sheet Data: | ||||||||||||||||
| Current assets | $ | 1,174,376 | $ | 1,329,847 | $ | 1,754,376 | $ | 1,622,976 | $ | 1,615,096 | ||||||
| Current liabilities | 1,373,760 | 1,449,795 | 2,388,620 | 1,454,603 | 1,471,552 | |||||||||||
| Working capital | (199,384 | ) | (119,948 | ) | (634,244 | ) | 168,373 | 143,544 | ||||||||
| Land, buildings and equipment (net) | 309,615 | 407,819 | 399,198 | 495,034 | 648,199 | |||||||||||
| Total assets | 2,506,530 | 2,842,277 | 3,325,837 | 3,507,581 | 3,467,085 | |||||||||||
| Bank loans | 121 | 14,474 | 20,244 | 103,479 | 63,378 | |||||||||||
| Long-term borrowings (including current installments): | ||||||||||||||||
| Corporate and other debt | 333,800 | 346,707 | 297,627 | 306,188 | 372,921 | |||||||||||
| Project debt | 137,177 | 205,840 | 226,056 | 274,993 | 349,501 | |||||||||||
| Capital lease obligations | 63,695 | 58,987 | — | — | — | |||||||||||
| Subordinated Robbins Facility exit funding obligations | 113,279 | 113,254 | 113,123 | 113,238 | 113,000 | |||||||||||
| Convertible subordinated notes | 210,000 | 210,000 | 210,000 | — | — | |||||||||||
| Preferred trust securities | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | |||||||||||
| Cash dividends per share of common stock | $ | 0.00 | $ | 0.00 | $ | 0.12 | $ | 0.24 | $ | 0.54 | ||||||
| Other data: | ||||||||||||||||
| Unfilled orders, end of year | $ | 2,285,318 | $ | 5,445,934 | $ | 6,004,420 | $ | 6,142,347 | $ | 6,050,525 | ||||||
| New orders booked | 2,163,499 | 3,052,410 | 4,109,321 | 4,480,000 | 3,623,202 | |||||||||||
| 1) | Includes in 2003, a $(15,100) impairment loss on the anticipated sale of a domestic corporate office building; a $16,700 gain on the sale of certain assets of Environmental and a gain of $4,300 on the sale of a waste-to-energy plant; revisions to project claim estimates and related cost $1,500; revisions to project estimates and related receivable allowances $(32,300); provision for asbestos claims $(68,100); performance intervention and restructuring charges $(43,600); charges for severance cost $(15,900); and legal and other $800. |
| 2) | Includes in 2002, losses recognized in anticipation of sales $(54,500); revisions to project claim estimates and related costs $(136,200); revisions to project cost estimates and related receivable allowances $(80,500); provision for asbestos claims $(26,200); provision for domestic plant impairment $(18,700); performance intervention and restructuring charges $(37,100); increased pension and postretirement medical costs $(10,600); and severance, increased legal and other provisions $(31,600). |
| 3) | In 2002, the Company recognized $(150,500) of impairment losses upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” |
| 4) | Includes in 2001, losses recognized in anticipation of sales $(40,300); revisions to project claim estimates and related costs $(37,000); revisions to project cost estimates and related receivable allowances $(123,600); provision for domestic plant impairment $(6,100); increased pension and postretirement medical costs $(9,100); and severance, increased legal and other provisions $(38,200). |
| 5) | Includes in 2001, a valuation allowance for domestic deferred tax assets $(194,600). |
21
| 6) | Includes in 1999, a provision for cost realignment $(37,600) and a charge totaling $(244,600) of which $(214,000) relates to the Robbins Facility write-down and $(30,600) relates to the current year operations of the Robbins Facility. |
| *The effect of the stock options was not included in the calculation of diluted earnings per share as these options were antidilutive due to the 2003, 2002, 2001, and 1999 losses. The effect of the convertible notes was not included in the calculation of diluted earnings per share as these options were antidilutive due to the 2003, 2002 and 2001 losses. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in thousands of dollars, except per share amounts)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report on Form 10-K contain forward-looking statements that are based on management’s assumptions, expectations and projections about the various industries within which the Company operates. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Company cautions that a variety of factors, including but not limited to the following, could cause business conditions and results to differ materially from what is contained in forward-looking statements such as: changes in the rate of worldwide economic growth in the major international economies; changes in investment by the power, oil and gas, pharmaceutical, chemical/petrochemical and environmental industries; changes in financial condition of customers; changes in regulatory environment; changes in project design or schedules; contract cancellations; changes in trade, monetary and fiscal policies worldwide; currency fluctuations; war or terrorist attacks on facilities either owned or where equipment or services are or may be provided; outcomes of pending and future litigation including litigation regarding the Company’s liability for damages and insurance coverage for asbestos exposure; protection and validity of patents and other intellectual property rights and increasing competition by foreign and domestic companies; monetization of certain facilities; and recoverability of claims against customers. For additional information, see Item 1, “Business — Risk Factors of the Business.”
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Overview
The accompanying consolidated financial statements and management’s discussion and analysis herein are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern (see “Liquidity and Capital Resources” and Note 1 to the consolidated financial statements for additional going concern information).
The Company operates through two main business groups – the Engineering & Construction Group (“E & C”), and the Energy Group (“Energy”). The corporate center and certain legacy liabilities (e.g. corporate debt) are included in the Corporate and Finance Group (“C & F”).
The global markets in which the Company operates are largely dependent on overall economic growth and continue to be highly competitive. Consolidated new orders and backlog have declined from recent years, but performance on existing contracts at the Company’s European operations continues to be profitable (see the Energy Group and Engineering & Construction Group discussions for additional details).
Many of the Company’s contracts contain lump-sum prices and management expects that the number of lump-sum contracts and the number of countries where these projects will be executed will increase in the future. Lump-sum contracts are inherently risky because the Company agrees to the selling price at the time it enters the contracts. Costs and execution schedule are based on estimates, and management assumes substantially all of the risks associated with completing the project as well as the post-completion warranty obligations. For the year 2003, net charges of approximately $30,800 were recorded primarily on lump-sum contracts — mainly associated with projects retained from the sale of Environmental assets. For the year 2002, charges of approximately $216,700 primarily on lump-sum contracts were recorded. The Company established a Project Risk Management Group (“PRMG”) in the second quarter of 2002 to be responsible for reviewing proposals and work that has been contracted to ensure that the Company is protected from unacceptable levels of financial risk. The charges noted above were incurred on projects whose contracts were signed prior to the formation of the PRMG (see “Performance Improvement Intervention” for more information).
22
In management’s view, 2003 was a transitional year that contained a number of positive developments but also included some challenges that adversely impacted the financial results. One of the most significant developments was the financial improvement in the Energy Group’s North American operations that returned to profitability during a depressed domestic power market. Management believes this turnaround resulted, in part, from changes in the unit’s management team as well as from the benefits obtained from the 2002 initiatives that focused on cost reductions and the way the Company plans and executes projects in the field. The European operations for both the E & C and Energy Groups continued to perform well in 2003 and remained profitable.
The Company successfully divested itself of several non-strategic assets during 2003 including the majority of the assets from its domestic Environmental business, its investment in a waste-to-energy facility in the State of New York, and an interest in a corporate office building in New Jersey. The Company also settled a number of domestic contract disputes that resulted in net cash proceeds to the Company of approximately $39,000, and successfully negotiated several settlement agreements with insurance carriers who provide coverage for asbestos claims. Finally, the Company reduced benefits under several of its employee benefit plans, including the freezing of its U.S. pension plan and the closing of its U.K. defined benefit pension plan to new participants. The changes to its benefit plans, as well as the improved performance in the global equity markets, positively impacted the Company’s shareholder’s deficit and improved the Company’s cost competitiveness.
Negative developments in 2003 included three projects retained in the Environmental sale and one project in the E & C’s North American operating unit which generated losses totaling in excess of $55,000 in 2003. Additionally, the backlog of unfilled orders declined in 2003 as the amount of revenues earned from projects exceeded new bookings. The time to complete the restructuring of the Company’s balance sheet continues to take longer than originally expected and resulted in significant costs to the Company’s C & F Group, and management believes had a negative impact on certain client perceptions towards the Company. Increasing the level of new bookings remains one of management’s priorities for 2004.
For the year 2003, the Company reported a net loss of $157,000, a reduction from the loss of $525,200 during the same period in 2002. The 2002 net loss included a charge of $150,500 as a cumulative effect of a change in accounting principle for goodwill. Included in the 2003 loss is a $15,100 pretax charge relating to the expected sale of an office building at its corporate headquarters in New Jersey, a $68,100 pretax charge for an increased asbestos provision, and pretax costs of $59,500 relating to the continuing restructuring efforts and severance, and a $16,700 pretax gain on the sale of substantially all the assets of Environmental. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. See Results of Operations below for additional details.
Cash, short-term investments, and restricted cash totaled $430,200 at December 26, 2003. This reflects an increase of $800 for the year.
The Company continues to carry high levels of debt in the United States, and the total U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to be cash flow negative. The Company’s foreign operations generate positive cash flow and are expected to continue to generate positive cash flow. The Company normally repatriates cash from its foreign operations and expects to continue to need to repatriate cash from its foreign operations in the future.
Maintaining adequate domestic liquidity remains one of management’s priorities and its U.S. liquidity forecasts are updated on a weekly basis. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand; cash flows from operations; cash repatriated from non-U.S. subsidiaries; asset sales; collections of receivables and claims recoveries; and working capital needs.
Commercial operations under a retained Environmental contract commenced in January 2004. The Company funded the construction of this project which processes spent nuclear waste for the U.S. Department of Energy. Capital recovery and operating revenues are generated as the plant processes the waste materials. This project is expected to generate in excess of $40,000 in net domestic cash flow during 2004 and represents a material component to the Company’s domestic cash flow forecast. Although there can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast, management currently forecasts that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004. See “Liquidity and Capital Resources” for additional details.
As part of its debt restructuring plan, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities,
23
$210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005. The S-4 is expected to be amended and filed after this Form 10-K is filed.
On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company is offering a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that the Company will complete the exchange offer on acceptable terms, or at all.
The Company may not be able to complete the restructuring plan on acceptable terms, or at all, which could have a material adverse impact on the Company’s operations.
Three Years Ended December 26, 2003
Results of Operations
| Consolidated Data | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
| Revenues | $ | 3,801,300 | $ | 3,574,500 | $ | 3,392,500 | ||||
| Net loss | (157,000 | ) | (525,200 | ) | (336,400 | ) | ||||
| Loss per share: | ||||||||||
| Basic and diluted loss per share | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) | |
The financial results for the years ended December 26, 2003, December 27, 2002, and December 28, 2001 contain net pretax charges of $151,700 $545,900, and $254,300, respectively. Details of the charges are identified below to provide a comprehensive understanding of the financial results.
| 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||||
| E & C | Energy | C & F | Total | E & C | Energy | C & F | Total | E & C | Energy | C & F | Total | ||||||||||||||||||||||||||
| 1 Change in accounting for goodwill | $ | — | $ | — | $ | — | $ | — | $ | 48,700 | $ | 101,800 | $ | — | $ | 150,500 | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2 (Gains)/losses recognized on/or in anticipation of sale | (16,700 | ) | (4,300 | ) | 15,100 | (5,900 | ) | — | 54,500 | — | 54,500 | — | 40,300 | — | 40,300 | ||||||||||||||||||||||
| 3 Revision to project claim estimates and related costs | 900 | (2,400 | ) | — | (1,500 | ) | 86,800 | 40,800 | 8,600 | 136,200 | 26,500 | 5,500 | 5,000 | 37,000 | |||||||||||||||||||||||
| 4 Revision to project cost estimated | |||||||||||||||||||||||||||||||||||||
| and related receivable reserve | 33,000 | (700 | ) | — | 32,300 | 34,850 | 45,650 | — | 80,500 | 25,200 | 98,400 | — | 123,600 | ||||||||||||||||||||||||
| 5 Provision for asbestos claims | — | — | 68,100 | 68,100 | — | — | 26,200 | 26,200 | — | — | — | — | |||||||||||||||||||||||||
| 6 Provision for domestic plant | |||||||||||||||||||||||||||||||||||||
| impairment | — | — | — | — | — | 18,700 | — | 18,700 | — | 6,100 | — | 6,100 | |||||||||||||||||||||||||
| 7 Performance intervention and | |||||||||||||||||||||||||||||||||||||
| restructuring | 1,000 | — | 42,600 | 43,600 | — | — | 37,100 | 37,100 | — | — | — | — | |||||||||||||||||||||||||
| 8 Pension curtailment/legacy | (2,600 | ) | — | (1,000 | ) | (3,600 | ) | — | — | 10,600 | 10,600 | — | — | 9,100 | 9,100 | ||||||||||||||||||||||
| 9 Severance | 6,600 | 6,700 | 2,600 | 15,900 | 500 | 4,300 | 2,900 | 7,700 | 1,300 | — | 3,400 | 4,700 | |||||||||||||||||||||||||
| 10 Legal and other | 3,900 | (3,900 | ) | 2,800 | 2,800 | 6,000 | 8,400 | 9,500 | 23,900 | — | — | 33,500 | 33,500 | ||||||||||||||||||||||||
| Total | $ | 26,100 | $ | (4,600 | ) | $ | 130,200 | $ | 151,700 | $ | 176,850 | $ | 274,150 | $ | 94,900 | $ | 545,900 | $ | 53,000 | $ | 150,300 | $ | 51,000 | $ | 254,300 | ||||||||||||
| (1) | The Company’s implementation of SFAS No. 142 in 2002 resulted in the impairment of goodwill in the E & C Group on Environmental of $48,700, and in the Energy Group on the Camden waste-to-energy facility of $24,800 and the North American power operations of $77,000, for a total of $101,800. Refer to Note 2 of the consolidated financial statements for a discussion of the requirements of SFAS No. 142. |
24
| (2) | In 2003, the Company recorded a $15,100 impairment loss in other deductions on the anticipated sale of a domestic corporate office building. Also in 2003, the Company sold certain assets of its wholly owned subsidiary, Environmental, resulting in a net gain of $16,700, the Energy Group had a gain of $4,300 on the sale of the Hudson Falls, New York waste-to-energy plant, both of which were recorded in other income. In 2002, a charge of $19,000 was recorded in other deductions on the anticipated sale of the Charleston, South Carolina waste-to-energy facility; the sale of this facility was completed in the fourth quarter of 2002. Also in 2002, a loss of $35,500 was recognized in other deductions on the anticipated sale of the Hudson Falls waste-to-energy facility that was sold in October 2003. In 2001, the Energy Group recorded $40,300 of losses in other deductions related to the sale of two hydrogen plants located in Venezuela and Chile ($5,000) in May 2001, and the Mt. Carmel cogeneration facility ($35,300) completed in December 2001. The amounts were recorded in other deductions. |
| (3) | In 2003, the E & C Group had a net charge of $2,100 on settlement of claims retained from the sale of assets of Environmental and a net gain of $1,200, with an overall charge of $900. The Energy Group had a recovery on a North American contract of $2,400. In 2002 and 2001, the Company reduced its estimates of claim recoveries to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. These charges were reflected in the cost of operating revenues ($136,200 in 2002 and $32,000 in 2001) and in other deductions ($5,000 in 2001). These charges include claims write-downs and the establishment of a provision for probable liquidated damages. |
| (4) | In 2003, the E & C Group recorded reserves relating to Environmental contracts retained in the amount of $32,900 and on three other contracts resulting in a net write-down of $100. The Energy Group has a net gain of $700 on six contracts. In 2002 and 2001, the charge for both groups totals $80,500 and $123,600, respectively. All of the above amounts were reflected in the cost of operating revenue. |
| The 2001 charge for $123,600 consists of $84,400 related to heat recovery steam generators (“HRSGs”). During 2000 and early 2001, the Company had been extremely successful in marketing these products, however, it was determined that the Company had underestimated the cost on seven contracts. The cost underestimates were primarily related to construction and subcontracted fabrication. Corrective action was taken on these projects resulting in an $84,400 charge. This product line is part of the Energy Group. Warranty and rework issues for one project resulted in a cost of $11,100 in the E&C Group. This cost related to a technical production issue on a refinery unit. |
| Additional charges in fourth quarter of 2001 relating to doubtful receivables, were made to establish reserves of $28,100 for approximately 20 receivable balances. The largest was for an Indonesian customer in the amount of $4,000. |
| (5) | The Company recorded charges related to increases in the valuation allowance for insurance claims receivable of $68,100, $26,200 and $0 for the years ended 2003, 2002 and 2001, respectively. These charges were recorded in other deductions in the consolidated statement of operations. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. The 2002 charge was recorded due to allocation of future costs to an insurer who became insolvent. |
| (6) | In 2002, a provision for impairment was recorded in cost of operating revenues of $13,400 relating to the write-down of fixed assets, and in other deductions of $5,300 for the Dansville, New York manufacturing facility under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Cash outflows related to the mothballing of the facility were approximately $3,300 in 2003. |
| (7) | Cost for performance intervention and restructuring activities were recorded in other deductions for $43,600 and $37,100 for the years 2003 and 2002, respectively. These activities are more fully described in the Performance Improvement Intervention section of this report. |
| (8) | The 2003 amount primarily represents a curtailment charge due to the changes in the Company’s domestic defined benefit plans and increased net periodic pension charges as a result of the decrease in the discount rates used in the updated actuarial determination of such amounts. The 2003, 2002 and 2001 amounts relate to the increased pension and postretirement medical costs. The 2003 and 2002 amounts were recorded in other deductions. The 2001 charge also includes $4,100 related to a restatement for postretirement medical benefits in accordance with SFAS 106. |
| (9) | The 2003 severance costs were recorded in cost of operating revenues for the E & C $(6,600) and Energy Groups $(6,700) and in selling, general and administrative expenses for the C & F Group $(2,600). The 2002 severance charges were recorded in cost of operating revenues $(500), selling, general and administrative expenses $(4,300) and other deductions $(2,900). The 2001 severance costs of $4,700 were recorded in general overhead costs. These amounts were substantially paid by the close of 2002. |
| (10) | The charges for 2003, 2002, and 2001 primarily represent accrual for legal settlements and other provisions. The amounts were recorded as follows for the years 2003, 2002 and 2001, respectively: E & C Group in cost of operating revenue $0 and $1,000, other deductions $3,900 and $5,000; Energy Group in |
25
| other deductions $(3,900) and $8,400; and C & F in selling, general and administrative expenses $0 and $4,900; and other deductions $2,800, $4,600 and $33,500. |
| The 2001 charge consisted of $20,000 related to the cancellation of a company-owned life insurance plan. The decision to cancel the plan was made and communicated to the insurance company in the fourth quarter of 2001. The Company surrendered the policies underlying this plan in the first quarter of 2002. The remaining $13,500 consisted primarily of the following items: the Company entered into an agreement to sell a non-core subsidiary and recognized a $6,000 loss on the sale; and the Company reached an agreement to settle outstanding issues with respect to its exit from the Robbins facility in March 2002, requiring the Company to record a charge to earnings of $6,000. The primary issues settled were the dispute with the title owner of the property and the distribution of any proceeds from the sale of the facility. |
Management recognizes that the E & C and Energy Groups are subject to charges due to contract disputes as previously described. In order to mitigate these charges in the future, the Company undertook the following actions during 2002 and 2003:
| • | A series of management actions were taken including leadership changes and performance interventions; |
| • | Implemented comprehensive contract accounting policies and procedures and related training programs on a company-wide basis; |
| • | Established a Project Risk Management Group that provides for corporate oversight; |
| • | Strengthened the financial controls relating to project execution and cash management; |
| • | Supplemented the financial expertise in contract areas; |
| • | Expanded the scope of the internal audit activities; and |
| • | Strengthened the expertise in contract audits by outsourcing the internal audit function to Deloitte & Touche LLP. |
The Company continued its actions in 2003 to reduce operating costs, to improve efficiencies, and to match internal resources to workload requirements through staff reductions and mothballing of the Dansville, New York manufacturing facility. The total number of staff reductions in 2003 approximated 2,300 and occurred primarily in North America and in the United Kingdom. Technical and non-technical positions were eliminated including executive and middle management, engineering, manufacturing, administrative support staff, and overhead personnel.
Consolidated Operating Revenues:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 3,723,800 | $ | 3,519,200 | $ | 3,315,300 | ||||
| $ Change | 204,600 | 203,900 | — | |||||||
| % Change | 5.8 | % | 6.2 | % | — | |||||
The 2003 increase in operating revenues resulted from the execution of several large projects in the Company’s European operations, including the United Kingdom, Continental Europe, and European Power. The 2003 increase noted above is net of a $235,600 reduction resulting from the sale of substantially all of the Environmental assets in March 2003.
The increase in 2002 operating revenues resulted primarily from the E & C Group’s operations in Continental Europe and the Energy Group’s operation in Finland. Both entities are executing several major projects in Europe.
See the individual group discussions for additional details.
26
Consolidated Cost of Operating Revenues:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 3,441,300 | $ | 3,426,900 | $ | 3,164,000 | ||||
| $ Change | 14,400 | 262,900 | — | |||||||
| % Change | 0.4 | % | 8.3 | % | — | |||||
As noted in the chart at the beginning of this section describing charges, Cost of Operating Revenues in 2003 and 2002 were negatively impacted by charges relating to revised claims estimates, revisions to contract estimates, receivable reserves, and the phase out and mothballing of the Dansville, New York manufacturing facility.
Consolidated Selling, General, and Administrative Expenses (SG&A):
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 199,900 | $ | 226,500 | $ | 225,400 | ||||
| $ Change | (26,600 | ) | 1,100 | — | ||||||
| % Change | (11.7 | )% | 0.5 | % | — | |||||
The decline in SG&A in 2003 was attributed to the sale of certain assets of Environmental in March 2003. Approximately $19,600 is attributed to the Environmental sale. (See the “Performance Improvement Intervention” Plan).
Minimizing SG&A expenses remain a focus for management. However, the cost of complying with the U.S. mandated Sarbanes-Oxley requirements, and the anticipated expansion of the sales and marketing efforts, will likely result in increased SG&A spending in 2004. Third party costs relating to the Sarbanes-Oxley compliance initiative is forecast to exceed $7,000 in 2004. This amount excludes the costs for internal resources and the costs for additional staff that are likely to be required worldwide.
Consolidated Other Income:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 77,500 | $ | 55,400 | $ | 77,200 | ||||
| $ Change | 22,100 | (21,800 | ) | — | ||||||
| % Change | 39.9 | % | (28.2 | )% | — | |||||
The increase in 2003 relates predominantly to the gain on the sale of certain assets of Environmental of $16,700 and a gain on the sale of the Hudson Falls, New York waste-to-energy plant of $4,300.
The decline in 2002 other income is attributable primarily to a 2001 licensing sales agreement by the Energy Group’s North American operation. No similar transaction occurred in 2002.
Other income in 2003 includes interest income of $10,100 versus $12,300 in 2002, and equity income in investments of $20,500 versus $15,900 in 2002.
Consolidated Other Deductions:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 168,500 | $ | 193,200 | $ | 126,500 | ||||
| $ Change | (24,700 | ) | 66,700 | — | ||||||
| % Change | (12.8 | )% | 52.7 | % | — | |||||
Other deductions in 2003 and 2002 contain many of the charges detailed at the beginning of this Item 7. Other deductions for 2003 include a $15,100 provision for a loss on an anticipated sale of a domestic corporate office building. The decrease in 2003 is due to a charge of $54,500 in 2002 in anticipation of the sale of the Hudson
27
Falls and Charleston waste-to-energy facilities. Other deductions for 2003 and 2002 include charges of $68,100 and $26,200, respectively for potentially uncollectible and insolvent insurance companies involved in the Company’s asbestos defense. No such charge was incurred in 2001. The 2002 charges relate to the Energy Group’s Charleston, South Carolina facility which was sold in October 2002 and the Hudson Falls, New York waste-to-energy facility which was sold in October 2003.
Other deductions for 2003 and 2002 also include charges for performance intervention and restructuring totaling $43,600 and $37,100, respectively, and legal settlements and other charges of $2,800 in 2003 versus $23,900 in 2002. Other deductions in 2002 also included $5,300 related to the mothballing of the Dansville, New York manufacturing facility.
Management expects Other Deductions to continue to be significant until the restructuring activities are completed.
Consolidated Tax Provision:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | 47,400 | $ | 14,700 | $ | 123,400 | ||||
| $ Change | 32,700 | (108,700 | ) | — | ||||||
| % Change | 222.4 | % | (88.1 | )% | — | |||||
The provisions of SFAS No. 109, “Accounting for Income Taxes,” prohibit the Company from recording domestic and certain foreign tax benefits due to the cumulative losses incurred domestically and in certain international tax jurisdiction in the three years ending December 26, 2003. Accordingly, the tax provision recorded on the pretax loss for 2003 and 2002 represents primarily foreign taxes from operations located in Europe, which generate taxable income which cannot be used to reduce losses incurred in other tax jurisdictions.
For statutory purposes, the majority of the domestic federal tax benefits, against which reserves have been taken, do not expire until 2020 and beyond, based on current tax laws. If the Company completes the exchange offer as discussed in the Registration Statement on Form S-4 discussed in Note 1 to the consolidated financial statements, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.
Net Loss–Consolidated:
| 12/26/03 | 12/27/02 | 12/28/01 | ||||||||
| Amount | $ | (157,000 | ) | $ | (525,200 | ) | $ | (336,400 | ) | |
| $ Change | 368,200 | (188,800 | ) | — | ||||||
| % Change | 70.1 | % | (56.1 | )% | — | |||||
The net loss for 2003 was due to the pretax charges totaling $151,700 detailed on the chart shown at the beginning of Item 7. The charges are a net of a gain on the sale of certain assets $(5,900); revisions to project claim estimates of $(1,500); revised contract cost estimates and related receivable allowances of $32,300; a provision for asbestos recoveries of $68,100; performance intervention and restructuring activities of $43,600; pension curtailment/legacy of $(3,600); severance of $15,900 and legal and other charges of $2,800.
The net loss for 2002 was primarily due to the pretax charges totaling $545,900 detailed on the chart shown at the beginning of this Item 7. These charges relate to the cumulative effects for a change in accounting principle for goodwill of $150,500; revisions to project claim estimates of $136,200; revised contract costs estimates and receivable allowances of $80,500; losses recognized in anticipation of the sale of the two Energy Group operating plants of $54,500; a provision for asbestos recoveries of $26,200; the mothballing of the Dansville, New York manufacturing facility of $18,700; performance intervention and restructuring activities of $37,100; severance of $7,700, pension and postretirement charges of $10,600, and legal and other charges of $23,900. Portions of the charges incurred in 2003 and 2002 by certain foreign operations are subject to tax benefits.
28
Major Business Groups
Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined below, is the primary earnings measure used by the Company’s chief decision makers. Previously, gross margin, which is equal to operating revenues less cost of operating revenues, was considered the primary financial measure.
Cumulative Effect of a Change in Accounting Principle for Goodwill—Net of $0 Tax
The Company subjects its reporting units to an annual step one goodwill impairment test as prescribed in SFAS No. 142. In 2003, no entity required a step two evaluation and no adjustments were made to the carrying value of the tested entities.
In 2002, the Company determined that three entities required a step two evaluation. Upon completion of these evaluations, goodwill was determined to be impaired and a charge of $150,500 was recorded. A charge of $48,700 was incurred relating to the environmental operating unit in the E & C Group, and a charge of $101,800 was incurred which relates to two domestic U.S. operating units in the Energy Group.
Engineering and Construction Group
| 2003 | 2002 | 2001 | ||||||||
| Operating revenues | $ | 2,293,700 | $ | 1,989,300 | $ | 1,910,600 | ||||
| Change from prior year $ | 304,400 | 78,700 | — | |||||||
| Change from prior year % | 15.3 | % | 4.1 | % | — | |||||
| EBITDA | 60,600 | (41,400 | ) | 32,600 | ||||||
| Change from prior year $ | 102,000 | (74,000 | ) | — | ||||||
| Change from prior year % | 246.4 | % | (227.0 | )% | — | |||||
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings/(loss) before taxes (before goodwill charge), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, adjusted for certain unusual and infrequent items specifically excluded in the terms of the Senior Credit Facility, is also used as a measure for certain covenants under the Senior Credit Facility. The Company believes that the line item on its consolidated statement of earnings entitled “net earnings/(loss)” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings/(loss) as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net earnings/(loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded. The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:
| • | It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations; |
| • | It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations; |
| • | It does not include depreciation. Because the Company must utilize substantial property, plants and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations. |
A reconciliation of EBITDA, a non-GAAP financial measure, to net earnings/(loss), a GAAP measure, is shown below.
| 2003 | 2002 | 2001 | ||||||||
| EBITDA | $ | 60,600 | $ | (41,400 | ) | $ | 32,600 | |||
| Less: Interest Expense | 3,200 | (400 | ) | (200 | ) | |||||
| Depreciation and amortization | 10,100 | 15,500 | 17,700 | |||||||
| Earnings/(Loss) before income taxes | 47,300 | (56,500 | ) | 15,100 | ||||||
| Tax (benefits)/provision | 15,900 | (11,500 | ) | 11,000 | ||||||
| Net earnings/(loss) prior to cumulative effect of a change in accounting principle | 31,400 | (45,000 | ) | 4,100 | ||||||
| Cumulative effect on prior years of change in accounting principle for goodwill | — | (48,700 | ) | — | ||||||
| Net earnings/(loss) | $ | 31,400 | $ | (93,700 | ) | $ | 4,100 | |||
29
Operating revenues were impacted by the sale of substantially all of the Environmental assets in March 2003. Operating revenues related to Environmental for 2003 and 2002 were $68,100 and $303,700, respectively. Operating revenues for 2003 and 2002 excluding Environmental increased $540,000 or 32% and $105,400 or 6.7% respectively. This increase is attributable to increases for 2003 in the E & C Group’s Continental Europe and United Kingdom operating units, partially offset by a decline in the U.S. operations. The European subsidiaries continue to execute several major projects in Europe, the Middle East, Singapore and China.
The decrease in the charges outlined at the beginning of this Item 7 account for the increased EBITDA for 2003. A gain of $16,700 and charges of $42,800 for 2003 compare to a charge of $128,200 in 2002.
The Company believes that the ongoing economic recovery in the United States has boosted prospects for growth in global trade, especially in Asia, in 2004. Growth in global trade is expected to impact the E & C industry in which the Company operates by, among other things, firming up the demand for oil and gas which management believes will help sustain higher energy prices and correspondingly drive demand for the Company’s business. Additionally, the Company believes gas to liquids plants may be planned for construction in Qatar. The Company anticipates this will encourage investment in oil and gas production facilities in 2004 in many parts of the world, notably the Middle East, Russia and the Caspian region. The Company believes that the liquid natural gas industry has increased development potential driven by the need to develop infrastructure to import LNG to the United States. In addition, the ongoing economic recovery is also expected to increase demand for petrochemical products. The Company anticipates investment in new capacity to continue and be heavily concentrated in the Middle East and China, although the latter country’s demand for imports may encourage some investment in other parts of Asia. The Company also anticipates investment may be higher in 2005 but some expect some improvement in 2004 as well. As the Company previously anticipated, there appears to be a slowing down of clean fuels projects at refineries in Europe and the U.S. as they work to meet current legislative demands. The Company believes increased investment due to the next series of environmental regulations may not occur until 2006 in the United States and 2007/2008 in Europe. However, several Middle East countries have begun planning large investment programs to upgrade their refineries in order to meet the demands of clean fuels export markets. This follows a period of low refinery investment in that region. The pharmaceutical industry continues to invest but at a reduced level owing to excess production capacity following a series of mergers. In general, the Company believes the underlying growth in demand for their products should result in increased investment in the latter part of 2005 and 2006, and that the most significant investment will likely be spread across the US, Europe and Singapore.
The war in Iraq and its reconstruction to date has not had a significant impact on operations for the group. Efforts continue to secure portions of this work, but projects in Iraq are not currently forecasted to have a material impact on the 2004 financial results. Refer to the Backlog and New Orders Booked section for further discussion of bookings and backlog.
Energy Group
| 2003 | 2002 | 2001 | ||||||||
| Operating revenues | $ | 1,427,900 | $ | 1,556,700 | $ | 1,423,600 | ||||
| Change from prior year $ | (128,800 | ) | 133,100 | — | ||||||
| Change from prior year % | (8.3 | )% | 9.4 | % | — | |||||
| EBITDA | 140,400 | (31,100 | ) | (27,200 | ) | |||||
| Change from prior year $ | 171,500 | (3,900 | ) | — | ||||||
| Change from prior year % | 551.4 | % | (14.3 | )% | — | |||||
For an explanation about the limitations of using EBITDA as a financial metric, see the notation above under Engineering and Construction Group. A reconciliation of EBITDA, a non-GAAP financial measure, to net earnings/(loss) a GAAP measure, is shown below.
30
| 2003 | 2002 | 2001 | ||||||||
| EBITDA | $ | 140,400 | $ | (31,100 | ) | $ | (27,200 | ) | ||
| Less: Interest Expense | 17,500 | 21,600 | 26,500 | |||||||
| Depreciation and amortization | 21,700 | 37,700 | 34,400 | |||||||
| Earnings/(loss) before income taxes | 101,200 | (90,400 | ) | (88,100 | ) | |||||
| Tax (benefits)/provision | 43,400 | (62,900 | ) | (27,400 | ) | |||||
| Net earnings/(loss) prior to cumulative effect of a change in accounting principle | 57,800 | (27,500 | ) | (60,700 | ) | |||||
| Cumulative effect on prior years of change in accounting principle for goodwill | — | (101,800 | ) | — | ||||||
| Net earnings/(loss) | $ | 57,800 | $ | (129,300 | ) | $ | (60,700 | ) | ||
The decrease in operating revenues for year 2003 primarily reflects the Company’s North American unit’s execution and completion in 2002 of several major projects that were not replaced in 2003. The decline recorded in North America was partially offset by the performance of the European operations which are executing major projects in Poland, Germany, Estonia, and Ireland.
The change in EBITDA was largely impacted by the 2002 charges outlined at the beginning of this Item 7 and by the successful completion of significant portions of work on projects in Poland, Ireland, and the United States.
The North American power market remains weak; however, operations in Northern Europe and selected markets in the Middle East remain relatively active. The Company’s operations in Europe have received notification of a significant award for a circulating fluidized bed boiler utilizing once through technology, however, formal notice to proceed is dependent on the client obtaining adequate financing. Notice to proceed is expected by the fourth quarter 2004 and the initial engineering work on this project is nearing completion. Additionally, management believes selective project opportunities exist in North America and in Eastern Europe at coal fired power plants. The Company’s North American operations expect the market to migrate toward increasing levels of service opportunities while awaiting the return of the re-powering opportunities in the second half of the decade. Eastern Europe is expected to generate significant coal fired project opportunities for the Company in 2005 and beyond.
The war in Iraq and its reconstruction has had no significant impact on the group’s operations to date and is not currently forecast to have a significant impact on the 2004 financial results. Refer to the Backlog and New Orders Booked section for further discussion of business outlook.
The Company has reviewed various methods of monetizing selected Power Systems facilities and sold the Hudson Falls, New York waste-to-energy facility in October 2003. A charge of $35,500 was recorded in 2002 in anticipation of this sale and a gain of $4,300 was recorded when the sale was completed. Based on current market conditions, management expects to continue to operate the remaining facilities in the normal course of business.
31
Management has reviewed the remaining facilities for impairment on an undiscounted cash flow basis and determined that no adjustment to the carrying amounts is required. If the Company decided to monetize the remaining assets, it is possible that the amounts realized could differ materially from the balances in the financial statements.
Financial Condition
The Shareholders’ Deficit at the year-end 2003 was $872,400 compared to a deficit of $780,900 at year-end 2002. A summary of the 2003 and 2002 changes follows:
| 2003 | 2002 | ||||||
| Shareholders’ Deficit as of beginning of year | $ | (780,900 | ) | $ | (48,400 | ) | |
| Net loss prior to cumulative effect of a change in accounting principle | (157,000 | ) | (374,700 | ) | |||
| Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill, net of $0 tax | — | (150,500 | ) | ||||
| Minimum pension liability adjustment | 58,700 | (226,000 | ) | ||||
| Foreign currency translation adjustment and other | 6,800 | 18,700 | |||||
| Shareholders’ Deficit as of end of year | $ | ( 872,400 | ) | $ | (780,900 | ) | |
For fiscal 2003, 2002 and 2001, investments in land, buildings and equipment were $12,900, $53,400 and $34,000, respectively. The investments were primarily related to information technology equipment and office equipment, and the routine capital expenditures at the Company’s build, own, and operate plants. In 2002, investments also included the buyout of an operating lease financing agreement on a corporate office building in New Jersey of approximately $33,000, approximately $4,700 of routine capital expenditures at the Company’s build, own and operate plants and $15,700 of other capital expenditures worldwide. Capital expenditures will continue to be directed primarily toward strengthening and supporting the Company’s core businesses and are limited by terms within the Senior Credit Facility. The Senior Credit Facility limits capital expenditures to $30,000 per year in 2004 and 2005.
The decrease in land, buildings and equipment during 2003 reflects the divesture of the Hudson Falls waste-to-energy facility and the write-down of an office building.
During 2003, the Company successfully settled several contract disputes resulting in net cash proceeds to the Company of approximately $39,000. The settlements resulted in reductions in accounts receivable and contracts in process.
Refer to Note 7 to the consolidated financial statements for information regarding the Company’s benefit plans and to Note 20 for information regarding the Company’s asbestos-related assets and liabilities.
Corporate and other debts, including the Senior Credit Facility, are as follows:
| December 26, 2003 | December 27, 2002 | ||||||
| Senior Credit Facility (average interest rate 7.16%) | $ | 128,163 | $ | 140,000 | |||
| Senior Notes at 6.75% due November 15, 2005 | 200,000 | 200,000 | |||||
| Other | 5,637 | 6,707 | |||||
| $ | 333,800 | $ | 346,707 | ||||
| Less, Current portion | 71 | 5,005 | |||||
| $ | 333,729 | $ | 341,702 | ||||
Special purpose project debt consists of the debt associated with the build, own, and operate special purpose operating subsidiaries. The operating results of these companies are consolidated within the Energy Group and the debt by company is as follows:
32
| December 26, 2003 | December 27, 2002 | ||||||
| Martinez Cogen Limited Partnership. | $ | 21,887 | $ | 27,907 | |||
| Foster Wheeler Coque Verde, L.P. | 37,782 | 40,077 | |||||
| Camden County Energy Recovery Associates | 77,508 | 88,920 | |||||
| Adirondack Resource Recovery Associates | — | 48,936 | |||||
| $ | 137,177 | $ | 205,840 | ||||
| Less, Current portion | 17,896 | 24,227 | |||||
| $ | 119,281 | $ | 181,613 | ||||
The Adirondack debt is associated to the Hudson Falls, New York waste-to-energy facility sold in October 2003.
Additionally, the Company held the following debt at the close of each period:
| December 26, 2003 | December 27, 2002 | ||||||
| Bank loans | $ | 121 | $ | 14,474 | |||
| Capital lease obligations, net of current portion $(1,322 and $750, respectively for 2003 and 2002) | $ | 62,373 | $ | 58,237 | |||
| Subordinated Robbins exit funding obligations, net of current portion $(1,690 and $1,580 respectively for 2003 and 2002) | $ | 111,589 | $ | 111,674 | |||
| Convertible subordinated notes | $ | 210,000 | $ | 210,000 | |||
| Preferred trust securities | $ | 175,000 | $ | 175,000 | |||
Bank loans reflect repayment at maturity in June 2003 of a credit facility in Europe.
Liquidity and Capital Resources
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. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the three-year period ended December 26, 2003, and has a shareholder deficit of $872,400. The Company has substantial debt obligations and during 2002, it was unable to comply with certain debt covenants under the previous revolving credit agreement. As described in more detail below, the Company received waivers
33
of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum EBITDA and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that the Company will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants.
The Company’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. The Company’s current cash flow forecasts indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004. Ensuring adequate domestic liquidity remains a priority for the Company’s management.
As of December 26, 2003, the Company had aggregate indebtedness of approximately $1,000,000. A breakdown of the debt is provided in the Financial Condition Section. Details about specific debt instruments are also provided later in this section.
The corporate debt must be funded primarily with distributions from foreign subsidiaries. As of December 26, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities and such amounts are included in restricted cash. The amount of restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
The Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. The Company’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, the Company repatriated approximately $100,000 from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.
Commercial operations under a domestic contract retained by the Company in the Environmental asset sale commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the invested capital is recovered during the early stages of processing the waste materials. This project is forecast to generate net cash flow from capital recovery and operations in 2004 in excess of $40,000. This represents a material component
34
of the domestic cash flow forecast and failure to generate such funds when forecast could have a material adverse impact on the Company’s ability to continue as a going concern.
On February 26, 2004, the California Public Utilities Commission approved certain changes to Pacific Gas & Electric’s rates. As relevant to the Company’s subsidiary’s Martinez Project, the E-20T rate has been decreased by approximately 15% retroactive to January 1, 2004, having a negative effect on the subsidiary’s 2004 cash flow and earnings. This rate change has been reflected in the Company’s liquidity forecast.
There can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast.
As part of its debt restructuring plan, the Company and certain of its subsidiaries filed an amended registration statement with the SEC on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005. The S-4 is expected to be amended and filed after this Form 10-K is filed.
On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company is offering a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that the Company will complete the exchange offer on acceptable terms, or at all.
Failure by the Company to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Environmental net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA as defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that the Company will be in compliance with these covenants throughout 2004. However, there can be no assurance that the actual results will match to forecasts or that the Company will not violate the covenants.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. By the fourth quarter 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
35
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in the Company’s liquidity forecast for 2004.
Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. The Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 at December 26, 2003) 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.
The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building. This repayment is included in 2002 capital expenditures. The long-term capital lease obligation of $44,120 at December 26, 2003 is included in capital lease obligations in the accompanying consolidated balance sheet. The Company entered into a binding agreement in the first quarter 2004 to sell the second corporate office building previously noted. The sale is expected to close in the second quarter 2004. The Company expects cash proceeds from the sale of approximately $17,000 and expects to repay 50% of this amount to the Senior Credit Facilities lenders.
During the third quarter of 2002, the Company also completed a receivables financing arrangement of up to $40,000. The funding available to the Company is dependent on the amount and characteristics of the domestic receivables. The amount available to the Company fluctuates daily, but the Company estimates that approximately $10,000 will be available during 2004. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commenced 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 26, 2003 and December 27, 2002, the Company had $0 borrowings outstanding under this facility.
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
Since January 15, 2002, the Company has exercised its right to defer payments on the junior subordinated debentures underlying the 9.00% Preferred Capital Trust I securities and, as a result, to defer payments on those securities. $175,000 in aggregate liquidation amount of the Preferred Trust Securities is currently outstanding. The Senior Credit Facility, as amended, currently requires the Company to defer the payment of the dividends on the preferred trust securities and no dividends were paid during 2003.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement or the receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default
36
under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations. The total amount of Foster Wheeler Ltd. debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003.
The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company’s operations used cash of approximately $62,100 in 2003 while the Company generated cash flow from operations of $160,400 during 2002. Management had previously forecasted much of the 2002 positive timing flows for several major projects to reverse in 2003, and forecasted cash flow from 2003 operations to be negative. The net cash use for operations in 2003 was primarily due to working capital requirements of approximately $42,000 and amounts spent on restructuring of approximately $53,000, offset by the cash generated from operations. The 2002 sources of cash include the effects of positive timing flows on several major projects in the U.S. and Europe, and the results of management’s comprehensive cash management activities. Cash flow from operations in 2001 was negative largely because of costs associated with project claims and trade receivables in excess of 180 days. Collection of receivables has been one of the primary focuses of the Company’s comprehensive plan to enhance cash generation and to improve profitability. The benefits from this intervention began to accrue in 2002 and the changes to policies and procedures are expected to improve the Company’s future operations.
The Company’s working capital varies from period to period depending on the mix, stage of completion and commercial terms and conditions of the Company’s contracts. Working capital needs increased in prior years as a result of the Company’s satisfying requests from its customers for more favorable payment terms under contracts. Such requests generally include reduced advance payments and less favorable payment schedules to the Company.
Restricted cash at December 26, 2003 consists of approximately $4,000 held primarily by special purpose entities and restricted for debt service payments, approximately $44,900 that was required to collateralize letters of credit and bank guarantees, and approximately $3,800 of client escrow funds. Domestic restricted cash totals approximately $4,700 which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $48,000 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.
On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Environmental, for sales proceeds then approximating $72,000. The Company also retained approximately $8,000 of Environmental’s cash on hand at the time of the asset sale. The sales proceeds were subject to adjustment based on a net worth calculation to be finalized subsequent to the sale. During the third quarter, the Company and the buyer agreed on a final net worth calculation that resulted in the Company returning $4,500 of the sales proceeds to the buyer over a six month time period. A total of $3,000 was returned by year-end and $1,500 was paid in February 2004. The net worth agreement had no impact on the pretax gain previously disclosed.
As noted above, the Company expects to receive net cash in excess of $40,000 in 2004 under a U.S. Government contract retained by Environmental. Project reserves of approximately $24,300 were recorded for this project during 2003 including a charge of $2,000 during the fourth quarter. Failure of the facility to operate as expected would delay recovery of the capital costs and would increase the project’s operating costs. If a delay occurs, it could have a material adverse impact on the Company’s financial condition, results of operations, and cash flow. For more information, see “Risk Factors – Foster Wheeler’s current and lump-sum, or fixed price, contracts and other shared risk contracts may result in significant losses if costs are greater than anticipated.”
A project reserve of approximately $8,600 was established in 2003 to reflect the diminished likelihood of full cost recovery on another contract retained by Environmental. This contract had been previously terminated for convenience by the ultimate client. This matter was settled in 2004, with no additional charge taken by the Company.
The Company also retained a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. The first phase of this project was profitable, but the close out of this phase resulted in increased costs. An $11,900 charge was recorded in 2003 and the remaining cash outlay of $4,000 will be expended in 2004. The Company is in the process of submitting requests for equitable adjustment related to this contract and, at December 26, 2003 and December 27, 2002, the Company’s financial statements reflect anticipated collection of $0 and $9,000, respectively, from these requests for equitable adjustment.
The second phase of the contract is billed on a cost plus fee basis and is expected to conclude in June 2004. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is for the construction, start-up and testing of the facility for a fixed price of $114,000, subject to escalation, is scheduled to commence in 2004. This phase will begin with the purchase of long lead items followed in 2005 by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency are evaluating the restructuring of the contract and have commenced discussions about possible restructuring or withdrawal from the contract. If the project were to proceed, the Company intends to seek third party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot obtain third party financing or the required surety bond, the Company’s participation would be uncertain. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has good legal defenses should the government agency decide to pursue an action.
During 2003, the Company successfully settled several domestic contract disputes. The disputes settled were both offensive and defensive in nature and generated approximately $39,000 in net proceeds during 2003. Additional payments associated with these settlements require the Company to pay a net $4,100 in 2004. These settlements resulted in a net pretax gain of $3,000.
In July 2003, several subsidiaries of the Company and Liberty Mutual Insurance Company, one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a
37
buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. The subsidiaries received in July an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.
In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims. The pending litigation and negotiations with other insurers is continuing.
In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.
Refer to Note 20 of the accompanying consolidated financial statements for more information regarding the Company’s asbestos liabilities.
It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. The Company traditionally obtained letters of credit or bank guarantees from its banks, or performance bonds from a surety on an unsecured basis. Due to the Company’s financial condition and current credit ratings, as well as changes in the bank and surety markets, the Company is now required in certain circumstances to provide security to banks and the surety to obtain new letters of credit, bank guarantees and performance bonds. (Refer to Note 2, “Restricted Cash”) If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees and performance bonds, its ability to enter into new contracts could be materially limited. Providing collateral increases working capital needs and limits the ability to repatriate funds from operating subsidiaries.
On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors. The principal changes consist of the following: the U.S. pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the number of employees eligible for the postretirement medical plan will be reduced; and the plan will be enhanced to increase the level of employer matching contribution. The net effect of these changes is expected to positively impact the financial condition of the Company through reduced costs and reduced cash outflow. The Company anticipates a savings in expenses over what would have been paid if the plans were not amended of approximately $10,000 per year. The savings will not begin until 2004. The Company froze the Supplemental Employee Retirement Plan (“SERP”) and in April 2003 issued accreting letters of credit to certain employees. At December 26, 2003, letters of credit totalling $2,250 were outstanding under the SERP curtailment. The Company paid $500 in cash to the select SERP eligible employees in the third quarter.
The Company maintains several defined benefit pension plans in its North American, United Kingdom, South African, and Canadian operations. Funding requirements for these plans are dependent, in part, on the performance of global equity markets and the discount rates used to calculate the present value of the liability. The poor performance of the global equity markets during recent years and low interest rates are expected to significantly increase the funding requirements for these plans in 2004 and 2005. The non-U.S. plans are funded from the local operating cash flows while funding for the U.S. plans is included within the U.S. working capital requirements previously noted. The U.S. pension plans are frozen and the United Kingdom’s plan is now closed to new entrants. The South African and Canadian plans are relatively immaterial. The liability interest rate used to calculate the U.S. funding requirement is established by the U.S. Government. The U.S. Congress previously passed legislation that temporarily increased the liability interest rate and thereby reduced the present value liability and corresponding funding requirements. This increased liability interest rate expired at the end of 2003 and the U.S. Congress is considering several proposals to amend the funding requirements. If the current rate is not extended, the funding requirement for the U.S. plans will approximate $37,000 in 2004 and $34,000 in 2005, versus $13,800 in 2003. If the current liability rate were increased by 100 basis points, the 2004 and 2005 funding requirements will be reduced by approximately $5,000 and $12,000 respectively. The funding amounts incorporate the savings achieved through the modification of the Company’s domestic pension plans discussed above, but are subject to change as the
38
performance of the plans’ investments and the liability interest rates fluctuate, and as the Company’s workforce demographics change. The next update will occur no later than the first quarter 2004.
On November 14, 2003, the New York Stock Exchange (“NYSE”) de-listed the Company’s common stock as well as its related security, 9.00% FW Preferred Capital Trust I based on the Company’s inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. The common stock and the 9.00% FW Preferred Capital Trust I securities are quoted on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company’s de-listing, this exemption was no longer available. To address this issue, the Company obtained the consent of the BMA to transfers between non-residents for so long as the Company’s shares continue to be quoted in the Pink Sheets or on the OTCBB. The Company believes that this consent will continue to be available.
The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during 2003 and does not expect to pay dividends on the common shares for the foreseeable future.
Contractual Obligations
The Company has contractual obligations comprised of bank loans, corporate and other debt, special purpose project debt, subordinated Robbins Facility exit funding obligations, convertible subordinated notes, preferred trust securities, and capital lease obligations. The Company is also obligated under non-cancelable operating lease obligations and purchase commitments. The aggregate maturities as of December 26, 2003, of these contractual obligations are as follows:
| Total | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | ||||||||||||||||
| Bank loans | $ | 121 | $ | 121 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
| Corporate and other debt | 333,800 | 71 | 333,039 | 647 | 43 | — | — | |||||||||||||||
| Special purpose project debt | 137,177 | 17,896 | 19,215 | 20,422 | 12,972 | 13,792 | 52,880 | |||||||||||||||
| Subordinated Robbins Facility exit funding obligations | 113,279 | 1,690 | 1,810 | 1,940 | 2,080 | 2,225 | 103,534 | |||||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | 210,000 | — | ||||||||||||||||
| Preferred Trust Securities | 175,000 | — | — | — | — | — | 175,000 | |||||||||||||||
| Preferred Trust Securities–deferred | ||||||||||||||||||||||
| interest payments | 38,021 | — | 38,021 | — | — | — | ��� | |||||||||||||||
| Operating lease commitments | 259,700 | 25,100 | 22,800 | 19,400 | 17,200 | 15,700 | 159,500 | |||||||||||||||
| Purchase commitments | 402,000 | 360,400 | 29,900 | 5,900 | 3,900 | 1,900 | — | |||||||||||||||
| Capital lease commitments | 166,730 | 6,830 | 6,797 | 7,246 | 6,973 | 7,449 | 131,435 | |||||||||||||||
| Total Contractual Cash Obligations | $ | 1,835,828 | $ | 412,108 | $ | 451,582 | $ | 55,555 | $ | 253,168 | $ | 41,066 | $ | 622,349 | ||||||||
Additionally, the Company expects to contribute a total of approximately $64,700 to its foreign and domestic pension plans in 2004.
In certain instances in its normal course of business, the Company has provided security for contract performance consisting of standby letters of credit, bank guarantees and surety bonds. As of December 26, 2003, such commitments and their period of expiration are as follows:
| Total | Less than 1 year | 2-3 Years | 4-5 Years | Over 5 Years | ||||||||||||
| Bank issued letters of credit and guarantees | $ | 483,000 | $ | 185,000 | $ | 198,000 | $ | 13,000 | $ | 87,000 | ||||||
| Surety bonds | 126,000 | 81,000 | 12,000 | 33,000 | — | |||||||||||
| Total Commitments | $ | 609,000 | $ | 266,000 | $ | 210,000 | $ | 46,000 | $ | 87,000 | ||||||
The Company may experience difficulty in obtaining surety bonds and bank guarantees/letters of credit on an unsecured basis in the future due to the changing view toward risk of loss in the current market, and the Company’s credit-rating. This may impact the Company’s ability to secure new business.
See Note 14 to the accompanying consolidated financial statements for a discussion of guarantees.
39
Backlog and New Orders
The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of backlog is not necessarily indicative of the future earnings of the Company related to the performance of such work. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which management has determined are likely to be performed. Although backlog represents only business that is considered firm, cancellations or scope adjustments may occur. Due to factors outside the Company’s control, such as changes in project schedules or project cancellations, the Company cannot predict with certainty the portion of backlog to be performed in a given year. Backlog is adjusted to reflect project cancellations, deferrals, sale of subsidiaries and revised project scope and cost.
| Consolidated Data | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
| Backlog | $ | 2,285,000 | $ | 5,446,000 | $ | 6,004,000 | ||||
| New orders | $ | 2,163,000 | $ | 3,052,000 | $ | 4,109,000 | ||||
The reduction in backlog is primarily attributable to the E & C Group’s U.K. and European operations. The balance reflects a decline in the Energy Group and the E & C Group’s North American operations. Approximately 52% of the 2003 year-end backlog is fixed price contracts as compared to 35% for 2002 and 45% for 2001. This is due primarily to a decline in projects with significant flow-through costs and the Environmental divestiture in March 2003.
A total of 72% of 2003 new orders in U.S. dollar terms were for projects awarded to the Company’s subsidiaries located outside of the United States compared to 62% in 2002, and 55% in 2001. Approximately 73%, 62% and 55% of new orders for 2003, 2002 and 2001, respectively, were for projects located outside of North America. Approximately 36% of 2003 new orders are fixed price contracts compared to 44% in 2002 and 48% in 2001. Key geographic regions contributing to new orders awarded in fiscal 2003 were Europe, the United States, Asia and the Middle East. Additional information is included in the group discussions below.
The reduced booking levels are an operating concern. Management believes the financial condition of the Company is having an increasingly negative impact with some clients. As a result, the Company established new, formalized internal reporting requirements in the second quarter of 2003 that closely monitors E & C man-hours in backlog and a new metric, Foster Wheeler scope.
Foster Wheeler scope is defined as the dollar value of backlog excluding costs incurred by Foster Wheeler as agent or as principal, on a reimbursable basis (i.e., flow-through costs). Foster Wheeler scope measures the component of backlog with mark-up, and corresponds to Foster Wheeler services plus fees for reimbursable contracts, and total selling price for lump sum contracts. It is useful to compare operating units with different composition of their contract portfolio between reimbursable and lump sum projects.
| Consolidated Data | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
| E & C Man-hours in year-end backlog (in thousands) | 3,830 | 5,900 | 9,390 | |||||||
| Foster Wheeler Scope in year-end backlog (1) | $ | 1,264,000 | $ | 2,092,000 | $ | 2,394,000 | ||||
| (1) Excludes Power Systems. | ||||||||||
The decline in E & C man-hours is attributable primarily to the European operations and, to a lesser extent, the U.K. operations. The decline in Foster Wheeler scope is attributable primarily to the Energy Group and, to a lesser extent, the E & C Group’s European operations. Since December 2002, Foster Wheeler scope declined $828,000 or 40%, due primarily to the European operations of the Energy Group and the E & C Group.
Additional information is included in the group discussions below.
40
Engineering and Construction Group (E & C)
| 2003 | 2002 | 2001 | ||||||||
| Backlog | $ | 1,343,000 | $ | 4,018,000 | $ | 4,475,000 | ||||
| New Orders | $ | 1,281,000 | $ | 1,672,000 | $ | 2,632,000 | ||||
| E & C Man-hours in year-end backlog (in thousands) | 3,830 | 5,900 | 9,390 | |||||||
| Foster Wheeler Scope in year-end backlog | $ | 424,000 | $ | 752,000 | $ | 961,000 | ||||
Backlog and new orders were reduced to reflect the divestiture of Environmental in March 2003. Environmental’s backlog at December 27, 2002 was approximately $1,800,000.
In addition to the impact of the Environmental divestiture, the decline in backlog is attributed to operations in the U.K. and United States. Two major engineering, procurement and construction projects were awarded at oil refineries in the U.K. and United States during 2001, and significant portions of the contracts were executed in 2002. Both projects include large quantities of flow-through costs. No similar sized projects, in U.S. dollar terms, were awarded in 2002, thereby decreasing backlog in 2003.
The decline in new orders, in U.S. dollar terms, relates to the two major engineering, procurement and construction projects noted above and reduced bookings associated with Environmental contracts divested in March 2003. Overall, the level of bookings in U.S. dollar terms is less than the group’s recent history. Approximately 70% of year-end backlog and 79% of 2003 bookings were from cost reimbursable plus fee contracts. This compares to 89% and 87% in 2002, and 73% and 71% in 2001, and reflects a decline in projects with significant flow-through costs and the Environmental divestiture. Approximately 86% of 2003 backlog and 96% of new orders are for projects located outside North America. This compares to 51% and 78% in 2002, and 50% and 64% in 2001.
In addition to the impact of the Environmental divestiture, the decline in E & C man-hours is attributable primarily to the European operations and, to a lesser extent, the U.K. Both are due to a reduction in new orders and the absence of replacing the aforementioned large oil refinery awards.
The decline in Foster Wheeler scope is $328,000, or 44%. This is less in percentage terms than the 67% decrease in backlog and reflects the aforementioned decline in flow-through costs and the Environmental divestiture in March 2003.
Results in 2003 reflected world economic growth and weak investment in many of the market sectors served by the E & C Group. Depressed oil refining margins discouraged investment, although the Company continued to win business because of spending on clean fuels production. The refinery market was most active in the United States and Europe, however, refinery owners in the Middle East were awarding contracts in the second half of the year.
The Company believes that the ongoing economic recovery in the United States has boosted prospects for growth in global trade, especially in Asia, in 2004. Growth in global trade is expected to impact the E & C industry in which the Company operates by, among other things, firming up the demand for oil and gas which management believes will help sustain higher energy prices and correspondingly drive demand for the Company’s business. Additionally, the Company believes gas to liquids plants may be planned for construction in Qatar. The Company anticipates this will encourage investment in oil and gas production facilities in 2004 in many parts of the world, notably the Middle East, Russia and the Caspian region. The Company believes that the liquid natural gas industry has increased development potential driven by the need to develop infrastructure to import LNG to the United States. In addition, the ongoing economic recovery is also expected to increase demand for petrochemical products. The Company anticipates investment in new capacity to continue and be heavily concentrated in the Middle East and China, although the latter country’s demand for imports may encourage some investment in other parts of Asia. The Company also anticipates investment may be higher in 2005 but some expect some improvement in 2004 as well. As the Company previously anticipated, there appears to be a slowing down of clean fuels projects at refineries in Europe and the U.S. as they work to meet current legislative demands. However, several Middle East countries have begun planning large investment programs to upgrade their refineries in order to meet the demands of clean fuels export markets. This follows a period of low refinery investment in that region. The pharmaceutical industry continues to invest but at a reduced level owing to excess production capacity following a series of mergers. In general, the Company believes the underlying growth in demand for their products should result in increased investment in the latter part of 2005 and 2006, and that the most significant investment will likely be spread across the US, Europe and Singapore. The Company presently expects that the growth in new orders resulting from these improved economic conditions will be realized in 2005 rather than in 2004.
41
Energy Group
| 2003 | 2002 | 2001 | ||||||||
| Backlog | $ | 946,000 | $ | 1,436,000 | $ | 1,548,000 | ||||
| New orders | $ | 873,000 | $ | 1,396,000 | $ | 1,478,000 | ||||
| Foster Wheeler Scope in year-end backlog | $ | 840,000 | $ | 1,340,000 | $ | 1,433,000 | ||||
The Energy Group’s backlog decreased $490,000 at the end of 2003, representing a 34% decrease from 2002 and a 39% decrease from 2001. Several large Heat Recovery Steam Generators and Selective Catalytic Reduction contracts were not replaced in 2002, thereby decreasing backlog in 2003. In addition, a major new contract anticipated to be awarded in 2003 to the Finnish operation was delayed and is now anticipated in the fourth quarter of 2004.
The decline in new orders for 2003 of $523,000, or 37%, is primarily a result of both Finnish and North American operations. Approximately 80% of 2003 year-end backlog and 57% of new orders were from fixed-price projects as compared to 93% and 72% in 2002, and 88% and 78% in 2001. Approximately 60% of 2003 backlog, and 38% of new orders, were for projects located outside North America as compared to 66% and 40% in 2002, and 62% and 37% in 2001. The decrease in the relative percentage of business outside North America reflects the slow worldwide economy in the power sector and the Company’s financial condition.
Foster Wheeler scope declined $500,000, or 37%, as compared to year-end 2002. This is slightly more in percentage terms than the 34% decrease in backlog and reflects a small increase in cost reimbursable plus fee versus lump sum contracts.
Results in 2003 reflected that the North American power market continues to suffer from relatively slow economic growth, over capacity, and the financial difficulties of independent power producers. In 2004, maintenance and service contracts continue to be the growth opportunities in the North American power market. Supply opportunities for new equipment associated with solid fuel boiler contracts are expected to be limited in the short term except for growth opportunities in circulating fluidized bed boilers which are expected to continue in certain European and Asian markets. Selected opportunities in environmental retrofits are expected to continue.
Other Matters
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 that are subject to change as events evolve and as additional information becomes available during the administration and litigation processes.
In the ordinary course of business, the Company and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be brought against the Company by customers alleging deficiencies in either equipment design or plant construction. Based on its knowledge of the facts and circumstances relating to the Company’s liabilities, if any, and to its insurance coverage, management of the Company believes that the disposition of such suits will not result in charges materially in excess of amounts provided in the accounts.
Inflation
The effect of inflation on the Company’s revenues and earnings is minimal. Although a majority of the Company’s revenues are realized under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to complete in these future periods. In addition, some contracts provide for price adjustments through escalation clauses.
42
Application of Critical Accounting Estimates
The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. Management and the Audit Committee of the Board of Directors approve the critical accounting policies.
Highlighted below are the accounting policies that management considers significant to the understanding and operations of the Company’s business as well as key estimates that are used in implementing the policies.
Revenue Recognition
Revenues and profits in long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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 percentage-of-completion method is the preferable method of revenue recognition as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”
The Company has thousands of projects in both reporting segments that are in various stages of completion. Such contracts require estimates to determine the appropriate final estimated cost (“FEC”), profits, revenue recognition, and the percentage complete. In determining the FEC, the Company uses significant estimates to forecast quantities to be expended (i.e. man-hours, materials and equipment), the costs for those quantities (including exchange rate fluctuations), and the schedule to execute the scope of work including allowances for weather, labor and civil unrest. Many of these estimates cannot be based on historical data as most contracts are unique, specifically designed facilities. In determining the revenues, the Company must estimate the percentage complete, the likelihood of the client paying for the work performed, and the cash to be received net of any taxes ultimately due or withheld in the country where the work is performed. Projects are reviewed on an individual basis and the estimates used are tailored to the specific circumstances. Significant judgment is exercised by management in establishing these estimates as all possible risks cannot be specifically quantified.
In 2003 and 2002, the Company recorded charges for revaluations of project cost estimates and provisions for uncollectible receivables of $32,300 and $80,500, respectively.
The recent financial results and the resultant intervention actions initiated by management evidence the fact that the estimates can be significantly different from the actual results. The project estimates are made on an individual project basis and are revised as additional information becomes available throughout the life cycle of contracts. If the FEC to complete long-term contracts indicates a loss, provision is made immediately for the total loss anticipated. Profits are accrued throughout the life of the project based on the percentage complete. The project life cycle, including the warranty commitments, can be up to six years in duration.
It is extremely difficult to calculate sensitivities on the above estimates given the thousands of individual contracts that exist at any point in time and because the estimates are project-specific rather than broad-based percentages.
Claims Recognition
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 clients 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 AICPA 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
43
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 management’s determination of 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 to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.
In 2002, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. As a result, pretax charges approximating $136,200 were recorded in 2002. As claims are settled, differences between the claim specific amounts reflected in the financial statements and the settlements are recorded as gains or losses. The Company continues to actively pursue these claims and, in 2003 recoveries of $1,500 were recognized as income when collected. At December 26, 2003, the Company had no claims and no requests for equitable adjustment recorded. Company policy requires all new claims in excess of $500 to be formally reviewed and approved by the corporate chief financial officer prior to being recorded in the financial results.
Asbestos
The Company has recorded assets of $555,400 relating to probable insurance recoveries of which approximately $60,000 is recorded in accounts and notes receivables, and $495,400 is recorded as long-term. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $372,200 and an estimated liability relating to future unasserted claims of approximately $214,000. Of the total, $60,000 is recorded in accrued expenses and $526,200 is recorded in asbestos related liability on the consolidated balance sheet. The liability is an estimate of future asbestos-related defense costs and indemnity payments that are based upon assumed average claim resolution costs applied against currently pending and estimated future claims. The asset is an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending litigation with certain insurers. The defense costs and indemnity payments are expected to be incurred over the next fifteen years.
As of December 26, 2003, approximately $257,700 was contested by the Company’s subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries various insurers and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurers would be immaterial. Based on the nature of the litigation and the opinions received from outside counsel, the Company believes that the possibility of not recovering the full amount of the asset is remote.
Management of the Company has considered the asbestos litigation and the financial viability and legal obligations of its subsidiaries’ insurance carriers and believes that except for those insurers which have become or may become insolvent for which a reserve has been provided, the insurers or their guarantors will continue to adequately fund claims and defense costs relating to asbestos litigation. The average cost per closed claims since 1993 is $1.8.
The Company recorded charges related to increases in the valuation allowance for insurance claims receivable of $68,100, $26,200 and $0 for the years ended 2003, 2002 and 2001, respectively. These charges were recorded in other deductions in the consolidated statement of operations. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. The 2002 charge was recorded due to allocation of future costs to an insurer who became insolvent.
It should be noted that the estimates of the assets and liabilities related to asbestos claims and recovery are subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies currently involved in litigation, the Company’s subsidiaries’ ability to recover from their insurers, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. If the number of claims received in the future exceeds the Company’s estimate, it is likely that the costs of defense and indemnity will similarly exceed the Company’s estimates. These factors are
44
beyond the Company’s control and could have a material adverse effect on the Company’s financial condition, results of operations, and cash flows.
The Company’s subsidiaries have been effective in managing the asbestos litigation in part because (1) the Company’s subsidiaries have access to historical project documents and other business records going back more than 50 years, allowing them to defend themselves by determining if they were present at the location that is the cause of the alleged asbestos claim and, if so, the timing and extent of their presence, (2) the Company’s subsidiaries maintain good records on insurance policies and have identified policies issued since 1952, and (3) the Company’s subsidiaries have consistently and vigorously defended these claims which has resulted in dismissal of claims that are without merit or settlement of claims at amounts that are considered reasonable.
Pension
Details of the Company’s pension plans are included in Note 7. The calculations of pension liability, annual service cost, and cash contributions required rely heavily on estimates about future events often extending decades into the future. Management is responsible for establishing the estimates used and major estimates include:
| • | The expected percentage of annual salary increases |
| • | The annual inflation percentage |
| • | The discount rate used to present value the future obligations |
| • | The expected long-term rate of return on plan assets |
| • | The selection of the actuarial mortality tables |
Management utilizes its business judgment in establishing these estimates. The estimates can vary significantly from the actual results and management cannot provide any assurance that the estimates used to calculate the pension liabilities included herein will approximate actual results. The volatility between the assumptions and actual results can be significant. For example, the performance by the global equity markets during 2000-2002 was significantly worse than estimated, while the equity markets in 2003 were better than expected. The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted average expected long-term rate of return on plan assets has declined from 9.3% to 7.9% over the past three years. Returns on the Company’s pension plan assets in the United States from 2000 through 2002 were less than the estimates by approximately $100,000. A reduction in the U.S. interest rate serving as the basis for the discount rate assumptions during the same three years accounted for an approximate $40,000 increase in the Company’s calculated liability.
Pension liability calculations are normally updated annually at each year end, but may be updated in interim periods if any major plan amendments or curtailments occur. The Company’s liability calculation is reflected in the financial statements herein.
Long-Lived Asset Accounting
The Company accounts for its long-lived assets, including those that it may consider monetizing, as assets to be held and used. Management periodically reviews subsidiaries for impairment as required under SFAS No. 144 using an undiscounted cash flow analysis. These reviews require estimating the costs to operate and maintain the facilities over an extended period that could approximate 25 years or more. Estimates are made regarding the costs to maintain and replace equipment throughout the facilities, period operating costs, the production quantities and revenues, and the ability by clients to financially meet their obligations. If a formal decision is made by management to sell an asset, a discounted cash flow methodology is utilized for such assessment.
Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.
45
Income Taxes
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.
In the fourth quarter of 2001, the Company established a valuation allowance of $194,600, primarily for domestic deferred tax assets under the provisions of SFAS No. 109. Such action was required due to the losses from domestic operations experienced in the three most recent fiscal years. For statutory purposes, the majority of the deferred tax assets for which a valuation allowance was provided do not begin to expire until 2020 and beyond, based on the current tax laws. Based on the establishment of the valuation allowance, the Company does not anticipate recognizing a provision for federal income taxes on domestic operations until some time subsequent to the successful completion of the proposed restructuring.
If the Company completes the exchange offer as discussed in Note 1 to the consolidated financial statements, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.
Performance Improvement Intervention
In March 2002, the Company initiated a comprehensive plan to enhance cash generation and to improve profitability. The operating performance portion of the plan concentrated on the quality and quantity of backlog, the execution of projects in order to achieve or exceed the profit and cash targets and the optimization of all non-project related cash sources and uses, including cost reductions. In connection with this plan, a group of outside consultants was hired for the purpose of carrying out a performance improvement intervention. The tactical portion of the performance improvement intervention concentrates on booking current projects, and generating incremental cash from high leverage opportunities such as overhead reductions, procurement, and accounts receivable. The systemic portion of the performance improvement intervention concentrates on sales effectiveness, estimating, bidding, and project execution procedures. Management believes the turnaround of the Energy Group’s North American operating unit is in large part the result of the intervention activities.
Specific details of the activities to date include the following:
Procurement
The Company concluded the implementation of a procurement initiative that focused on reducing internal man-hours and cycle times as well as engaging in strategic agreements with key suppliers.
Accounts Receivable
A company-wide management operating system was implemented to identify and track actions relating to collection of all receivables. A policy was established requiring actions to be taken prior to receivables becoming due as well as the actions to be taken when collections are past due.
Trade accounts and notes receivable at December 26, 2003 and December 27, 2002 were $451,000 and $543,100, respectively, at a time that operating revenues increased $204,600 when compared to 2002 showing improvement in collection.
Cost Reductions
Management continues to evaluate its staffing levels in relation to current and expected workload. Staff levels were reduced by approximately 2,300 during 2003. The reductions included technical and non-technical positions, including executive and middle management levels, engineering, manufacturing, administrative support
46
staff, overhead personnel, and office expenses. The staff reductions include early retirements, voluntary and involuntary terminations.
Management will continue to adjust the Company’s resources to match its workload and continues to explore ways to increase efficiencies and reduce costs. Management expects to increase the use of its low cost engineering center in India during 2004.
Sales
The Company continues to emphasize booking high quality contracts. In May 2002, the Company launched an initiative to improve the sales effectiveness of its North American Energy and E & C Groups and in 2003 reorganized and added resources to its E & C sales force.
Risk Management
The Company’s Project Risk Management Group (“PRMG”), established in the second quarter of 2002, is responsible for reviewing proposals and contracts that are in execution to ensure that the Company is protected from taking unacceptable levels of financial risk. During the second quarter 2003, an outside consulting firm was engaged to supplement the internal resources in the PRMG. The PRMG continues to be assisted in its efforts by Deloitte & Touche LLP, the Company’s internal auditors.
The Project Risk Management Group also issued, in conjunction with the financial group, a set of Corporate Policies to govern proposals and contracting, project execution including subcontracting, and procurement and contract accounting.
High-leverage Projects
The Company launched a major initiative in the second quarter of 2002 that focused on the way the Company plans and executes projects in the field. The initiative’s objective was to build a best in class, Foster Wheeler project management system. This activity took the best practices and integrated them into a Company wide system.
The initiative was completed in January 2003 and determined that best in class practices existed but were not consistently applied. Updated systems and procedures were subsequently implemented and are applied to all new projects.
Code of Ethics
The Company maintains a code of ethics for all employees, including executive management. No exceptions or waivers were made to the code of ethics during 2003. See “Code of Ethics” in Item 10 under Part III of this report.
Accounting Developments
In November 2002, the FASB issued FASB Interpretation (“FIN”) 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 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:
| a) | Product warranties |
| 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) |
47
| 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 Form 10-K implemented the disclosure requirements of this interpretation. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements. Management does, however, believe that a subsidiary trust which issued mandatory redeemable preferred securities will need to be de-consolidated in 2004 under this interpretation. This will have no impact on the Company’s consolidated debt as the intercompany debt to the subsidiary trust will become third party debt upon de-consolidation.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does
48
not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employer’s Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” The FSP permits employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). Without the FSP, plan sponsors would be required under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date President Bush signed the Act into law. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB on how to account for the federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. In accordance with the FSP, the Company has not reflected the impact of the Act on any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the consolidated financial statements or accompanying notes. Specific authoritative guidance on the accounting for the federal subsidy is pending, and that guidance, when issued, could require the Company to change previously reported information. The Company is currently assessing the impact of the Act and whether its postretirement plan should be amended in consideration of the new legislation.
Safe Harbor Statement
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other sections of this Annual Report on Form 10-K and other reports and oral statements made by representatives of the Company from time to time may contain forward-looking statements that are based on management’s assumptions, expectations and projections about the Company and the various industries within which the Company operates. These include statements regarding the Company’s expectation regarding revenues (including as expressed by its backlog), its liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of insurance recoveries. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Company cautions that a variety of factors, including but not limited to the factors described under Item 1. “Business–Risk Factors of the Business” and the following, could cause business conditions and results to differ materially from what is contained in forward-looking statements:
| • | changes in the rate of economic growth in the United States and other major international economies; |
| • | changes in investment by the power, oil & gas, pharmaceutical, chemical/petrochemical and environmental industries; |
| • | changes in the financial condition of our customers; |
| • | changes in regulatory environment; |
| • | changes in project design or schedules; |
| • | contract cancellations; |
| • | changes in estimates made by the Company of costs to complete projects; |
| • | changes in trade, monetary and fiscal policies worldwide; |
| • | currency fluctuations; |
49
| • | war and/or terrorist attacks on facilities either owned or where equipment or services are or may be provided; |
| • | outcomes of pending and future litigation, including litigation regarding the Company’s liability for damages and insurance coverage for asbestos exposure; |
| • | protection and validity of patents and other intellectual property rights; |
| • | increasing competition by foreign and domestic companies; |
| • | compliance with debt covenants; |
| • | monetization of certain Power System facilities; |
| • | implementation of its restructuring plan; |
| • | recoverability of claims against customers; and |
| • | changes in estimates used in its critical accounting policies. |
Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. The reader should consider the areas of risk described above in connection with any forward-looking statements that may be made by the Company.
The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is advised, however, to consult any additional disclosures the Company makes in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk (amounts in thousands of dollars)
Management’s strategy for managing transaction risks associated with currency fluctuations is for each operating unit to enter into derivative transactions, such as foreign currency exchange contracts, to hedge its exposure on contracts into the operating unit’s functional currency. The Company utilizes all such financial instruments solely for hedging. Company policy prohibits the speculative use of such instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to such financial instruments. To minimize this risk, the Company enters into these financial instruments with financial institutions that are primarily rated “A” or better by Standard & Poor’s or “A2” or better by Moody’s. Management believes that the geographical diversity of the Company’s operations mitigates the effects of the currency translation exposure. However, the Company maintains substantial operations in Europe and is subject to translation risk for the Euro and Pound Sterling. No significant unhedged assets or liabilities are maintained outside the functional currencies of the operating subsidiaries. Accordingly, translation exposure is not hedged.
Interest Rate Risk — The Company is exposed to changes in interest rates primarily as a result of its borrowings under its Revolving Credit Agreement, bank loans, and its variable rate special-purpose project debt. If market rates average 1% more in 2004 than in 2003, the Company’s interest expense would increase, and income before tax would decrease by approximately $1,500. This amount has been determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate balances as of December 26, 2003. In the event of a significant change in interest rates, management would likely attempt to take action to further mitigate its exposure to the change. However, due to the Company’s financial situation, it is unlikely that a hedging facility would be available.
Foreign Currency Risk — The Company has significant overseas operations. Generally, all significant activities of the overseas subsidiaries are recorded in their functional currency, which is generally the currency of the country of domicile of the subsidiary. This results in a mitigation of the potential impact of earnings fluctuations as a result of changes in foreign exchange rates. In addition, in order to further mitigate risks associated with foreign currency fluctuations for long-term contracts not negotiated in the subsidiary’s functional currency, the subsidiaries enter into foreign currency exchange contracts to hedge the exposed contract value back to their functional currency.
At December 26, 2003, the Company’s primary foreign currency exposures and contracts are set forth below:
50
| Currency Hedged (bought or sold forward | Functional Currency | Foreign Currency Exposure (in equivalent US dollars) | Notional Amount of Forward Buy Contracts | Notional Amount of Forward Sell Contracts | ||||||||
| Euro and legacy countries | US dollar | $ | 10,000 | $ | 10,000 | $ | — | |||||
| British pound | 822 | — | 822 | |||||||||
| Polish zloty | 5,559 | — | 5,559 | |||||||||
| Swiss franc | Euro | 7,733 | — | 7,733 | ||||||||
| Singapore dollar | Euro | 5,836 | 5,836 | — | ||||||||
| US dollar | Euro | 53,845 | 1,940 | 51,905 | ||||||||
| British pound | 245 | — | 245 | |||||||||
| South African rand | British pound | 882 | — | 882 | ||||||||
| Total | $ | 84,922 | $ | 17,776 | $ | 67,146 | ||||||
The notional principal amount provides one measure of the transaction volume outstanding as of year end, and does not represent the amount of exposure to market loss. Amounts ultimately realized upon final settlement of these financial instruments, along with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The contracts mature in 2004. Increases in fair value of the forward sell contracts result in losses while fair value increases of the forward buy contracts result in gains. The contracts have been established by various international subsidiaries to sell a variety of currencies and receive their respective functional currency or other currencies for which they have payment obligations to third parties. See Note 10 to the consolidated financial statements for further information regarding derivative financial instruments.
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
| Pages | |||
| Report of Independent Registered Public Accounting Firm | 53 | ||
| 54 | |||
| 55 | |||
| 56 | |||
| 57 | |||
| 58 | |||
| Other Financial Statements of Certain Foster Wheeler Subsidiaries | |||
| The following financial statements for certain of Foster Wheeler Ltd. indirectly wholly owned subsidiaries are included pursuant to Regulation S-X Rule 3-16 of the Exchange Act, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.” See Note 9 to the Foster Wheeler Ltd. consolidated financial statements. | |||
| 133 | |||
| 176 | |||
| 202 | |||
| 228 | |||
| 253 | |||
| 280 | |||
| 293 | |||
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations and comprehensive loss, of shareholders’ deficit and of cash flows, present fairly, in all material respects, the financial position of Foster Wheeler Ltd. and its subsidiaries (the “Company”) at December 26, 2003 and December 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2003 in conformity with accounting principles generally accepted in the United States of America. These consolidated 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 2 to the consolidated financial statements, effective December 29, 2001, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses in each of the three years in the period ended December 26, 2003 and has a shareholders’ deficit of $872,400,000 at December 26, 2003. The Company has substantial debt obligations and during 2003 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to complete planned restructuring activities, 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 Company maintaining credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. 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 10, 2004,
except for Note 24 D
as to which the date is
April 9, 2004.
53
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED
(in thousands of dollars, except per share amounts)
December 26, | December 27, | December 28, | ||||||||
2003 | 2002 | 2001 | ||||||||
| Revenues: | ||||||||||
| Operating revenues | $ | 3,723,815 | $ | 3,519,177 | $ | 3,315,314 | ||||
| Other income (including interest: | ||||||||||
| 2003 — $10,130; 2002 — $12,251; 2001 — $9,060) | 77,493 | 55,360 | 77,160 | |||||||
| Total revenues and other income | 3,801,308 | 3,574,537 | 3,392,474 | |||||||
| Costs and expenses: | ||||||||||
| Cost of operating revenues | 3,441,342 | 3,426,910 | 3,164,025 | |||||||
| Selling, general and administrative expenses | 199,949 | 226,524 | 225,392 | |||||||
| Other deductions | 168,455 | 193,156 | 126,495 | |||||||
| Minority interest | 5,715 | 4,981 | 5,043 | |||||||
| Interest expense | 77,354 | 66,418 | 68,734 | |||||||
| Dividends on preferred security of subsidiary trust | 18,130 | 16,610 | 15,750 | |||||||
| Total costs and expenses | 3,910,945 | 3,934,599 | 3,605,439 | |||||||
| Loss before income taxes | (109,637 | ) | (360,062 | ) | (212,965 | ) | ||||
| Provision for income taxes | 47,426 | 14,657 | 123,395 | |||||||
| Net loss prior to cumulative effect of a change in accounting principle | (157,063 | ) | (374,719 | ) | (336,360 | ) | ||||
| Cumulative effect of a change in accounting principle for goodwill, net of $0 tax | — | (150,500 | ) | — | ||||||
| Net loss | (157,063 | ) | (525,219 | ) | (336,360 | ) | ||||
| Other comprehensive income/(loss): | ||||||||||
| Cumulative effect of prior years (to December 29, 2000) of a change in accounting principle for derivative | ||||||||||
| instruments designated as cash flow hedges | — | — | 6,300 | |||||||
| Change in gain on derivative instruments designated as cash flow hedges | — | (3,834 | ) | (2,466 | ) | |||||
| Foreign currency translation adjustment | 6,762 | 22,241 | (10,191 | ) | ||||||
| Minimum pension liability adjustment net of tax provision/ (benefits): 2003 — $18,886; 2002 — ($73,400); 2001 — $0 | 58,677 | (226,011 | ) | (36,770 | ) | |||||
| Comprehensive loss | $ | (91,624 | ) | $ | (732,823 | ) | $ | (379,487 | ) | |
| Loss per share: | ||||||||||
| Basic and Diluted | ||||||||||
| Net loss prior to cumulative effect of a change in accounting principle | $ | (3.83 | ) | $ | (9.15 | ) | $ | (8.23 | ) | |
| Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill | — | (3.67 | ) | — | ||||||
| Net loss | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) | |
| Shares outstanding (in thousands): | ||||||||||
| Basic: weighted-average number of shares outstanding | 41,045 | 40,957 | 40,876 | |||||||
| Diluted: effect of share options | — | — | — | |||||||
| Total diluted | 41,045 | 40,957 | 40,876 | |||||||
See notes to consolidated financial statements
54
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)
December 26, 2003 | December 27, 2002 | ||||||
ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 364,095 | $ | 344,305 | |||
| Short-term investments | 13,390 | 271 | |||||
| Accounts and notes receivable, net: | |||||||
| Trade | 451,010 | 543,055 | |||||
| Other | 105,404 | 85,166 | |||||
| Contracts in process | 166,503 | 270,492 | |||||
| Inventories | 6,790 | 9,332 | |||||
| Prepaid, deferred and refundable income taxes | 37,160 | 41,155 | |||||
| Prepaid expenses | 30,024 | 36,071 | |||||
| Total current assets | 1,174,376 | 1,329,847 | |||||
| Land, buildings and equipment | 622,729 | 769,680 | |||||
| Less accumulated depreciation | 313,114 | 361,861 | |||||
| Net book value | 309,615 | 407,819 | |||||
| Restricted cash | 52,685 | 84,793 | |||||
| Notes and accounts receivable — long-term | 6,776 | 21,944 | |||||
| Investment and advances | 98,651 | 88,523 | |||||
| Goodwill, net | 51,121 | 50,214 | |||||
| Other intangible assets, net | 71,568 | 72,668 | |||||
| Prepaid pension cost and related benefit assets | 7,240 | 26,567 | |||||
| Asbestos-related insurance recovery receivable | 495,400 | 534,045 | |||||
| Other assets | 182,151 | 156,279 | |||||
| Deferred income taxes | 56,947 | 69,578 | |||||
| TOTAL ASSETS | $ | 2,506,530 | $ | 2,842,277 | |||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | |||||||
| Current Liabilities: | |||||||
| Current installments on long-term debt | $ | 20,979 | $ | 31,562 | |||
| Bank loans | 121 | 14,474 | |||||
| Accounts payable | 305,286 | 283,940 | |||||
| Accrued expense | 381,376 | 326,881 | |||||
| Estimated costs to complete long-term contracts | 552,754 | 645,763 | |||||
| Advance payment by customers | 50,248 | 82,658 | |||||
| Income taxes | 62,996 | 64,517 | |||||
| Total current liabilities | 1,373,760 | 1,449,795 | |||||
| Corporate and other debt less current installment | 333,729 | 341,702 | |||||
| Special-purpose project debt less current installments | 119,281 | 181,613 | |||||
| Capital lease obligations | 62,373 | 58,237 | |||||
| Deferred income taxes | 9,092 | 8,333 | |||||
| Pension, postretirement and other employee benefits | 295,133 | 437,820 | |||||
| Asbestos-related liability | 526,200 | 519,790 | |||||
| Other long-term liabilities and minority interest | 124,792 | 109,361 | |||||
| Subordinated Robbins exit funding obligations less current installment | 111,589 | 111,674 | |||||
| Convertible subordinated notes | 210,000 | 210,000 | |||||
| Mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures | 175,000 | 175,000 | |||||
| Deferred accrued interest expense-mandatory redeemable interest securities | 38,021 | 19,891 | |||||
| Commitments and contingencies | — | — | |||||
| TOTAL LIABILITIES | 3,378,970 | 3,623,216 | |||||
| Shareholders’ Deficit: | |||||||
| Preferred Stock | |||||||
| Authorized 1,500,000 shares, no par value — none outstanding | — | ||||||
| Common stock $1.00 par value: authorized 160,000,000 shares; issued: 2003 — 40,771,560 and 2002 — 40,771,560 | 40,772 | 40,772 | |||||
| Paid-in capital | 201,841 | 201,718 | |||||
| Accumulated deficit | (811,054 | ) | (653,991 | ) | |||
| Accumulated other comprehensive loss | (303,999 | ) | (369,438 | ) | |||
| TOTAL SHAREHOLDERS’ DEFICIT | (872,440 | ) | (780,939 | ) | |||
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 2,506,530 | $ | 2,842,277 | |||
See notes to consolidated financial statements
55
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
(in thousands of dollars, except share data and per share amounts)
December 26, | December 27, | December 28, | ||||||||
2003 | 2002 | 2001 | ||||||||
| Common Stock | ||||||||||
| Balance at beginning of year | $ | 40,772 | $ | 40,772 | $ | 40,748 | ||||
| Sold under stock options: (shares: 2000-66,000) | — | — | 66 | |||||||
| Bermuda reorganization | — | — | (42 | ) | ||||||
| Balance at end of year | 40,772 | 40,772 | 40,772 | |||||||
| Paid-in Capital | ||||||||||
| Balance at beginning of year | 201,718 | 201,390 | 200,963 | |||||||
| Stock options issued to non-employees | 123 | 328 | — | |||||||
| Stock option exercise price less par value | — | 561 | ||||||||
| Excess of cost of treasury stock or common stock issued under incentive and other plans over market value | — | 6 | ||||||||
| Bermuda reorganization | — | (140 | ) | |||||||
| Balance at end of year | 201,841 | 201,718 | 201,390 | |||||||
| (Accumulated Deficit) / Retained Earnings | ||||||||||
| Balance at beginning of year | (653,991 | ) | (128,772 | ) | 212,476 | |||||
| Net loss for the year | (157,063 | ) | (525,219 | ) | (336,360 | ) | ||||
| Cash dividends paid: | ||||||||||
| Common (per share outstanding: 2001 — $0.12) | (4,888 | ) | ||||||||
| Balance at end of year | (811,054 | ) | (653,991 | ) | (128,772 | ) | ||||
| Accumulated Other Comprehensive Loss | ||||||||||
| Balance at beginning of year | (369,438 | ) | (161,834 | ) | (118,707 | ) | ||||
| Cumulative effect on prior years (to December 29, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges | — | — | 6,300 | |||||||
| Change in net gain on derivative instruments designated as cash flow hedges | — | (3,834 | ) | (2,466 | ) | |||||
| Change in accumulated translation adjustment during the year | 6,762 | 22,241 | (10,191 | ) | ||||||
| Minimum pension liability (net of tax provision/ | ||||||||||
| (benefits) 2003 — $18,886; 2002 — $(73,400); 2001 — $0) | 58,677 | (226,011 | ) | (36,770 | ) | |||||
| Balance at end of year | (303,999 | ) | (369,438 | ) | (161,834 | ) | ||||
| Treasury Stock | ||||||||||
| Balance at beginning of year | — | — | 165 | |||||||
| Common stock acquired for Treasury: (shares: 2001 — 3,000) | — | — | 37 | |||||||
| Shares issued under incentive and other plans (shares: 2001 — 3,008) | — | — | (20 | ) | ||||||
| Bermuda reorganization | (182 | ) | ||||||||
| Balance at end of year | — | — | — | |||||||
| Total Shareholders’ Deficit | $ | (872,440 | ) | $ | (780,939 | ) | $ | (48,444 | ) | |
See notes to consolidated financial statements.
56
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
(in thousands of dollars)
December 26, | December 27, | December 28, | ||||||||
2003 | 2002 | 2001 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net loss | $ | (157,063 | ) | $ | (525,219 | ) | $ | (336,360 | ) | |
| Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||||
| Cumulative effect of a change in accounting principle | — | 150,500 | — | |||||||
| Provision for impairment loss | 15,100 | 18,700 | — | |||||||
| Provision for restructuring | — | — | 41,570 | |||||||
| Depreciation and amortization | 35,574 | 44,425 | 55,750 | |||||||
| Deferred tax | 19,774 | (28,355 | ) | 137,801 | ||||||
| (Gain)/provision for loss on sale of cogeneration plants | (4,300 | ) | 54,500 | 40,300 | ||||||
| Provision for asbestos claims | 68,081 | 26,200 | — | |||||||
| Claims (recoveries)/write downs and related contract provisions | (1,500 | ) | 136,200 | 37,000 | ||||||
| Contract reserves and receivable provisions | 32,300 | 80,500 | 123,600 | |||||||
| Dividends on Preferred Trust securities | 18,130 | 16,610 | 3,484 | |||||||
| Gain on sale of land, building and equipment | (17,970 | ) | (1,269 | ) | (10,174 | ) | ||||
| Earnings on equity interests, net of dividends | (9,145 | ) | (4,262 | ) | (4,658 | ) | ||||
| Other equity earnings, net of dividends | (3,312 | ) | (1,850 | ) | (1,544 | ) | ||||
| Other noncash items | (2,884 | ) | (14,827 | ) | (2,787 | ) | ||||
| Changes in assets and liabilities: | ||||||||||
| Receivables | 78,069 | 192,801 | (96,607 | ) | ||||||
| Contracts in process and inventories | 47,353 | 53,361 | (88,044 | ) | ||||||
| Accounts payable and accrued expenses | 11,265 | (153,565 | ) | 35,338 | ||||||
| Estimated costs to complete long-term contracts | (142,914 | ) | 62,870 | (25,026 | ) | |||||
| Advance payments by customers | (38,287 | ) | 18,206 | 5,399 | ||||||
| Income taxes | 2,499 | 15,535 | (14,265 | ) | ||||||
| Other assets and liabilities | (12,868 | ) | 19,304 | 10,542 | ||||||
| Net cash (used)/provided by operating activities | (62,098 | ) | 160,365 | (88,681 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Change in restricted cash | 38,414 | (84,793 | ) | — | ||||||
| Capital expenditures | (12,870 | ) | (53,395 | ) | (33,998 | ) | ||||
| Proceeds from sale of assets | 87,159 | 6,282 | 59,672 | |||||||
| Decrease in investments and advances | — | 9,107 | 16,008 | |||||||
| (Increase)/decrease in short-term investments | (6,808 | ) | 93 | 1,530 | ||||||
| Net cash provided/(used) by investing activities | 105,895 | (122,706 | ) | 43,212 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Dividends to common shareholders | — | — | (4,888 | ) | ||||||
| Distributions to minority shareholder | (2,879 | ) | (2,061 | ) | (1,367 | ) | ||||
| Repurchase of common stock | — | — | (37 | ) | ||||||
| Proceeds from convertible subordinated notes | — | — | 202,912 | |||||||
| Proceeds from the exercise of stock options | — | — | 627 | |||||||
| Decrease in short-term debt | (14,826 | ) | (7,792 | ) | (82,032 | ) | ||||
| Proceeds from long-term debt | — | 70,546 | 185,042 | |||||||
| Proceeds from lease financing obligation | — | 44,900 | — | |||||||
| Repayment of long-term debt | (34,100 | ) | (45,591 | ) | (214,724 | ) | ||||
| Net cash (used)/provided by financing activities | (51,805 | ) | 60,002 | 85,533 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 27,798 | 22,624 | (7,937 | ) | ||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 19,790 | 120,285 | 32,127 | |||||||
| Cash and cash equivalents at beginning of year | 344,305 | 224,020 | 191,893 | |||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 364,095 | $ | 344,305 | $ | 224,020 | ||||
| Cash paid during the year for: | ||||||||||
| Interest (net of amount capitalized) | $ | 63,194 | $ | 60,973 | $ | 74,201 | ||||
| Income taxes | $ | 17,588 | $ | 13,508 | $ | 15,543 | ||||
See notes to consolidated financial statements.
57
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except per share amount)
| 1. | Going Concern |
The accompanying consolidated financial statements of Foster Wheeler Ltd., hereinafter referred to as “Foster Wheeler” or the “Company” are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the three-year period ended December 26, 2003, and has a shareholders’ deficit of $872,400. The Company has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. As described in more detail below, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that the Company will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants.
The Company’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. The Company’s current cash flow forecasts indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004.
As of December 26, 2003, the Company had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily from distributions from foreign subsidiaries. As of December 26, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities. The amount of restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
The Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. The Company’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, the Company repatriated approximately $100,000 from its non-U.S. subsidiaries.
58
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 1. | Going Concern — (Continued) |
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.
As part of its debt restructuring plan, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.
On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company is offering a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that the Company will complete the exchange offer on acceptable terms, or at all.
Failure by the Company to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that Company will be in compliance with these covenants throughout 2004.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. As of December 26, 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
59
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 1. | Going Concern — (Continued) |
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in the Company’s liquidity forecast for 2004.
Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 as of December 26, 2003) 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.
The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company, for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation is included in capital lease obligations in the accompanying consolidated balance sheet.
In the third quarter of 2002, the Company entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special-purpose subsidiary, Foster Wheeler Funding II LLC (“FW Funding”) as described below. FW Funding is included in the consolidated financial statements of the Company.
FW Funding is a party to a Purchase, Sale and Contribution Agreement (“PSCA”) with six of the Company’s wholly owned domestic subsidiaries. Pursuant to PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. FW Funding simultaneously entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly unused line fee equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced 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.
No borrowings were outstanding under this facility as of December 26, 2003 or December 27, 2002. As of December 26, 2003, FW Funding held $94,200 of trade accounts receivable, net of allowances, which are included in the consolidated balance sheet.
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under
60
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 1. | Going Concern — (Continued) |
the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of the Company debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003. The Company would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 18, 2003, Foster Wheeler received a formal notice from the New York Stock Exchange (“NYSE”) indicating that the Company was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. Following discussions with the Company in May 2003, the NYSE permitted the Company’s securities to continue to be listed subject to the Company’s return to compliance with the continued listing standard within 18 months of receipt of the notice and further subject to quarterly review by the NYSE. At that time, Foster Wheeler’s ticker symbol was designated with the suffix “bc” indicating that it was below compliance with the NYSE listing standards. Following its most recent review, the NYSE determined to de-list the Company as of November 14, 2003 based on the Company’s inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. The Company’s common stock now trades on the Pink Sheets and its common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company being de-listed, this exemption is no longer available. To address this issue, the Company obtained the consent of the BMA to transfers between non-residents for so long as the Company’s shares continue to be quoted in the Pink Sheets or on the OTCBB. The Company believes that this consent will continue to be available.
| 2. | Summary of Significant Accounting Policies |
Principles of Consolidation — The consolidated financial statements include the accounts of Foster Wheeler Ltd. 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 operations and December 31 for foreign operations. For domestic operations, the years 2003, 2002 and 2001 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 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, asbestos litigation and expected recoveries and contingencies, among others. At December 26, 2003, December 27, 2002 and December 28, 2001, the Company had claims of $0, $9,000 and $135,000, respectively. The decrease in recorded claims in 2002 resulted from the collection of $11,000 and a provision recorded for the balance. In 2002, the Company revised its estimates 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 in long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual task for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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.
61
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
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.
Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.
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 $305,300 are maintained by foreign subsidiaries as of December 26, 2003. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.
Restricted Cash — Restricted cash at December 26, 2003 consists of approximately $4,000 held primarily by special purpose entities and restricted for debt service payments, approximately $44,900 that was required to collateralize letters of credit and bank guarantees, and approximately $3,800 of client escrow funds. Domestic restricted cash totals approximately $4,700 which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $48,000 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.
Restrictions on Shareholders Dividends —The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during 2003 and does not expect to pay dividends on the common shares for the foreseeable future.
Restricted Net Assets — One of the Company’s subsidiaries has entered into a bonding arrangement with a bank, which contains covenants limiting its ability to make distributions to the Company. The covenants include a restriction on the distribution of dividends to 75% of statutory earnings and the requirement to maintain an equity ratio (calculated as equity divided by the sum of the equity and total liabilities) of at least 30%. In addition, the subsidiary is not permitted to make intercompany loans to the Company. As a result, the net assets of the subsidiary can only be distributed annually through dividends after the subsidiary’s statutory financial statements have been issued. As of December 26, 2003 and December 27, 2002, $37,148 and $30,638, respectively, of the subsidiary’s retained earnings are considered restricted.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under FASB Statement No. 115 “Accounting for Certain Investments in Debt and
62
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
Equity Securities.” Realized gains and losses from sales are based on the specific-identification method. For the years ended 2003, 2002 and 2001, unrealized gains and losses were immaterial.
2003 | 2002 | 2001 | ||||||||
| Proceeds from sales of short-term investments | $ | — | $ | — | $ | 2,000 | ||||
| Gain/(loss) | $ | — | $ | — | $ | — |
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 4. 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.
Other Accounts and Notes Receivable — Non-trade accounts and notes receivable consist primarily of:
2003 | 2002 | ||||||
| Insurance claims receivable | $ | 60,000 | $ | 35,000 | |||
| Foreign refundable value-added tax | $ | 13,600 | 6,800 |
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.
Effective December 29, 2001, 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.
The Company recorded an impairment loss of $15,100 on a corporate office building in the third quarter of 2003 in anticipation of a sale, in accordance with SFAS No. 144. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building is included in land, buildings, and equipment on the consolidated balance sheet.
In 2002, the Company recorded losses of $35,500 in anticipation of a sale of its Hudson Falls waste-to-energy facility. This facility was sold in October, 2003. A loss of $19,000 was also recorded in 2002 on the Charleston waste-to-energy facility. This facility was sold in October 2002. These losses were recorded in other deductions on the consolidated statement of operations and comprehensive loss.
During the third quarter of 2002, management of the Energy Group approved a plan to convert the use of its domestic manufacturing facility to focus on the after-market service business and wind down the facility’s fabrication of new power generation equipment due to cost competitive considerations. The plan was subject to discussions with the local labor unions. In accordance with SFAS No. 144, the facility was tested for impairment using estimated future cash flows based on the revised use of the facility. The review indicated impairment in the facility’s carrying value of $13,400. The Company recorded the impairment loss in the third quarter of 2002 and the impairment is reflected in the cost of operating revenues as depreciation in the accompanying consolidated statement of operations and comprehensive income/(loss). During the fourth quarter of 2002, the Company decided to take the necessary steps to mothball the facility. Additional charges of $5,300 were recorded in December 2002.
63
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
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 cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. 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 equity method.
Income Taxes — 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 $177,500 as of December 26, 2003. 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.
| 2003 | 2002 | 2001 | ||||||||
| Cumulative translation adjustment at beginning of year | $ | (85,157 | ) | $ | (107,398 | ) | $ | (97,207 | ) | |
| Current year foreign currency adjustment | 6,762 | 22,241 | (10,191 | ) | ||||||
| Cumulative translation adjustment at end of year | $ | (78,395 | ) | $ | (85,157 | ) | $ | (107,398 | ) | |
| 2003 | 2002 | 2001 | ||||||||
| Foreign currency transaction gains | $ | 1,700 | $ | 2,900 | $ | 3,400 | ||||
| Foreign currency transaction gains, net of tax | 1,100 | 1,900 | 2,200 |
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, “Accounting for Derivative Instruments and Hedging Activities.” At December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded approximately a $3,400 after tax loss in 2003 and a $5,500 after tax gain in 2002.
Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.
Effective December 29, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which supersedes APB Opinion No. 17, “Intangible Assets.” The statement requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually. The Company tests for impairment at the reporting unit level as defined in SFAS No. 142.
64
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
Goodwill was allocated to the reporting units based on the original purchase price allocation. This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. Impairment losses have been measured as of December 29, 2001 and recognized as the cumulative effect of a change in accounting principle in 2002. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144.
As of December 26, 2003 and December 27, 2002, the Company had unamortized goodwill of $51,121 and $50,214, respectively. The increase in goodwill of $907 resulted from foreign currency exchange gains. All of the goodwill at December 26, 2003, and all but $27 of the goodwill at December 27, 2002 related to the Energy Group. As of December 28, 2001, the Company had unamortized goodwill of $200,152. The reduction in goodwill in 2002 is due to the $150,500 impairment losses discussed below, offset by foreign currency translation adjustments of $562. In accordance with SFAS No. 142, the Company is no longer amortizing goodwill and in 2003, the fair value of the reporting units exceeded the carrying amounts. The Company recognized $150,500 of impairment losses in 2002 related to the goodwill as a cumulative effect of a change in accounting principle. Of this total, $24,800 was associated with the Camden waste-to-energy facility and $77,000 was associated with the North American Power unit included in the operations of the Energy Group. The fair value of the facility and the operating unit were estimated using the expected present value of future cash flows. The remaining $48,700 relates to Foster Wheeler Environmental Corporation in the E & C Group. An impairment of the goodwill on this subsidiary was initially determined based upon indications of its market value from potential buyers. Based upon the market value, it was determined under step one that a potential impairment existed. The Company then completed step two and determined that a full write down of the goodwill was required. All of the other reporting units were also subjected to the first step of the goodwill impairment test.
As of December 26, 2003 and December 27, 2002, the Company had unamortized identifiable intangible assets of $71,568 and $72,668, respectively. The following table details amounts relating to those assets.
| As of December 26, 2003 | As of December 27, 2002 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
| Patents | $ | 36,703 | $ | (13,802 | ) | $ | 35,695 | $ | (11,973 | ) | |||
| Trademarks | 61,943 | (13,276 | ) | 60,378 | (11,432 | ) | |||||||
| Total | $ | 98,646 | $ | (27,078 | ) | $ | 96,073 | $ | (23,405 | ) | |||
Amortization expense related to patents and trademarks for 2003, 2002, and 2001 was $3,675, $3,535, and $3,165, respectively. Amortization expense is expected to approximate $3,500 each year in the next five years.
The following table presents the current and prior years reported amounts adjusted to eliminate the effect of goodwill amortization in accordance with SFAS No. 142.
December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| Reported net loss | $ | (157,063 | ) | $ | (525,219 | ) | $ | (336,360 | ) | |
| Add back: goodwill amortization | — | — | 5,369 | |||||||
| Adjusted net loss | $ | (157,063 | ) | $ | (525,219 | ) | $ | (330,991 | ) | |
| Basic and Diluted Earnings Per Share: | ||||||||||
| Reported Net Loss | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) |
65
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
| Goodwill Amortization | — | 0.13 | ||||||||
| Adjusted Net Loss | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.10 | ) | |
Earnings per Share — Basic per share data has been computed based on the weighted-average number of shares of common stock outstanding. In 1999, the Company adopted The Directors Deferred Compensation and Stock Award Plan (the “Plan”). Under the Plan, each non-management director is credited annually with share units of the Company’s common stock. In addition, each non-management director may elect to defer receipt of compensation for services rendered as a director, which deferred amount is credited to his or her account in the form of share units. The Company makes a supplemental contribution equal to 15% of the deferred amount. Additional share data presented below:
2003 | 2002 | 2001 | ||||||||
| Directors Deferred Compensation | ||||||||||
| Beginning shares | 245,942 | 129,366 | 88,275 | |||||||
| Shares credited in participants’ accounts | 70,580 | 145,885 | 41,091 | |||||||
| Shares delivered to directors upon their retirement | (41,987 | ) | (29,309 | ) | — | |||||
| Incremental shares | 28,593 | 116,576 | 41,091 | |||||||
| Shares included in the calculation of basic earnings per share | 274,535 | 245,942 | 129,366 | |||||||
| Options to purchase shares of common stock not included in the computation of diluted earnings | ||||||||||
| per share due to their antidilutive effect | 117,145 | 3,877,361 | 2,330,736 | |||||||
| Shares on convertible subordinated notes not included in the computation of diluted earnings | ||||||||||
| per share due to their antidilutive effect | 13,085,751 | 13,085,751 | 13,085,751 | |||||||
Stock Option Plans — The Company has two fixed option plans which reserve shares of common stock for issuance to executives, key employees, and directors. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (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 for the 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 2003, 2002 and 2001 consistent with the provisions of SFAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:
2003 | 2002 | 2001 | ||||||||
| Net loss — as reported | $ | (157,063 | ) | $ | (525,219 | ) | $ | (336,360 | ) | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $5 in 2003, $390 in 2002 and $154 in 2001. | 125 | 3,631 | 6,091 | |||||||
| Net loss — pro forma | $ | (157,188 | ) | $ | (528,850 | ) | $ | (342,451 | ) | |
| Loss per share as reported | ||||||||||
| Basic | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) |
66
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
| Diluted* | $ | (3.83 | ) | $ | (12.82 | ) | $ | (8.23 | ) | |
| Loss per share — pro forma | ||||||||||
| Basic | $ | (3.83 | ) | $ | (12.91 | ) | $ | (8.38 | ) | |
| Diluted* | $ | (3.83 | ) | $ | (12.91 | ) | $ | (8.38 | ) |
*Stock options not included in diluted earnings per share due to losses in 2003, 2002 and 2001.
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:
2003 | 2002 | 2001 | ||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 1.36 | % | ||||
| Expected volatility | 88.23 | % | 83.62 | % | 79.20 | % | ||||
| Risk free interest rate | 3.22 | % | 2.90 | % | 4.23 | % | ||||
| Expected life (years) | 5.0 | 5.0 | 5.0 |
Under the 1995 Stock Option Plan approved by the 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. In April 1990, the shareholders approved a Stock Option Plan for Directors of the Company. On April 29, 1997, the shareholders approved an amendment of the Directors’ Stock Option Plan, which authorizes the granting of options on 400,000 shares of common stock to non-employee directors of the Company, who will automatically receive an option to acquire 3,000 shares each year.
These plans provide that shares granted come from the Company’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 granted.
In connection with the reorganization of Foster Wheeler Corporation on May 25, 2001, obligations under the stock option plans were assumed by Foster Wheeler Inc., an indirect wholly owned subsidiary of the Company.
The Company also granted 1,300,000 inducement options in 2001 to its chief executive officer in connection with an employment agreement and a further 1,000,000 options in 2002 based upon an amendment to his employment agreement. The 2001 options vest 20% each year over the term of the agreement, while the 2002 options vest one-forty-eighth (1/48) on the date of grant and 1/48 on the first day of each successive month thereafter. The Company granted 255,000 inducement options to its president and chief executive officer of Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”) in connection with his employment agreement in 2002 and granted a further 100,000 inducement option to him in 2003. The 2002 options vest ratably over five years, while the 2003 options vest ratably over four years. The price of the options granted pursuant to these agreements was fair market value on the date of the grant. The options granted under these agreements expire 10 years from the date granted.
In 2002, the Company granted 250,000 options to one of its consultants. The price of the options granted was fair market value on the date of the grant. The options fully vested on March 31, 2003 and expire ten years from the date of grant. In accordance with SFAS No. 123, the Company recognized $123 and $328 of expense related to these options in 2003 and 2002, respectively. As these options are not part of the Company’s employee stock option plans, they are not included in the information presented below.
Information regarding these option plans for the years 2003, 2002, and 2001 is as follows (presented in actual number of shares):
67
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
2003 | 2002 | 2001 | |||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||||||
| Options outstanding, beginning of year | 8,445,099 | $ | 10.17 | 4,957,621 | $ | 16.75 | 3,137,621 | $ | 23.73 | ||||||||||
| Options exercised | — | — | — | (66,000 | ) | 9.51 | |||||||||||||
| Options granted | 138,145 | 1.35 | 3,627,361 | 1.64 | 1,936,250 | 5.30 | |||||||||||||
| Options cancelled or expired | (468,589 | ) | 7.59 | (139,883 | ) | 22.26 | (50,250 | ) | 21.07 | ||||||||||
| Options outstanding, end of year | 8,114,655 | $ | 10.17 | 8,445,099 | $ | 10.17 | 4,957,621 | $ | 16.75 | ||||||||||
| Option price range at end of year | $ | 1.17 | to | $ | 1.46 | to | $ | 4.985 | to | ||||||||||
| $ | 45.6875 | $ | 45.6875 | $ | 45.6875 | ||||||||||||||
| Option price range for exercised shares | — | — | $ | 9 | to | ||||||||||||||
| $ | 15.0625 | ||||||||||||||||||
| Options available for grant at end of year | 594,846 | 554,069 | 566,180 | ||||||||||||||||
| Weighted-average fair value of options | |||||||||||||||||||
| granted during the year | $ | 0.94 | $ | 1.11 | $ | 3.23 | |||||||||||||
| Options exercisable at end of year | 4,814,894 | 3,555,752 | 2,620,547 | ||||||||||||||||
| Weighted-average price of exercisable | |||||||||||||||||||
| options at end of year | $ | 15.22 | $ | 20.35 | $ | 26.30 | |||||||||||||
The following table summarizes information about fixed-price stock options outstanding as of December 26, 2003:
| 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 12/26/03 | Weighted- Average Exercise Price | |||||||||||
| $32.9375 to 40.0625 | 160,834 | 1 year | 36.04 | 160,834 | 36.04 | |||||||||||
| 29.75 to 35.25 | 369,167 | 2 years | 30.20 | 369,167 | 30.20 | |||||||||||
| 42.1875 to 45.6875 | 253,584 | 3 years | 42.62 | 253,584 | 42.62 | |||||||||||
| 36.9375 to 37.25 | 371,500 | 4 years | 36.96 | 371,500 | 36.96 | |||||||||||
| 27.50 to 27.625 | 406,000 | 5 years | 27.62 | 406,000 | 27.62 | |||||||||||
| 13.50 to 15.0625 | 635,000 | 6 years | 14.16 | 635,000 | 14.16 | |||||||||||
| 6.34375 to 10.00 | 601,486 | 7 years | 8.73 | 475,486 | 8.40 | |||||||||||
| 4.985 to 11.60 | 1,902,500 | 8 years | 5.29 | 1,067,167 | 5.49 | |||||||||||
| 1.46 to 1.65 | 3,276,439 | 9 years | 1.62 | 1,076,156 | 1.62 | |||||||||||
| 1.17 to 2.17 | 138,145 | 10 years | 1.35 | — | — | |||||||||||
| $1.17 to 45.6875 | 8,114,655 | 4,814,894 | ||||||||||||||
Recent Accounting Developments — In November 2002, the FASB issued FASB Interpretation (“FIN”) 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 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:
a. Product warranties
b. Guarantees that are accounted for as derivatives
68
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
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 annual periods ending after December 15, 2002. The Company in its 2002 Form 10-K implemented the disclosure requirements of this interpretation. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and | |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements. Management does, however, believe that a subsidiary trust which issued mandatory redeemable preferred securities will need to be de-consolidated in 2004 under this interpretation. This will have no impact on the Company’s consolidated debt as the intercompany debt to the subsidiary trust will become third party debt upon de-consolidation.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily
69
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 2. | Summary of Significant Accounting Policies — (Continued) |
redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” The FSP permits employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). Without the FSP, plan sponsors would be required under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date President Bush signed the Act into law. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB on how to account for the federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. In accordance with the FSP, the Company has not reflected the impact of the Act on any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the consolidated financial statements or accompanying notes. Specific authoritative guidance on the accounting for the federal subsidy is pending, and that guidance, when issued, could require the Company to change previously reported information. The Company is currently assessing the impact of the Act and whether its postretirement plan should be amended in consideration of the new legislation.
| 3. | Research and Development |
For the years 2003, 2002, and 2001, approximately $6,200, $10,300 and $12,300, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $10,200, $18,100, and $39,200, respectively, were spent on customer-sponsored research activities.
70
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 4. | Accounts and Notes Receivable |
The following table shows the components of trade accounts and notes receivable:
| December 26, 2003 | December 27, 2002 | ||||||
| From long-term contracts: | |||||||
| Amounts billed due within one year | $ | 332,135 | $ | 410,214 | |||
| Retention: | |||||||
| Billed: | |||||||
| Estimated to be due in: | |||||||
| 2003 | — | 58,042 | |||||
| 2004 | 30,502 | 25,481 | |||||
| 2005 | 21,338 | 4,978 | |||||
| 2006 | 656 | — | |||||
| Total billed | 52,496 | 88,501 | |||||
| Unbilled: | |||||||
| Estimated to be due in: | |||||||
| 2003 | — | 97,997 | |||||
| 2004 | 79,937 | 4 | |||||
| 2005 | 669 | — | |||||
| 2006 | — | — | |||||
| 2007 | 2,699 | — | |||||
| Total unbilled | 83,305 | 98,001 | |||||
| Total retentions | 135,801 | 186,502 | |||||
| Total receivables from long-term contracts | 467,936 | 596,716 | |||||
| Other trade accounts and notes receivable | 20,480 | 19,387 | |||||
| 488,416 | 616,103 | ||||||
| Less allowance for doubtful accounts | 37,406 | 73,048 | |||||
| Accounts receivable, net | $ | 451,010 | $ | 543,055 | |||
In the third quarter of 2002, the Company entered into a receivables securitization facility that matures on August 15, 2005 and is secured by a portion of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special purpose subsidiary, Foster Wheeler Funding II LLC (“FW Funding”) as described below. FW Funding is included in the consolidated financial statements of the Company.
FW Funding entered a Purchase, Sale and Contribution Agreement (“PSCA”) with six of the Company’s wholly owned domestic subsidiaries. Pursuant to the PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. FW Funding also entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly unused line fee equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced 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.
71
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 4. | Accounts and Notes Receivable — (Continued) |
No amounts were outstanding under this facility as of December 26, 2003 or December 27, 2002. FW Funding may increase or decrease, at its discretion, its use of the facility on a weekly basis subject to the availability of sufficient eligible trade accounts receivable and the facility’s maximum amount of $40,000. As of December 26, 2003, FW Funding held $94,200 of trade accounts receivable, net of allowances, which are included in the consolidated balance sheet and had approximately $11,900 of availability under the facility.
| 5. | Contracts in Process and Inventories |
The following table shows the elements included in contracts in process as related to long-term contracts:
2003 | 2002 | ||||||
| Contracts in Process | |||||||
| Costs plus accrued profits less earned revenues on contracts currently in process | $ | 238,645 | $ | 336,074 | |||
| Less progress payments | 72,142 | 65,582 | |||||
| Net | $ | 166,503 | $ | 270,492 | |||
Costs of inventories are shown below:
2003 | 2002 | ||||||
| Inventories | |||||||
| Materials and supplies | $ | 5,098 | $ | 9,102 | |||
| Finished goods | 1,692 | 230 | |||||
| Total | $ | 6,790 | $ | 9,332 | |||
| 6. | Land, Buildings and Equipment |
Land, buildings and equipment are stated at cost and are set forth below:
2003 | 2002 | ||||||
| Land and land improvements | $ | 24,057 | $ | 23,806 | |||
| Buildings | 142,608 | 151,462 | |||||
| Equipment | 450,941 | 590,295 | |||||
| Construction in progress | 5,123 | 4,117 | |||||
| Total | $ | 622,729 | $ | 769,680 | |||
Depreciation expense for the years 2003, 2002, and 2001 was $31,214, $54,492, and $44,348, respectively.
| 7. | Pensions and Other Postretirement Benefits |
Pension Benefits — Domestic and certain foreign subsidiaries of the Company have several pension plans covering substantially all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation; the domestic plans are noncontributory. Effective January 1, 1999, a cash balance program was established for the domestic plan. The pension benefit under the previous formulas remain the same for current employees if so elected, however, new employees are offered only the cash balance program. The cash balance plan resembles a savings account. Amounts are credited based on age and a percentage of earnings. At termination or retirement, the employee receives the balance in the account in a lump-sum. Under the cash balance program, future increases in employee earnings will not apply to prior service costs. It is the Company’s policy to fund the plans on a current basis to the extent deductible under existing Federal tax regulations. Such contributions, when made, are intended to provide not only for benefits attributed to service to date, but also those expected to be earned in the future. The Company also has a non-qualified, unfunded supplemental executive retirement plan (“SERP”) which covers certain employees. The Company froze the SERP and, in April 2003, issued letters of credit totaling $2,250 to certain employees to support its obligations under the SERP. In the third quarter of 2003, cash payments of approximately $500 were made to select SERP participants.
72
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 7. | Pensions and Other Postretirement Benefits — (Continued) |
On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors.
The principal changes consist of the following: the domestic pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan was frozen and will be available on a subsidized premium basis only to currently active employees who reached the age of 40 on May 31, 2003; and the 401(k) plan was enhanced to increase the level of employer matching contribution. The net effect of these changes is expected to positively impact the financial condition of the Company through reduced costs and reduced cash outflow in future years.
Through the year ended December 26, 2003, the Company recognized a cumulative minimum liability in its financial statements for both domestic and foreign underfunded plans in the amount of $311,746 resulting in a cumulative pretax charge to Other Comprehensive Loss. This represents a reduction in the minimum liability of $58,903 from the prior year, including the impact of foreign currency translation. 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.
Domestic subsidiaries of the Company have a 401(k) plan for salaried employees. For the year 2003, the Company contributed a 100% match of the first 3% and a 50% match of the next 3% of base pay of employee contributions, subject to the annual IRS limit, which amounted to a cost of $4,066. For the years 2002 and 2001, the Company contributed a 50% match of the first 6% of base pay of employee contributions, subject to the annual IRS limit which amounted to a cost of $5,507 and $5,008, respectively.
Other Benefits — In addition to providing pension benefits, some of the Company’s domestic subsidiaries provide certain health care and life insurance benefits for retired employees. Employees may become eligible for these benefits if they qualify for and commence normal or early retirement pension benefits as defined in the pension plan while working for the Company. Benefits are provided through insurance companies. Additionally, some of the Company’s domestic subsidiaries also have a plan which provides coverage for an employee’s beneficiary upon the death of the employee.
73
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 7. | Pensions and Other Postretirement Benefits — (Continued) |
The following chart contains the disclosures for pension and other benefits for the years 2003, 2002 and 2001.
Pension Benefits | Other Benefits | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||
| Projected Benefit Obligation (PBO) | ||||||||||||||
| PBO at beginning of period | $ | 820,173 | $ | 641,100 | $ | 133,392 | $ | 118,959 | ||||||
| Service cost | 20,776 | 29,044 | 741 | 2,785 | ||||||||||
| Interest cost | 46,861 | 40,874 | 9,205 | 8,255 | ||||||||||
| Plan participants contributions | 7,147 | 5,690 | — | — | ||||||||||
| Plan amendments | 1,961 | 3,091 | (55,201 | ) | (8,510 | ) | ||||||||
| Actuarial loss | 31,508 | 106,005 | 21,277 | 23,035 | ||||||||||
| Benefits paid | (48,818 | ) | (37,120 | ) | (11,910 | ) | (8,733 | ) | ||||||
| Curtailments | (35,719 | ) | — | (2,598 | ) | — | ||||||||
| Special termination benefits/other | (3,683 | ) | (8,514 | ) | — | (2,399 | ) | |||||||
| Foreign currency exchange rate changes | 54,691 | 40,003 | — | — | ||||||||||
| PBO at end of period | $ | 894,897 | $ | 820,173 | $ | 94,906 | $ | 133,392 | ||||||
| Plan Assets | ||||||||||||||
| Fair value of plan assets beginning of period | $ | 487,304 | $ | 521,195 | $ | — | $ | — | ||||||
| Actual return on plan assets | 90,179 | (62,743 | ) | — | — | |||||||||
| Employer contributions | 44,988 | 41,917 | 11,910 | 8,733 | ||||||||||
| Plan participants contributions | 7,147 | 5,690 | — | — | ||||||||||
| Benefits paid | (48,818 | ) | (37,120 | ) | (11,910 | ) | (8,733 | ) | ||||||
| Other | 2,136 | (9,819 | ) | — | — | |||||||||
| Foreign currency exchange rate changes | 39,766 | 28,184 | — | — | ||||||||||
| Fair value of plan assets at end of period | $ | 622,702 | $ | 487,304 | $ | — | $ | — | ||||||
| Funded Status | ||||||||||||||
| Funded status | $ | (272,195 | ) | $ | (332,869 | ) | $ | (94,906 | ) | $ | (133,392 | ) | ||
| Unrecognized net actuarial loss/(gain) | 377,046 | 436,100 | 47,614 | (14,846 | ) | |||||||||
| Unrecognized prior service cost | 9,732 | 12,507 | (62,453 | ) | 31,308 | |||||||||
| Adjustment for the minimum liability | (311,746 | ) | (370,649 | ) | — | — | ||||||||
| Accrued benefit cost | $ | (197,163 | ) | $ | (254,911 | ) | $ | (109,745 | ) | $ | (116,930 | ) | ||
Pension Benefits | Other Benefits | |||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||
| Net Periodic Benefit Cost | ||||||||||||||||||||
| Service cost | $ | 20,776 | $ | 29,044 | $ | 27,248 | $ | 741 | $ | 2,785 | $ | 996 | ||||||||
| Interest cost | 46,861 | 40,874 | 37,856 | 9,205 | 8,255 | 7,227 | ||||||||||||||
| Expected return on plan assets | (38,836 | ) | (42,700 | ) | (51,819 | ) | — | — | — | |||||||||||
| Amortization of transition asset | 71 | 63 | 56 | — | — | — | ||||||||||||||
| Amortization of prior service cost | 1,643 | 1,810 | 1,692 | (1,485 | ) | (2,853 | ) | (2,206 | ) | |||||||||||
| Other | 32,106 | 15,453 | 5,020 | (3,340 | ) | (5,013 | ) | 4,396 | ||||||||||||
| SFAS No.87 net periodic pension cost | 62,621 | 44,544 | 20,053 | 5,121 | 3,174 | 10,413 | ||||||||||||||
| SFAS No.88 cost* | 1,108 | 1,908 | 1,900 | — | — | — | ||||||||||||||
| Total net periodic pension cost | $ | 63,729 | $ | 46,452 | $ | 21,953 | $ | 5,121 | $ | 3,174 | $ | 10,413 | ||||||||
| Weighted-Average Assumptions-Net | ||||||||||||||||||||
Periodic Benefit Cost | ||||||||||||||||||||
| Discount Rate | 5.7 | % | 6.3 | % | 6.4 | % | 6.625 | % | 7.40 | % | 7.75 | % | ||||||||
| Long-term rate of return | 7.9 | % | 8.2 | % | 9.3 | % | ||||||||||||||
| Salary scale | 3.3 | % | 4.0 | % | 4.2 | % | ||||||||||||||
| Weighted-Average Assumptions- | ||||||||||||||||||||
Benefit Obligations | ||||||||||||||||||||
| Discount Rate | 5.6 | % | 6.0 | % | 6.0 | % | 6.625 | % | ||||||||||||
| Salary scale | 3.4 | % | 3.9 | % | ||||||||||||||||
74
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 7. | Pensions and Other Postretirement Benefits — (Continued) |
*Under the provision of SFAS No. 88 “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” charges were recorded for a provision for the impact of the freezing of the domestic pension plans in 2003, a provision for the mothballing of a domestic manufacturing facility of $900, a provision for employee terminations as part of the workforce reduction of $100, and a provision for the retirement of the Company’s Vice President of Human Resources of approximately $900 in 2002; a provision for the retirement of the Company’s Chief Executive Officer resulted in a charge of $1,900 in 2001.
| Health care cost trend: | ||||
| 2003 | 8.5 | % | ||
| Decline to 2010 | 5.0 | % |
Assumed health care cost trend rates have a significant effect on the amounts reported for the other benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| 1-Percentage Point Increase | 1-Percentage Point Decrease | ||||||
| Effect on total of service and interest cost components | $ | 569 | $ | (495 | ) | ||
| Effect on accumulated postretirement benefit obligations | $ | 5,207 | $ | (4,587 | ) |
Plan measurement date
The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.
Accumulated benefit obligation
The accumulated benefit obligations (ABO) for the Company’s plans totaled approximately $812,000 and $738,000 at year end 2003 and 2002, respectively. As previously discussed, the Company has recorded a net cumulative charge to other comprehensive loss for the years 2000 through 2003 due to the (ABO) exceeding the fair value of plan assets.
Investment policy
Each of the Company’s plans is governed by a written investment policy.
The investment policy of the U.K. plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.
The investment policy of the U.S. plans allocates assets in accordance with the policy guidelines. The asset mix target for the plans is 70% equities and 30% fixed income securities. The investment policy is currently undergoing a review by the Company to ensure investment strategy is aligned with plan liabilities, considering the changes to the domestic benefits program made in 2003.
The investment policy of the Canadian plans uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.
Long-term rate of return assumptions
The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted average expected long-term rate of return on plan assets has declined from 9.3% to 7.9% over the past three years.
75
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 7. | Pensions and Other Postretirement Benefits — (Continued) |
| 2003 | 2002 | |||
| Plan Asset Allocation | ||||
U.K. Plans | ||||
| U.K. equities | 38 | % | 39 | % |
| Non-U.K. equities | 25 | % | 24 | % |
| U.K. fixed income securities | 32 | % | 34 | % |
| Non-U.K. fixed income securities | 0 | % | 0 | % |
| Other | 5 | % | 3 | % |
| Total | 100 | % | 100 | % |
| U.S. Plans | ||||
| U.S. equities | 44 | % | 39 | % |
| Non-U.S. equities | 24 | % | 19 | % |
| U.S. fixed income securities | 20 | % | 25 | % |
| Non-U.S. fixed income securities | 1 | % | 1 | % |
| Other | 11 | % | 16 | % |
| Total | 100 | % | 100 | % |
| Canadian Plans | ||||
| Canandian equities | 23 | % | 24 | % |
| Non-Canadian equities | 26 | % | 25 | % |
| Canadian fixed income securities | 44 | % | 45 | % |
| Non-Canadian fixed income securities | 0 | % | 0 | % |
| Other | 7 | % | 6 | % |
| Total | 100 | % | 100 | % |
Contributions
The Company expects to contribute a total of approximately $64,700 to its foreign and domestic pension plans in 2004.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, are expected to be paid on the domestic defined benefit plans.
Pension Benefits | Other Benefits | ||||||
| 2004 | $ | 22,200 | $ | 7,900 | |||
| 2005 | 20,600 | 7,900 | |||||
| 2006 | 20,700 | 8,000 | |||||
| 2007 | 20,800 | 8,000 | |||||
| 2008 | 21,200 | 8,000 | |||||
| 2009-2013 | 109,900 | 38,000 |
| 8. | Bank Loans |
The approximate weighted-average interest rates on borrowings outstanding (primarily foreign) at the end of 2003 and 2002 were 4.91% and 4.38%, respectively.
Unused lines of credit for short-term bank borrowings aggregated $8,255 at year-end 2003, all of which were available outside the United States and Canada in various currencies at interest rates consistent with market conditions in the respective countries.
Interest costs incurred (including dividends on preferred security) in 2003, 2002, and 2001 were $95,791, $84,396, and $85,202, respectively, of which $307, $1,368, and $718, respectively, were capitalized.
76
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 9. | Corporate and Other Debt and Convertible Subordinated Notes |
Corporate Debt — The Company, through its subsidiary Foster Wheeler LLC, has $200,000 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 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. See Note 24 regarding guarantees issued in favor of the Senior Notes.
In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The term loan and revolving loans bear interest at the Company’s option of (a) LIBOR plus 6.00% or (b) the Base Rate plus 5.00%. The “Base Rate” means the higher of (i) the Bank of America prime rate or (ii) the Federal Funds rate plus 0.5%.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 pretax charges related to specific contingencies may be excluded from the covenant calculation, if incurred, through December 31, 2003.
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in the Company’s liquidity forecast for 2004.
Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 at December 26, 2003) 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.
As of December 26, 2003, $128,163 was borrowed under the Senior Credit Facility. This amount appears on the Consolidated Balance Sheet under the caption “Corporate and Other Debt.” As of December 26, 2003, $105,777 of standby letters of credit was outstanding.
77
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 9. | Corporate and Other Debt and Convertible Subordinated Notes — (Continued) |
Corporate and other debt consisted of the following:
| 2003 | 2002 | ||||||
| Senior Credit Facility (average interest rate 7.16%) | $ | 128,163 | $ | 140,000 | |||
| Senior Notes at 6.75% due November 15, 2005 | 200,000 | 200,000 | |||||
| Other | 5,637 | 6,707 | |||||
| 333,800 | 346,707 | ||||||
| Less: Current portion | 71 | 5,005 | |||||
| $ | 333,729 | $ | 341,702 | ||||
| Principal payments are payable in annual installments of: | |||||||
| 2004 | $ | — | |||||
| 2005 | 333,039 | ||||||
| 2006 | 647 | ||||||
| 2007 | 43 | ||||||
| $ | 333,729 | ||||||
Convertible Subordinated Notes — In May and June 2001, the Company 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 notes may be converted into common shares at an initial conversion rate of 62.131 common shares per $1,000 principal amount, or $16.05 per common share, subject to adjustment under certain circumstances. The notes are subordinated in right of payment to all existing and future senior indebtedness of the Company. The net proceeds of approximately $202,900 were used to repay $76,300 under the 364-day revolving credit facility that expired on May 30, 2001 and to reduce advances outstanding under a revolving credit agreement. Amortization of debt issuance costs is included as a component of interest expense over the term of the notes.
| 10. | 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 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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the years ended December 26, 2003 and December 27, 2002 $5,160 pretax ($3,400 after tax) net loss and $8,470 pretax ($5,500 after tax) net gains on derivative instruments, respectively, which were recorded as reductions in cost of operating revenues on the consolidated statement of operations and comprehensive loss. 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 26, 2003, approximately $67,100 was owed to the Company by counterparties and $17,800 was owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive loss 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 12 months.
78
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 11. | 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 at 71/4% interest, due October 15, 2009 of $12,130 and October 15, 2024 of $77,155 | $ | 89,285 | ||
| 1999D Accretion Bonds at 7% Interest, due October 15, 2009 | 23,994 | |||
| Total | $ | 113,279 | ||
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 | |||||||||||
| Year | Due 2009 | Due 2024 | Total | ||||||||
| 2004 | $ | 1,690 | $ | 1,690 | |||||||
| 2005 | 1,810 | 1,810 | |||||||||
| 2006 | 1,940 | 1,940 | |||||||||
| 2007 | 2,080 | 2,080 | |||||||||
| 2008 | 2,225 | 2,225 | |||||||||
| 2009 | 2,385 | 2,385 | |||||||||
| 2023 | $ | 37,230 | 37,230 | ||||||||
| 2024 | 39,925 | 39,925 | |||||||||
| Total | $ | 12,130 | $ | 77,155 | $ | 89,285 | |||||
1999D Bonds — The 1999D Accretion Bonds were originally issued for $18,000. The total amount due on October 15, 2009 is $35,817.
| 12. | 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 Foster Wheeler Ltd. and Foster Wheeler LLC. 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 $38,021. The maturity date is January 15, 2029. Foster Wheeler can redeem these Preferred Trust Securities on or after January 15, 2004.
| 13. | 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.
79
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 13. | Special-Purpose Project Debt — (Continued) |
| 2003 | 2002 | ||||||||
| Note payable, interest varies based on one of several money market rates (2003-year-end rate 1.985%), due semiannually through July 30, 2006 | $ | 21,887 | (1 | ) | $ | 27,907 | |||
| Senior Secured Notes, interest 11.443%, due annually April 15, 2004 through 2015 | 37,782 | (2 | ) | 40,077 | |||||
| Solid Waste Disposal and Resource Recovery System Revenue Bonds, interest 7.125% to 7.5%, due annually December 1, 2004 through 2010 | 77,508 | (3 | ) | 88,920 | |||||
| Resource Recovery Revenue Bonds, interest 7.9% to 10%, due annually December 15, 2003 through 2012 | — | 48,936 | (4 | ) | |||||
| 137,177 | 205,840 | ||||||||
| Less: Current portion | 17,896 | 24,227 | |||||||
| Total | $ | 119,281 | $ | 181,613 | |||||
| (1) | The note payable for $21,887 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 $37,782 were issued for 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. |
| (3) | The Solid Waste Disposal and Resource Recovery System Revenue Bonds totaling $77,508 were issued for 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 20). |
| (4) | The Resource Recovery Revenue Bonds were issued for a total amount of $86,780. The bonds are collateralized by a pledge of certain revenues and assets of the project. This facility was sold in 2003 along with the debt obligation. |
Principal payments are payable in annual installments as follows:
| 2005 | $ | 19,215 | ||
| 2006 | 20,422 | |||
| 2007 | 12,972 | |||
| 2008 | 13,792 | |||
| 2009 | 14,588 | |||
| Thereafter | 38,292 | |||
| Total | $ | 119,281 | ||
| 14. | Guarantees and Warranties |
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 | $ | 5,300 | ||||
| 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.
80
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 14. | Guarantees and Warranties — (Continued) |
| 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 | |||
| Accruals | 72,800 | |||
| Settlements | (13,800 | ) | ||
| Adjustments to provisions | (9,300 | ) | ||
| Balance as of December 26, 2003 | $ | 131,600 | ||
| 15. | 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.
| December 26, 2003 | December 27, 2002 | ||||||||||||
| Italian Project | Chilean Project | Italian Project | Chilean Project | ||||||||||
| Balance Sheet Data: | |||||||||||||
| Current assets | $ | 95,977 | $ | 23,891 | $ | 80,966 | $ | 22,352 | |||||
| Other assets (primarily buildings and equipment) | 409,267 | 185,315 | 344,993 | 218,990 | |||||||||
| Current liabilities | 32,735 | 17,188 | 20,665 | 14,748 | |||||||||
| Other liabilities (primarily long-term debt) | 385,047 | 121,362 | 344,148 | 152,949 | |||||||||
| Net assets | 87,462 | 70,656 | 61,146 | 73,645 | |||||||||
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||||||||||||||
| Italian Project | Chilean Project | Italian Project | Chilean Project | Italian Project | Chilean Project | Venezuela Project | ||||||||||||||||
| Income Statement Data for twelve months: | ||||||||||||||||||||||
| Total revenues | $ | 219,818 | $ | 39,114 | $ | 171,565 | $ | 38,425 | $ | 159,845 | $ | 40,546 | $ | 4,428 | ||||||||
| Gross earnings | 56,699 | 20,739 | 43,133 | 20,777 | 44,457 | 21,764 | 2,902 | |||||||||||||||
| Income before income taxes | 38,405 | 10,712 | 31,358 | 10,087 | 21,618 | 10,467 | 2,684 | |||||||||||||||
| Net earnings | 23,144 | 8,891 | 17,648 | 8,372 | 11,955 | 8,689 | 2,582 | |||||||||||||||
As of December 26, 2003, the Company’s share of the net earnings and investment in the equity affiliates totaled $17,142 and $98,651, respectively. Dividends of $7,997 were received during the year 2003. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $2,700 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 Chilean project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.
The undistributed retained earnings of the Company’s equity investees amounted to approximately $28,765 and $20,143 at December 26, 2003 and December 27, 2002, respectively.
| 16. | Income Taxes |
The components of loss before income taxes for the years 2003, 2002 and 2001 were taxed under the following jurisdictions:
81
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 16. | Income Taxes — (Continued) |
| 2003 | 2002 | 2001 | ||||||||
| Domestic | $ | (155,538 | ) | $ | (506,639 | ) | $ | (244,809 | ) | |
| Foreign | 45,901 | (3,923 | ) | 31,844 | ||||||
| Total | $ | (109,637 | ) | $ | (510,562 | ) | $ | (212,965 | ) | |
The provision for income taxes on those earnings was as follows:
| 2003 | 2002 | 2001 | ||||||||
| Current tax expense: | ||||||||||
| Domestic | $ | 14,939 | $ | 5,931 | $ | 5,486 | ||||
| Foreign | 31,887 | 10,978 | 22,545 | |||||||
| Total current | 46,826 | 16,909 | 28,031 | |||||||
| Deferred tax (benefit)/expense: | ||||||||||
| Domestic | (84 | ) | — | 102,147 | ||||||
| Foreign | 684 | (2,252 | ) | (6,783 | ) | |||||
| Total deferred | 600 | (2,252 | ) | 95,364 | ||||||
| Total provision for income taxes | $ | 47,426 | $ | 14,657 | $ | 123,395 | ||||
Deferred tax assets (liabilities) consist of the following:
| 2003 | 2002 | 2001 | ||||||||
| Difference between book and tax depreciation | $ | (13,654 | ) | $ | (35,002 | ) | $ | (34,369 | ) | |
| Pensions | 46,160 | 61,279 | (7,584 | ) | ||||||
| Capital lease transactions | 263 | (7,376 | ) | (8,612 | ) | |||||
| Revenue recognition | 12,192 | 7,210 | (5,999 | ) | ||||||
| Other | — | — | (192 | ) | ||||||
| Gross deferred tax assets (liabilities) | 44,961 | 26,111 | (56,756 | ) | ||||||
| Current taxability of estimated costs to complete long-term contracts | 19,039 | 14,278 | 4,297 | |||||||
| Income currently taxable deferred for financial reporting | 1,706 | 4,175 | 5,307 | |||||||
| Expenses not currently deductible for tax purposes | 200,084 | 129,917 | 122,983 | |||||||
| Investment tax credit carryforwards | 20,538 | 30,893 | 30,893 | |||||||
| Postretirement benefits other than pensions | 62,369 | 67,113 | 47,242 | |||||||
| Asbestos claims | 40,328 | 6,200 | 7,000 | |||||||
| Minimum tax credits | 17,917 | 10,883 | 11,073 | |||||||
| Foreign tax credits | 28,178 | 9,579 | 6,485 | |||||||
| Net operating loss carryforwards | 99,076 | 178,067 | 15,332 | |||||||
| Effect of write-downs and restructuring reserves | 11,234 | 40,873 | 63,680 | |||||||
| Other | 30,020 | 15,621 | 19,871 | |||||||
| Valuation allowance | (502,444 | ) | (444,427 | ) | (268,851 | ) | ||||
| 28,045 | 63,172 | 65,312 | ||||||||
| Net deferred tax assets | $ | 73,006 | $ | 89,283 | $ | 8,556 | ||||
The domestic investment tax credit carryforwards, if not used, will expire in the years 2004 through 2008. Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2004 through 2008. 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. In 2003 and 2002, the valuation allowance increased by $58,017 and $175,576, 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
82
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 16. | Income Taxes — (Continued) |
assets for which a valuation allowance is provided do not begin expiring until 2020 and beyond, based on the current tax laws.
If the Company completes the exchange offer as discussed in Note 1, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.
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:
| 2003 | 2002 | 2001 | ||||||||
| Tax benefit at U.S. statutory rate | (35.0 | )% | (35.0 | )% | (35.0 | )% | ||||
| State income taxes, net of Federal income tax benefit | 6.8 | 0.4 | 1.9 | |||||||
| Increase in valuation allowance | 52.9 | 34.4 | 86.2 | |||||||
| Difference in estimated income taxes on foreign income and losses, net of previously provided amounts | 15.1 | 2.0 | 2.2 | |||||||
| Deferred charge | 1.7 | .4 | .9 | |||||||
| Other | 1.8 | .7 | 1.7 | |||||||
| 43.3 | % | 2.9 | % | 57.9 | % | |||||
| 17. | 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 total $26,700 in 2003, $32,000 in 2002, and $29,800 in 2001. Future minimum rental commitments on non-cancelable leases are as follows:
| Fiscal year: | ||||
| 2004 | $ | 25,100 | ||
| 2005 | 22,800 | |||
| 2006 | 19,400 | |||
| 2007 | 17,200 | |||
| 2008 | 15,700 | |||
| Thereafter | 159,500 | |||
| $ | 259,700 | |||
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 $3,622, $3,197 and $3,080, for the years ended December 26, 2003, December 27, 2002 and December 28, 2001, respectively. As of December 27, 2003 and December 27, 2002, the balance of the deferred gains was $74,151 and $69,540, 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.
| 18. | Capital Leases |
During 2002, the Company entered into sale-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capital leases. Assets under capital leases are summarized as follows:
| 2003 | 2002 | ||||||
| Buildings and improvements | $ | 38,522 | $ | 35,755 | |||
| Less accumulated amortization | 1,276 | 342 | |||||
| Net assets under capital leases | $ | 37,246 | $ | 35,413 | |||
83
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 18. | Capital Leases — (Continued) |
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 26, 2003:
| Fiscal year: | ||||
| 2004 | $ | 6,830 | ||
| 2005 | 6,797 | |||
| 2006 | 7,246 | |||
| 2007 | 6,973 | |||
| 2008 | 7,449 | |||
| Thereafter | 131,435 | |||
| Less: Interest | (103,035 | ) | ||
| Net minimum lease payments under capital leases | 63,695 | |||
| Less: current portion of net minimum lease payments | 1,322 | |||
| Long-term net minimum lease payments | $ | 62,373 | ||
84
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 19. | Quarterly Financial Data (Unaudited) |
| Three Months Ended | |||||||||||||
| 2003 | March 28 | June 27 | Sept. 26 | Dec. 26 | |||||||||
| Operating revenues | $ | 784,092 | $ | 922,238 | $ | 886,573 | $ | 1,130,912 | |||||
| Gross earnings from operations | 56,963 | 63,023 | 80,079 | 82,408 | |||||||||
| Net loss | (19,820 | ) | (29,338 | ) | (26,897 | ) | (81,008 | ) | |||||
| Loss per share: | |||||||||||||
| Basic and diluted | $ | (0.48 | ) | $ | (0.72 | ) | $ | (0.65 | ) | $ | (1.98 | ) | |
| Shares outstanding: | |||||||||||||
| Weighted-average number of shares outstanding | 41,035 | 41,044 | 41,041 | 41,058 | |||||||||
| Effect of stock options and convertible notes | * | * | * | * | |||||||||
| Total diluted weighted-average number of shares | |||||||||||||
| Outstanding | 41,035 | 41,044 | 41,041 | 41,058 | |||||||||
| Three Months Ended | |||||||||||||
| 2002 | March 29 | June 28 | Sept. 27 | Dec. 27 | |||||||||
| 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 | (25,610 | ) | (85,996 | ) | (151,010 | ) | (112,103 | ) | |||||
| Cumulative effect of a change in accounting principle for goodwill, net of $0 tax | (150,500 | ) | |||||||||||
| Net loss | (176,110 | ) | (85,996 | ) | (151,010 | ) | (112,103 | ) | |||||
| Loss per share: | |||||||||||||
| Basic and diluted | |||||||||||||
| Net (loss) prior to cumulative effect of a change in accounting principal | $ | (.63 | ) | $ | (2.10 | ) | $ | (3.69 | ) | $ | (2.73 | ) | |
| Cumulative effect of a change in accounting principle for goodwill | (3.67 | ) | — | — | — | ||||||||
| Net loss | $ | (4.30 | ) | $ | (2.10 | ) | $ | (3.69 | ) | $ | (2.73 | ) | |
| Shares outstanding: | |||||||||||||
| Weighted-average number of shares outstanding | 40,920 | 40,945 | 40,963 | 40,999 | |||||||||
| Effect of stock options and convertible notes | * | * | * | * | |||||||||
| Total diluted weighted-average number of shares | |||||||||||||
| Outstanding | 40,920 | 40,945 | 40,963 | 40,999 | |||||||||
*The effect of the stock options and convertible notes were not included in the calculation of diluted earnings per share as these options were antidilutive due to the quarterly loss.
| 20. | 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. 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
85
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 20. | Litigation and Uncertainties — (Continued) |
allegedly performed by the Company’s subsidiaries during the 1970s and prior. A summary of claim activity for the three years ended December 26, 2003 is as follows:
| Number of Claims | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
| Balance, beginning of year | 139,800 | 110,700 | 92,100 | |||||||
| New claims | 48,260 | 45,200 | 54,700 | |||||||
| Claims resolved | (17,200 | ) | (16,100 | ) | (36,100 | ) | ||||
| Balance, end of year | 170,860* | 139,800 | 110,700 | |||||||
*Includes approximately 24,500 claims on inactive court dockets.
The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed or will be reimbursed from insurance coverage, was $66,000 in 2003 and $57,200 in 2002, and $66,900 in 2001.
The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $1.8. 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 $555,400 relating to probable insurance recoveries of which approximately $60,000 is recorded in accounts and notes receivables, and $495,400 is recorded as long-term. 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 settlements with other insurers. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $372,200 and an estimated liability relating to future unasserted claims of approximately $214,000. Of the total, $60,000 is recorded in accrued expenses and $526,200 is recorded in asbestos-related liability on the consolidated balance sheet. 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 fifteen 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 26, 2003, total indemnity costs paid, prior to insurance recoveries, were approximately $354,000 and total defense costs paid were approximately $109,000.
The Company recorded charges related to increases in the valuation allowance for insurance claims receivable of $68,100, $26,200 and $0 for the years ended 2003, 2002 and 2001, respectively. These charges were recorded in other deductions in the consolidated statement of operations. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. The 2002 charge was recorded due to allocation of future costs to an insurer who became insolvent.
As of December 26, 2003, $257,700 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries various insurers and the subsidiaries as self-insurers. 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.
In July 2003, several subsidiaries of the Company and Liberty Mutual Insurance Company, one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a
86
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 20. | Litigation and Uncertainties — (Continued) |
buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. The subsidiaries received in July an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.
In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims.
In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.
The pending litigation and negotiations with other insurers is continuing.
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 believes 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 uncertainties 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 case has been amicably resolved by the parties and the appeal of the verdict has been dismissed. The terms of the settlement are confidential. The Company’s financial obligation was covered 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 yet to be calculated. This amended final judgment in the amount of $54,283 included such interest for the period beginning in 1983 when the lawsuit was filed through entry of judgment. Post-judgment interest accrued at a rate of 5.471 percent per annum from November 29, 1999. The management of Tray, Inc. believes that the Court’s decision contained numerous factual and legal errors subject to reversal on appeal. Tray, Inc. filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. On April 1, 2003, Tray, Inc. filed for bankruptcy. In the third quarter of 2003, the parties amicably resolved the cases. Management assessed the liability associated with the legal proceeding and determined that the previously recorded provision in the financial statements for this liability was adequate to address the terms of the settlement.
The Company has a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. The first phase of this project was profitable, but the close out of this phase resulted in increased costs. An $11,900 charge was recorded in 2003 and the remaining cash outlay of $4,000 will be expended in 2004. The Company is in the process of submitting requests for equitable adjustment related to this contract and at
87
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 20. | Litigation and Uncertainties — (Continued) |
December 26, 2003 and December 27, 2002, the Company’s financial statements reflect anticipated collection of $0 and $9,000, respectively, from these requests for equitable adjustment.
The second phase is billed on a cost plus fee basis and is expected to conclude in June 2004. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is for the construction, start-up and testing of the facility for a fixed price of $114,000, subject to escalation, is scheduled to commence in 2004. This phase will begin with the purchase of long lead items followed in 2005 by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency are interested in restructuring the contract and have commenced discussions about the possible restructuring or withdrawal from the contract. If the project were to proceed, the Company intends to seek third party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot obtain third party financing or the required surety bond, the Company’s participation would be uncertain; this could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has good legal defenses should the government agency decide to pursue an action.
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, 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 Country 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.
Under U.S. Federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Clean Water Act, the Clean Air Act, and similar state and local laws, the current owner or operator of real property and the past owners or operators of real property (if disposal or release took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances, and are subject to additional liabilities if they do not comply with applicable laws regulating such hazardous substances. In either case, such liabilities can be substantial. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or mediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person (“off-site facility”). Liability at such off-site facilities is typically allocated among all of the viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site, and other factors.
The Company currently owns and operates industrial facilities and has also transferred its interests in industrial facilities that it formerly owned or operated. It is likely that as a result of its current or former operations, such facilities have been impacted by hazardous substances. The Company is not aware of any conditions at its currently owned facilities in the United States that it expects will cause the Company to incur material costs which have not been accrued.
The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities that may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be material. No assurance can be provided that the
88
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 20. | Litigation and Uncertainties — (Continued) |
Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.
The Company had been notified that it was a potentially responsible party (“PRP”) under CERCLA or similar state laws at three off-site facilities, excluding sites as to which the Company has resolved its liability. At each of these sites, the Company’s liability should be substantially less than the total site remediation costs because the percentage of waste attributable to the Company compared to that attributable to all other PRPs is low. The Company does not believe that its share of cleanup obligations at any of the off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.
The Company’s project claims have increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise from changes in the initial scope of work or from owner-caused delays. These claims are often subject to lengthy arbitration or litigation proceedings. The costs associated with these changes or owner-caused delays include additional direct costs, such as labor and material costs associated with the performance of the additional works, as well as indirect costs that may arise due to delays in the completion of the project, such as increased labor costs resulting from changes in labor markets. The Company has used significant additional working capital in projects with cost overruns pending the resolution of the relevant project claims. The Company cannot assure that project claims will not continue in the future.
The Company established a provision for the balance of outstanding commercial claims as of December 27, 2002 to bring the net book value of such claims to $0. At that time, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. The Company continues to pursue these claims, but there can be no assurance that it will recover the full amount of the claims, or anything at all.
The Company also faces a number of counterclaims brought against it by certain project owners in connection with several of the project claims described above. If the Company were found liable for any of these counterclaims, it would have to incur write-downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.
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.
| 21. | Preferred Share Purchase Rights |
On September 22, 1987, the Company’s Board of Directors (the “Board”) declared a dividend distribution of one Preferred Share Purchase Right (“Right”) on each share of the Company’s common stock outstanding as of October 2, 1987 and adopted the Rights Agreement, dated as of September 22, 1987 (the “Rights Agreement”). On September 30, 1997, the Board amended and restated the Rights Agreement. Each Right allows the shareholder to purchase one one-hundredth of a share of a new series of preferred stock of the Company at an exercise price of $175. Rights are exercisable only if a person, together with its affiliates, acquires 20% or more of the Company’s common stock or announces a tender offer the consummation of which would result in ownership by a person, together with its affiliates, of 20% or more of the Company’s common stock. In connection with the reorganization on May 25, 2001, Foster Wheeler Corporation Rights were exchanged for Rights of Foster Wheeler Ltd. A new rights agreement governs the Rights, although the terms are the same. The Rights, which do not have the right to vote or receive dividends, expire on May 20, 2011, and may be redeemed, prior to becoming exercisable, by the Board at $.02 per Right or by shareholder action with an acquisition proposal.
If any person, together with its affiliates, acquires 20% or more of the Company’s outstanding common stock, the ¨flip-in¨ provision of the Rights will be triggered and the Rights will entitle a holder (other than such person or any member of such group) to acquire a number of additional shares of the Company’s common stock having a market value of twice the exercise price of each Right.
89
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 21. | Preferred Share Purchase Rights — (Continued) |
In the event the Company is involved in a merger or other business combination transaction, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of the acquiring Company’s common stock having a market value at that time of twice the Right’s exercise price. The Board of Directors may amend the Rights Agreement to prevent approved transactions from triggering the Rights.
| 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.
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.
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 2 and 10).
Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:
| December 26, 2003 | December 27, 2002 | ||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
| Nonderivatives: | |||||||||||||
| Cash and short-term investments | $ | 377,485 | $ | 377,485 | $ | 344,576 | $ | 344,576 | |||||
| Restricted Cash | 52,685 | 52,685 | 84,793 | 84,793 | |||||||||
| Long-term debt | (1,032,951 | ) | (591,080 | ) | (1,109,788 | ) | (569,985 | ) | |||||
| Derivatives: | |||||||||||||
| Foreign currency contracts | 3,310 | 3,310 | 8,470 | 8,470 | |||||||||
In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $609,000 and $1,182,394 as of December 26, 2003 and December 27, 2002, respectively. These balances include the standby letters of credit issued under the Senior Credit Facility discussed in Note 9. 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 26, 2003, the Company had $84,922 of foreign currency contracts outstanding. These foreign currency contracts mature in 2004. The contracts have been established by various international subsidiaries to sell a variety of currencies, and 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 26, 2003 and December 27, 2002, the Company had no significant concentrations of credit risk. The Company had issued a third-party financial guarantee totaling $2,750 at year-end 2003 and $2,750 at year-end 2002 with respect to a partnership interest in a commercial real estate project.
90
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 23. | Business Segments — Data |
The business of the Company and its subsidiaries falls within two business groups. THE ENGINEERING AND CONSTRUCTION GROUP (“E & C”) 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, however, the domestic environmental remediation business was sold in 2003. 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 2003, the E & C Group accounted for approximately 62% of the operating revenues. The geographic dispersion of these operating revenues was as follows: 12% North America, 11% Asia, 58% Europe, 6% Middle East, and 13% other. The Energy Group accounted for 38% of the operating revenues of the Company. The geographic dispersion of these operating revenues was as follows: 42% North America, 43% Europe, 6% Asia, 8% Middle East, and 1% South America.
Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined below, is the primary earnings measure used by the Company’s chief decision makers. Previously, gross margin, which is equal to operating revenues less cost of operating revenues, was considered the primary financial measure. Segment information for 2002 and 2001 has been restated to conform to the current presentations.
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings/(loss) before taxes (before goodwill charge), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, adjusted for certain unusual and infrequent items specifically excluded in the terms of the Senior Credit Facility, is also used as a measure for certain covenants under the Senior Credit Facility. The Company believes that the line item on its consolidated statement of earnings entitled “net earnings/(loss)” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings/(loss) as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net earnings/(loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded. The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:
| • | It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations; |
| • | It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations; | |
| • | It does not include depreciation. Because the Company must utilize substantial property, plants and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations. |
A reconciliation of EBITDA, a non-GAAP financial measure, to net (loss)/earnings, a GAAP measure, is shown on the next page.
Export revenues account for 4.5% of operating revenues. No single customer represented 10% or more of operating revenues for 2003, 2002, or 2001.
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.
91
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 23. | Business Segments — Data — (Continued) |
Summary financial information concerning the Company’s reportable segments is shown in the following table:
| Total | Engineering and Construction | Energy Group | Corporate and Financial Services (1) | ||||||||||||||||||
| 2003 | |||||||||||||||||||||
| Third party revenue | $ | 3,801,308 | $ | 2,342,660 | $ | 1,450,162 | $ | 8,486 | |||||||||||||
| Intercompany revenue | — | 10,733 | 4,315 | (15,048 | ) | ||||||||||||||||
| Total revenue | $ | 3,801,308 | $ | 2,353,393 | $ | 1,454,477 | $ | (6,562 | ) | ||||||||||||
| EBITDA | 21,421 | $ | 60,655 | $ | 140,394 | $ | (179,628 | ) | |||||||||||||
Less: Interest expense (2)(3) | 95,484 | 3,201 | 17,453 | 74,830 | (3) | ||||||||||||||||
| Less: Depreciation and amortization | 35,574 | 10,133 | 21,713 | 3,728 | |||||||||||||||||
| (Loss)/earnings before income taxes | (109,637 | ) | 47,321 | (4) | (5) | 101,228 | (4) | (5) | (258,186 | ) | (5) | ||||||||||
| Tax provision/(benefits) | 47,426 | 15,906 | 43,403 | (11,883 | ) | ||||||||||||||||
| Net (loss)/earnings | $ | (157,063 | ) | $ | 31,415 | $ | 57,825 | $ | (246,303 | ) | |||||||||||
| Identifiable assets | $ | 2,506,530 | $ | 1,030,737 | $ | 1,229,270 | $ | 246,523 | |||||||||||||
| Capital expenditures | $ | 12,870 | $ | 5,688 | $ | 6,582 | $ | 600 | |||||||||||||
| 2002 | |||||||||||||||||||||
| Third party revenue | $ | 3,574,537 | $ | 2,014,678 | $ | 1,544,706 | $ | 15,153 | |||||||||||||
| Intercompany revenue | — | 12,853 | 32,068 | (44,921 | ) | ||||||||||||||||
| Total revenue | $ | 3,574,537 | $ | 2,027,531 | $ | 1,576,774 | $ | (29,768 | ) | ||||||||||||
| EBITDA | $ | (219,209 | ) | $ | (41,438 | ) | $ | (31,148 | ) | $ | (146,623 | ) | |||||||||
Less: Interest expense (2)(3) | 83,028 | (415 | ) | 21,621 | 61,822 | (3) | |||||||||||||||
| Less: Depreciation and amortization | 57,825 | 15,490 | (9) | 37,622 | (9) | 4,713 | |||||||||||||||
| Loss before income taxes and cumulative effect of a | |||||||||||||||||||||
| change in accounting principle for goodwill | (360,062 | ) | (56,513 | ) | (6) | (8) | (90,391 | ) | (6) | (7) | (8) | (213,158 | ) | (6) | (7) | (8) | |||||
| Tax provision/(benefits) | 14,657 | (11,485 | ) | (62,859 | ) | 89,001 | |||||||||||||||
| Net loss prior to cumulative effect of a change in | |||||||||||||||||||||
| accounting principle for goodwill | (374,719 | ) | (45,028 | ) | (27,532 | ) | (302,159 | ) | |||||||||||||
| Cumulative effect on prior years of a change in | |||||||||||||||||||||
| accounting principle for goodwill | (150,500 | ) | (48,700 | ) | (101,800 | ) | — | ||||||||||||||
| Net loss | $ | (525,219 | ) | $ | (93,728 | ) | $ | (129,332 | ) | $ | (302,159 | ) | |||||||||
| Identifiable assets | $ | 2,842,277 | $ | 1,100,401 | $ | 1,431,211 | $ | 310,665 | |||||||||||||
| Capital expenditures | $ | 53,395 | $ | 9,907 | $ | 9,317 | $ | 34,171 | |||||||||||||
| 2001 | |||||||||||||||||||||
| Third party revenue | $ | 3,392,474 | $ | 1,931,523 | $ | 1,439,153 | $ | 21,798 | |||||||||||||
| Intercompany revenue | — | 12,495 | 29,691 | (42,186 | ) | ||||||||||||||||
| Total revenue | $ | 3,392,474 | $ | 1,944,018 | $ | 1,468,844 | $ | (20,388 | ) | ||||||||||||
| EBITDA | $ | (72,731 | ) | $ | 32,661 | $ | (27,223 | ) | $ | (78,169 | ) | ||||||||||
Less: Interest expense (2)(3) | 84,484 | (179 | ) | 26,493 | 58,170 | (3) | |||||||||||||||
| Less: Depreciation and amortization | 55,750 | 17,721 | 34,470 | 3,559 | |||||||||||||||||
| (Loss)/earnings before income taxes | (212,965 | ) | 15,119 | (10) | (88,186 | ) | (10) | (11) | (139,898 | ) | (10) | (11) | |||||||||
| Tax provision/(benefits) | 123,395 | 10,982 | (27,430 | ) | 139,843 | (12) | |||||||||||||||
| Net (loss)/earnings | $ | (336,360 | ) | $ | 4,137 | $ | (60,756 | ) | $ | (279,741 | ) | ||||||||||
| Identifiable assets | $ | 3,325,837 | $ | 1,289,207 | $ | 1,758,399 | $ | 278,231 | |||||||||||||
| Capital expenditures | $ | 33,998 | $ | 11,494 | $ | 15,463 | $ | 7,041 | |||||||||||||
92
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 23. | Business Segments — Data — (Continued) |
| (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. |
| (3) | Includes dividends on Preferred Security of $18,130 in 2003, $16,610 in 2002, and $15,750 in 2001. |
| (4) | Includes in 2003, revaluation of contract estimates and revisions of contract claims of $30,800; Engineering and Construction Group (E & C) $33,900 and Energy Group (Energy) $(3,100). |
| (5) | Includes in 2003, a gain on the sale of Environmental in E & C of $16,700 and an impairment on the anticipated sale of domestic corporate office building in the Corporate and Financial Services (C & F) of $15,100. Includes gain on sale of waste-to-energy plant of $4,300 in Energy, and provision for asbestos claims of $68,100 in C & F in 2003, $58,700 of performance intervention activities, debt restructuring efforts, accrual for legal settlement, severance costs, increased pension and post retirement costs; $8,900 in E & C, $2,800 in Energy, and $47,000 in C & F. |
| (6) | Includes in 2002, revaluation of contract estimates and provisions for uncollectible receivables of $216,700 $(210,800 after-tax): Engineering and Construction Group (E & C) $121,650, Energy Group (Energy) $86,450 and Corporate and Financial Services (C & F) $8,600; and a provision for mothballing a domestic manufacturing facility of $18,700 for Energy. |
| (7) | Includes in 2002, anticipated loss on sale of assets of $54,500 in Energy and provisions for asbestos claim of $26,200 in C & F. |
| (8) | 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 E & C, $12,700 in Energy, and $60,100 in C & F. |
| (9) | Excluded cumulative effect in 2002, goodwill change in accounting principle of $48,700 in E & C and $101,800 in Energy. |
| (10) | 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. |
| (11) | 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). |
| (12) | Includes in 2001, a valuation allowance for deferred tax assets of $194,600 on Corporate and Financial Services. |
93
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 23. | Business Segments — Data — (Continued) |
| 2003 | 2002 | 2001 | ||||||||
Equity earnings in unconsolidated subsidiaries were as follows: | ||||||||||
| Engineering and Construction Group | $ | 9,738 | $ | 7,334 | $ | 4,432 | ||||
| Energy Group | 7,404 | 6,672 | 8,404 | |||||||
| Total | $ | 17,142 | $ | 14,006 | $ | 12,836 | ||||
| Geographic Concentration | ||||||||||
| Revenues: | ||||||||||
| United States | $ | 996,831 | $ | 1,544,827 | $ | 1,673,457 | ||||
| Europe | 2,741,413 | 1,923,211 | 1,669,409 | |||||||
| Canada | 69,626 | 136,267 | 126,851 | |||||||
| Corporate and Financial Services, including eliminations | (6,562 | ) | (29,768 | ) | (77,243 | ) | ||||
| Total | $ | 3,801,308 | $ | 3,574,537 | $ | 3,392,474 | ||||
| Long-lived assets: | ||||||||||
| United States | $ | 258,261 | $ | 345,934 | $ | 534,345 | ||||
| Europe | 215,101 | 195,359 | 174,058 | |||||||
| Canada | 1,255 | 1,537 | 1,958 | |||||||
| Corporate and Financial Services, including eliminations | 56,338 | 76,394 | 47,894 | |||||||
| Total | $ | 530,955 | $ | 619,224 | $ | 758,255 | ||||
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 2003 were as follows:
| 2003 | 2002 | 2001 | ||||||||
| Power | $ | 1,731,339 | $ | 1,647,135 | $ | 1,399,450 | ||||
| Oil and gas/refinery | 1,254,052 | 922,267 | 807,367 | |||||||
| Pharmaceutical | 300,507 | 404,825 | 485,786 | |||||||
| Chemical | 204,738 | 156,606 | 177,777 | |||||||
| Environmental | 124,724 | 353,981 | 337,248 | |||||||
| Power production | 167,594 | 130,843 | 150,990 | |||||||
| Eliminations and other | (59,139 | ) | (96,480 | ) | (43,304 | ) | ||||
| Total Operating Revenues | $ | 3,723,815 | $ | 3,519,177 | $ | 3,315,314 | ||||
| 24. | Consolidating Financial Information |
A. Senior Notes at 6.75%
As a result of the reorganization on May 25, 2001, Foster Wheeler LLC, as successor to Foster Wheeler Corporation, became obligor for the Senior Notes due November 15, 2005. In connection with the Company’s finalizing the Senior Credit Facility, Foster Wheeler Ltd. and the following 100% owned companies issued guarantees in favor of the holders of the Senior Notes: Equipment Consultants, Inc., Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), 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 North America Corp. (formerly known as “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
94
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
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. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the wholly owned subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. None of the subsidiary guarantors are restricted from making distributions to the Company. The following represents summarized condensed consolidating financial information as of December 26, 2003 and December 27, 2002 with respect to the financial position, and for the three years ended December 26, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.
The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd. which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.
In 2002, the Guarantor and the Non-Guarantor Subsidiaries columns in the accompanying condensed consolidating balance sheets have been reclassified to conform to current financial statement presentation. In particular, allowance for doubtful accounts on accounts receivable trade of $66,561 have been reclassified from estimated costs to complete long-term contracts $(61,561) and advance payments $(5,000) to accounts receivable trade. Accordingly, the accounts receivable trade balance is now presented net of all reserves.
95
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
ASSETS | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | �� | $ | 32,984 | $ | 331,111 | $ | — | $ | 364,095 | |||||||
| Accounts and notes receivable, net | — | 272,361 | 111,142 | 798,644 | (625,733 | ) | 556,414 | ||||||||||||
| Contracts in process and inventories | — | — | 121,527 | 60,876 | (9,110 | ) | 173,293 | ||||||||||||
| Investment and advances | — | — | 88,641 | — | (88,641 | ) | — | ||||||||||||
| Other current assets | — | — | 4,310 | 76,264 | — | 80,574 | |||||||||||||
| Total current assets | — | 272,361 | 358,604 | 1,266,895 | (723,484 | ) | 1,174,376 | ||||||||||||
| Investments in subsidiaries and others | (872,080 | ) | (919,588 | ) | 407,023 | 98,651 | 1,384,645 | 98,651 | |||||||||||
| Land, buildings & equipment (net) | — | — | 64,315 | 245,300 | — | 309,615 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 575,118 | 281,108 | 458,490 | (1,517,940 | ) | 6,776 | ||||||||||||
| Intangible assets (net) | — | — | 101,664 | 21,025 | — | 122,689 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | 495,400 | — | — | — | 495,400 | |||||||||||||
| Other non-current assets | — | 28,478 | 83,898 | 186,647 | — | 299,023 | |||||||||||||
| TOTAL ASSETS | $ | (662,080 | ) | $ | 451,769 | $ | 1,296,612 | $ | 2,277,008 | $ | (856,779 | ) | $ | 2,506,530 | |||||
LIABILITIES & SHAREHOLDERS’ (DEFICIT)/EQUITY | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 412 | $ | 78,278 | $ | 723,122 | $ | 519,693 | $ | (634,843 | ) | $ | 686,662 | ||||||
| Estimated costs to complete long-term contracts | — | — | 162,168 | 390,586 | — | 552,754 | |||||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 17,209 | 118,272 | — | 134,344 | |||||||||||
| Total current liabilities | 360 | 77,193 | 902,499 | 1,028,551 | (634,843 | ) | 1,373,760 | ||||||||||||
| Corporate and other debt | — | 328,163 | 44,120 | 23,819 | — | 396,102 | |||||||||||||
| Special-purpose project debt | — | — | — | 119,281 | — | 119,281 | |||||||||||||
| Pension, postretirement and other employee benefits | — | — | 216,281 | 78,852 | — | 295,133 | |||||||||||||
| Asbestos-related liability | — | 526,200 | — | — | — | 526,200 | |||||||||||||
| Other long-term liabilities and minority interest | — | 392,221 | 894,203 | 763,125 | (1,877,644 | ) | 171,905 | ||||||||||||
| Subordinated Robbins obligations | — | — | 111,589 | — | — | 111,589 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | — | — | 175,000 | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,360 | 1,323,777 | 2,168,692 | 2,188,628 | (2,512,487 | ) | 3,378,970 | ||||||||||||
| Common stock and paid-in capital | 242,613 | 242,613 | 242,613 | 325,741 | (810,967 | ) | 242,613 | ||||||||||||
| Accumulated deficit | (811,054 | ) | (810,622 | ) | (810,694 | ) | (33,254 | ) | 1,654,570 | (811,054 | ) | ||||||||
| Accumulated other comprehensive loss | (303,999 | ) | (303,999 | ) | (303,999 | ) | (204,107 | ) | 812,105 | (303,999 | ) | ||||||||
| TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY | (872,440 | ) | (872,008 | ) | (872,080 | ) | 88,380 | 1,655,708 | (872,440 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY | $ | (662,080 | ) | $ | 451,769 | $ | 1,296,612 | $ | 2,277,008 | $ | (856,779 | ) | $ | 2,506,530 | |||||
96
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
24. Consolidating Financial Information — (Continued)
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
ASSETS | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 19,771 | $ | 324,534 | $ | — | $ | 344,305 | |||||||
| Accounts and notes receivable, net | — | 228,428 | 163,817 | 847,482 | (611,506 | ) | 628,221 | ||||||||||||
| Contracts in process and inventories | — | — | 177,115 | 110,959 | (8,250 | ) | 279,824 | ||||||||||||
| Investment and advances | — | — | 292,654 | — | (292,654 | ) | — | ||||||||||||
| Other current assets | — | — | 39,924 | 38,102 | (529 | ) | 77,497 | ||||||||||||
| Total current assets | — | 228,428 | 693,281 | 1,321,077 | (912,939 | ) | 1,329,847 | ||||||||||||
| Investments in subsidiaries and others | (780,671 | ) | (842,608 | ) | 325,341 | 88,523 | 1,297,938 | 88,523 | |||||||||||
| Land, buildings & equipment (net) | — | — | 103,489 | 304,330 | — | 407,819 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 595,656 | 289,106 | 658,167 | (1,730,985 | ) | 21,944 | ||||||||||||
| Intangible assets (net) | — | — | 104,349 | 18,533 | — | 122,882 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | 534,045 | — | — | — | 534,045 | |||||||||||||
| Other non-current assets | — | 20,749 | 107,174 | 209,296 | (2 | ) | 337,217 | ||||||||||||
| TOTAL ASSETS | $ | (570,671 | ) | $ | 536,270 | $ | 1,622,740 | $ | 2,599,926 | $ | (1,345,988 | ) | $ | 2,842,277 | |||||
LIABILITIES & SHAREHOLDERS’ (DEFICIT)/EQUITY | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 320 | $ | 39,048 | $ | 743,006 | $ | 448,732 | $ | (620,285 | ) | $ | 610,821 | ||||||
| Estimated costs to complete long-term contracts | — | — | 279,739 | 366,024 | — | 645,763 | |||||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 23,643 | 170,705 | — | 193,211 | |||||||||||
| Total current liabilities | 268 | 37,963 | 1,046,388 | 985,461 | (620,285 | ) | 1,449,795 | ||||||||||||
| Corporate and other debt | — | 340,000 | 43,678 | 16,261 | — | 399,939 | |||||||||||||
| Special-purpose project debt | — | — | — | 181,613 | — | 181,613 | |||||||||||||
| Pension, postretirement and other employee benefits | — | — | 294,133 | 143,687 | — | 437,820 | |||||||||||||
| Asbestos-related liability | — | 519,790 | — | — | — | 519,790 | |||||||||||||
| Other long-term liabilities and minority interest | — | 419,134 | 907,538 | 971,731 | (2,160,818 | ) | 137,585 | ||||||||||||
| Subordinated Robbins obligations | — | — | 111,674 | — | — | 111,674 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | — | — | 175,000 | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,268 | 1,316,887 | 2,403,411 | 2,473,753 | (2,781,103 | ) | 3,623,216 | ||||||||||||
| Common stock and paid-in capital | 242,490 | 242,490 | 242,490 | 374,892 | (859,872 | ) | 242,490 | ||||||||||||
| (Accumulated deficit)/retained earnings | (653,991 | ) | (653,669 | ) | (653,723 | ) | 5,727 | 1,301,665 | (653,991 | ) | |||||||||
| Accumulated other comprehensive loss | (369,438 | ) | (369,438 | ) | (369,438 | ) | (254,446 | ) | 993,322 | (369,438 | ) | ||||||||
| TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY | (780,939 | ) | (780,617 | ) | (780,671 | ) | 126,173 | 1,435,115 | (780,939 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY | $ | (570,671 | ) | $ | 536,270 | $ | 1,622,740 | $ | 2,599,926 | $ | (1,345,988 | ) | $ | 2,842,277 | |||||
97
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating Revenues | $ | — | $ | — | $ | 942,720 | $ | 2,872,147 | $ | (91,052 | ) | $ | 3,723,815 | ||||||
| Other Income | 13,650 | 54,037 | 54,884 | 108,311 | (153,389 | ) | 77,493 | ||||||||||||
| Total revenues and other income | 13,650 | 54,037 | 997,604 | 2,980,458 | (244,441 | ) | 3,801,308 | ||||||||||||
| Cost of operating revenues | — | — | 880,982 | 2,656,912 | (96,552 | ) | 3,441,342 | ||||||||||||
| Selling, general and administrative expenses | — | — | 85,187 | 114,652 | 110 | 199,949 | |||||||||||||
| Other deductions and minority interest | 24 | 198 | 74,560 | 109,564 | (10,176 | ) | 174,170 | ||||||||||||
| Interest expense * | 13,719 | 63,256 | 61,673 | 94,659 | (137,823 | ) | 95,484 | ||||||||||||
| Equity in net loss of subsidiaries | (156,970 | ) | (147,536 | ) | (45,855 | ) | — | 350,361 | — | ||||||||||
| (Loss)/earnings before income taxes | (157,063 | ) | (156,953 | ) | (150,653 | ) | 4,671 | 350,361 | (109,637 | ) | |||||||||
| Provision for income taxes | — | — | 6,317 | 41,109 | — | 47,426 | |||||||||||||
| Net loss | (157,063 | ) | (156,953 | ) | (156,970 | ) | (36,438 | ) | 350,361 | (157,063 | ) | ||||||||
| Other comprehensive income: | |||||||||||||||||||
| Foreign currency translation adjustment | 6,762 | 6,762 | 6,762 | 5,858 | (19,382 | ) | 6,762 | ||||||||||||
| Minimum pension liability adjustment net of tax of $18,886 | 58,677 | 58,677 | 58,677 | 44,483 | (161,837 | ) | 58,677 | ||||||||||||
| Comprehensive (loss)/income | $ | (91,624 | ) | $ | (91,514 | ) | $ | (91,531 | ) | $ | 13,903 | $ | 169,142 | $ | (91,624 | ) | |||
| * Includes dividends on preferred securities of $18,130. | |||||||||||||||||||
98
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | 1,392,043 | $ | 2,228,851 | $ | (101,717 | ) | $ | 3,519,177 | ||||||
| Other income | 13,650 | 50,355 | 38,180 | 99,943 | (146,768 | ) | 55,360 | ||||||||||||
| Total revenues and other income | 13,650 | 50,355 | 1,430,223 | 2,328,794 | (248,485 | ) | 3,574,537 | ||||||||||||
| Cost of operating revenues | — | — | 1,440,544 | 2,089,827 | (103,461 | ) | 3,426,910 | ||||||||||||
| Selling, general and administrative expenses | — | — | 127,353 | 99,171 | — | 226,524 | |||||||||||||
| Other deductions and minority interest | 73 | 4,205 | 95,469 | 98,390 | — | 198,137 | |||||||||||||
| Interest expense * | 13,749 | 52,785 | 58,797 | 102,721 | (145,024 | ) | 83,028 | ||||||||||||
| Equity in net losses of subsidiaries | (374,547 | ) | (370,193 | ) | (71,753 | ) | — | 816,493 | — | ||||||||||
| Loss before income taxes | (374,719 | ) | (376,828 | ) | (363,693 | ) | (61,315 | ) | 816,493 | (360,062 | ) | ||||||||
| Provision /(benefit) for income taxes | — | (2,322 | ) | 10,854 | 6,125 | — | 14,657 | ||||||||||||
| Net loss prior to cumulative effect of a change in accounting principle | (374,719 | ) | (374,506 | ) | (374,547 | ) | (67,440 | ) | 816,493 | (374,719 | ) | ||||||||
| Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax | (150,500 | ) | (150,500 | ) | (150,500 | ) | (24,800 | ) | 325,800 | (150,500 | ) | ||||||||
| Net loss | (525,219 | ) | (525,006 | ) | (525,047 | ) | (92,240 | ) | 1,142,293 | (525,219 | ) | ||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | 22,241 | 22,241 | 22,241 | 22,241 | (66,723 | ) | 22,241 | ||||||||||||
| Net (loss)/gain on derivative instruments | (3,834 | ) | (3,834 | ) | (3,834 | ) | 284 | 7,384 | (3,834 | ) | |||||||||
| Minimum pension liability adjustment net of tax benefit of $73,400 | (226,011 | ) | (226,011 | ) | (226,011 | ) | (170,303 | ) | 622,325 | (226,011 | ) | ||||||||
| Comprehensive loss | $ | (732,823 | ) | $ | (732,610 | ) | $ | (732,651 | ) | $ | (240,018 | ) | $ | 1,705,279 | $ | (732,823 | ) | ||
| * Includes dividends on preferred securities of $16,610. | |||||||||||||||||||
99
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | 1,500,541 | $ | 2,002,529 | $ | (187,756 | ) | $ | 3,315,314 | ||||||
| Other income | 8,000 | 38,152 | 58,877 | 100,307 | (128,176 | ) | 77,160 | ||||||||||||
| Total revenues and other income | 8,000 | 38,152 | 1,559,418 | 2,102,836 | (315,932 | ) | 3,392,474 | ||||||||||||
| Cost of operating revenues | — | — | 1,506,801 | 1,823,980 | (166,756 | ) | 3,164,025 | ||||||||||||
| Selling, general and administrative expenses | — | — | 124,533 | 100,859 | — | 225,392 | |||||||||||||
| Other deductions and minority interest | 130 | 2,195 | 84,003 | 71,625 | (26,415 | ) | 131,538 | ||||||||||||
| Interest expense * | 8,018 | 28,846 | 66,636 | 103,745 | (122,761 | ) | 84,484 | ||||||||||||
| Equity in net (loss)/earnings of subsidiaries | (336,264 | ) | (343,362 | ) | 5,493 | — | 674,133 | — | |||||||||||
| (Loss)/earnings before income taxes | (336,412 | ) | (336,251 | ) | (217,062 | ) | 2,627 | 674,133 | (212,965 | ) | |||||||||
| Provision /(benefit) for income taxes | (52 | ) | — | 119,202 | 4,245 | — | 123,395 | ||||||||||||
| Net loss | (336,360 | ) | (336,251 | ) | (336,264 | ) | (1,618 | ) | 674,133 | (336,360 | ) | ||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | (10,191 | ) | (10,191 | ) | (10,191 | ) | (12,683 | ) | 33,065 | (10,191 | ) | ||||||||
| Net gain on derivative instruments | 3,834 | 3,834 | 3,834 | (284 | ) | (7,384 | ) | 3,834 | |||||||||||
| Minimum pension liability adjustment net of tax benefit of $0 | (36,770 | ) | (36,770 | ) | (36,770 | ) | — | 73,540 | (36,770 | ) | |||||||||
| Comprehensive loss | $ | (379,487 | ) | $ | (379,378 | ) | $ | (379,391 | ) | $ | (14,585 | ) | $ | 773,354 | $ | (379,487 | ) | ||
| * Includes dividends on preferred securities of $15,750. | |||||||||||||||||||
100
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by | |||||||||||||||||||
| Operating Activities | $ | (93 | ) | $ | 18,811 | $ | (163,781 | ) | $ | 87,168 | $ | (4,203 | ) | $ | (62,098 | ) | |||
Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | 15,524 | 22,890 | — | 38,414 | |||||||||||||
| Capital expenditures | — | — | (105 | ) | (12,765 | ) | — | (12,870 | ) | ||||||||||
| Proceeds from sale of properties | — | — | 79,701 | 7,458 | — | 87,159 | |||||||||||||
| Increase in investment and advances | — | — | 274 | (274 | ) | — | — | ||||||||||||
| Increase in short-term investments | — | — | — | (6,808 | ) | — | (6,808 | ) | |||||||||||
| Net cash provided by | |||||||||||||||||||
| Investing Activities | — | — | 95,394 | 10,501 | — | 105,895 | |||||||||||||
Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | — | — | (4,203 | ) | 4,203 | — | ||||||||||||
| Decrease in short-term debt | — | — | — | (14,826 | ) | — | (14,826 | ) | |||||||||||
| Proceeds from long-term debt | — | — | — | — | — | — | |||||||||||||
| Repayment of long-term debt | — | (11,837 | ) | (1,580 | ) | (20,683 | ) | — | (34,100 | ) | |||||||||
| Other | 93 | (6,974 | ) | 83,180 | (79,178 | ) | — | (2,879 | ) | ||||||||||
| Net cash provided/(used) by | |||||||||||||||||||
| Financing Activities | 93 | (18,811 | ) | 81,600 | (118,890 | ) | 4,203 | (51,805 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 27,798 | — | 27,798 | |||||||||||||
Increase in cash and cash equivalents | — | — | 13,213 | 6,577 | — | 19,790 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 19,771 | 324,534 | — | 344,305 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 32,984 | $ | 331,111 | $ | — | $ | 364,095 | |||||||
101
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash(used)/provided by | |||||||||||||||||||
| Operating Activities | $ | (172 | ) | $ | (15,109 | ) | $ | 197,489 | $ | (3,483 | ) | $ | (18,360 | ) | $ | 160,365 | |||
Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | (15,900 | ) | (68,893 | ) | — | (84,793 | ) | ||||||||||
| Capital expenditures | — | — | (40,932 | ) | (12,463 | ) | — | (53,395 | ) | ||||||||||
| Proceeds from sale of properties | — | — | 1,783 | 4,499 | — | 6,282 | |||||||||||||
| (Increase)/decrease in investment and advances | — | (350 | ) | (21,049 | ) | 30,506 | — | 9,107 | |||||||||||
| Decrease in short-term investments | — | — | — | 93 | — | 93 | |||||||||||||
| Net cash used by | |||||||||||||||||||
Investing Activities | — | (350 | ) | (76,098 | ) | (46,258 | ) | — | (122,706 | ) | |||||||||
| Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | — | — | (18,360 | ) | 18,360 | — | ||||||||||||
| Increase in short-term debt | — | — | — | (7,792 | ) | — | (7,792 | ) | |||||||||||
| Proceeds from long-term debt | — | 70,000 | — | 546 | — | 70,546 | |||||||||||||
| Proceeds from lease financing obligation | — | — | 44,900 | — | — | 44,900 | |||||||||||||
| Repayment of long-term debt | — | — | (24,440 | ) | (21,151 | ) | — | (45,591 | ) | ||||||||||
| Other | 172 | (54,541 | ) | (163,185 | ) | 215,493 | — | (2,061 | ) | ||||||||||
| Net cash provided/(used) by | |||||||||||||||||||
Financing Activities | 172 | 15,459 | (142,725 | ) | 168,736 | 18,360 | 60,002 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 143 | 22,481 | — | 22,624 | |||||||||||||
(Decrease)/increase in cash and cash equivalents | — | — | (21,191 | ) | 141,476 | — | 120,285 | ||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 40,962 | 183,058 | — | 224,020 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 19,771 | $ | 324,534 | $ | — | $ | 344,305 | |||||||
102
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
A. Senior Notes at 6.75% — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by | |||||||||||||||||||
| Operating Activities | $ | (96 | ) | $ | (181,267 | ) | $ | 418,899 | $ | (71,574 | ) | $ | (254,643 | ) | $ | (88,681 | ) | ||
Cash Flows from Investing Activities | |||||||||||||||||||
| Capital expenditures | — | (2,346 | ) | (17,074 | ) | (14,578 | ) | — | (33,998 | ) | |||||||||
| Proceeds from sale of properties | — | — | 190 | 59,482 | — | 59,672 | |||||||||||||
| Decrease/(increase) in investment and advances | — | — | 77,838 | (61,830 | ) | — | 16,008 | ||||||||||||
| Increase in short-term investments | — | — | — | 1,530 | — | 1,530 | |||||||||||||
| Net cash (used)/provided by | |||||||||||||||||||
| Investing Activities | — | (2,346 | ) | 60,954 | (15,396 | ) | — | 43,212 | |||||||||||
Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | (4,888 | ) | (228,936 | ) | (25,707 | ) | 254,643 | (4,888 | ) | |||||||||
| Decrease in short-term debt | — | — | (76,250 | ) | (5,782 | ) | — | (82,032 | ) | ||||||||||
| Proceeds from Convertible Bonds, net | 202,912 | — | — | 202,912 | |||||||||||||||
| Proceeds from long-term debt | — | 178,061 | (285,000 | ) | 291,981 | — | 185,042 | ||||||||||||
| Repayment of long-term debt | — | (193,062 | ) | (1,601 | ) | (20,061 | ) | — | (214,724 | ) | |||||||||
| Other | (202,816 | ) | 203,502 | 113,620 | (115,083 | ) | — | (777 | ) | ||||||||||
| Net cash provided/(used) by | |||||||||||||||||||
| Financing Activities | 96 | 183,613 | (478,167 | ) | 125,348 | 254,643 | 85,533 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | (347 | ) | (7,590 | ) | — | (7,937 | ) | ||||||||||
Increase in cash and cash equivalents | — | — | 1,339 | 30,788 | — | 32,127 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 39,623 | 152,270 | — | 191,893 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 40,962 | $ | 183,058 | $ | — | $ | 224,020 | |||||||
103
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes
In May and June 2001, Foster Wheeler Ltd. issued 6.5% Convertible Subordinated Notes (“Convertible Notes”) due in 2007. The Convertible Notes are fully and unconditionally guaranteed by Foster Wheeler LLC, a 100% owned subsidiary of Foster Wheeler Ltd. Foster Wheeler LLC has assumed the obligation to fund the debt service. The following summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of Foster Wheeler LLC because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents summarized condensed consolidating financial information as of December 26, 2003 and December 27, 2002 with respect to the financial position, and for the three years ended December 26, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.
The Foster Wheeler Ltd. column presents the financial information of the parent company, who is also the issuer. The Guarantor Subsidiary column presents the financial information of the sole guarantor, Foster Wheeler LLC. The non-guarantor subsidiaries include the results of all direct and indirect non-guarantor subsidiaries of Foster Wheeler Ltd., including Foster Wheeler Holdings Ltd. (previously known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.
In 2002, the Non-Guarantor Subsidiaries column in the accompanying condensed consolidating balance sheets has been reclassified to conform to current financial statement presentation. In particular, allowance for doubtful accounts on accounts receivable trade of $66,561 have been reclassified from estimated costs to complete long-term contracts $(61,561) and advance payments $(5,000) to accounts receivable trade. Accordingly, the accounts receivable trade balance is now presented net of all reserves.
104
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 364,095 | $ | — | $ | 364,095 | ||||||
| Accounts and notes receivable, net | — | 272,361 | 497,096 | (213,043 | ) | 556,414 | ||||||||||
| Contracts in process and inventories | — | — | 173,293 | — | 173,293 | |||||||||||
| Other current assets | — | — | 80,574 | — | 80,574 | |||||||||||
| Total current assets | — | 272,361 | 1,115,058 | (213,043 | ) | 1,174,376 | ||||||||||
| Investments in subsidiaries and others | (872,080 | ) | (919,588 | ) | 146,231 | 1,744,088 | 98,651 | |||||||||
| Land, buildings & equipment (net) | — | — | 309,615 | — | 309,615 | |||||||||||
| Notes and accounts receivable long-term | 210,000 | 575,118 | 181,716 | (960,058 | ) | 6,776 | ||||||||||
| Intangible assets (net) | — | — | 122,689 | — | 122,689 | |||||||||||
| Asbestos-related insurance recovery receivable | — | 495,400 | — | — | 495,400 | |||||||||||
| Other non-current assets | — | 28,478 | 270,545 | — | 299,023 | |||||||||||
| TOTAL ASSETS | $ | (662,080 | ) | $ | 451,769 | $ | 2,145,854 | $ | 570,987 | $ | 2,506,530 | |||||
| LIABILITIES & SHAREHOLDERS’ DEFICIT | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 412 | $ | 78,278 | $ | 821,015 | $ | (213,043 | ) | $ | 686,662 | |||||
| Estimated costs to complete long-term contracts | — | — | 552,754 | — | 552,754 | |||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 135,481 | — | 134,344 | |||||||||
| Total current liabilities | 360 | 77,193 | 1,509,250 | (213,043 | ) | 1,373,760 | ||||||||||
| Corporate and other debt | — | 328,163 | 67,939 | — | 396,102 | |||||||||||
| Special-purpose project debt | — | — | 119,281 | — | 119,281 | |||||||||||
| Pension, postretirement and other employee benefits | — | — | 295,133 | — | 295,133 | |||||||||||
| Asbestos-related liability | — | 526,200 | — | — | 526,200 | |||||||||||
| Other long-term liabilities and minority interest | — | 392,221 | 739,742 | (960,058 | ) | 171,905 | ||||||||||
| Subordinated Robbins obligations | — | — | 111,589 | — | 111,589 | |||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | 210,000 | |||||||||||
| Preferred trust securities | — | — | 175,000 | — | 175,000 | |||||||||||
| TOTAL LIABILITIES | 210,360 | 1,323,777 | 3,017,934 | (1,173,101 | ) | 3,378,970 | ||||||||||
| Common stock and paid in capital | 242,613 | 242,613 | 242,613 | (485,226 | ) | 242,613 | ||||||||||
| Accumulated deficit | (811,054 | ) | (810,622 | ) | (810,694 | ) | 1,621,316 | (811,054 | ) | |||||||
| Accumulated other comprehensive loss | (303,999 | ) | (303,999 | ) | (303,999 | ) | 607,998 | (303,999 | ) | |||||||
| TOTAL SHAREHOLDERS’ DEFICIT | (872,440 | ) | (872,008 | ) | (872,080 | ) | 1,744,088 | (872,440 | ) | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | (662,080 | ) | $ | 451,769 | $ | 2,145,854 | $ | 570,987 | $ | 2,506,530 | |||||
105
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 344,305 | $ | — | $ | 344,305 | ||||||
| Accounts and notes receivable, net | — | 228,428 | 567,341 | (167,548 | ) | 628,221 | ||||||||||
| Contracts in process and inventories | — | — | 279,824 | — | 279,824 | |||||||||||
| Other current assets | — | — | 77,497 | — | 77,497 | |||||||||||
| Total current assets | — | 228,428 | 1,268,967 | (167,548 | ) | 1,329,847 | ||||||||||
| Investments in subsidiaries and others | (780,671 | ) | (842,608 | ) | 150,514 | 1,561,288 | 88,523 | |||||||||
| Land, buildings & equipment (net) | — | — | 407,819 | — | 407,819 | |||||||||||
| Notes and accounts receivable long-term | 210,000 | 595,656 | 196,944 | (980,656 | ) | 21,944 | ||||||||||
| Intangible assets (net) | — | — | 122,882 | — | 122,882 | |||||||||||
| Asbestos-related insurance recovery receivable | — | 534,045 | — | — | 534,045 | |||||||||||
| Other non-current assets | — | 20,749 | 316,468 | — | 337,217 | |||||||||||
| TOTAL ASSETS | $ | (570,671 | ) | $ | 536,270 | $ | 2,463,594 | $ | 413,084 | $ | 2,842,277 | |||||
| LIABILITIES & SHAREHOLDERS’ DEFICIT | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 320 | $ | 39,048 | $ | 739,001 | $ | (167,548 | ) | $ | 610,821 | |||||
| Estimated costs to complete long-term contracts | — | — | 645,763 | — | 645,763 | |||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 194,348 | — | 193,211 | |||||||||
| Total current liabilities | 268 | 37,963 | 1,579,112 | (167,548 | ) | 1,449,795 | ||||||||||
| Corporate and other debt | — | 340,000 | 59,939 | — | 399,939 | |||||||||||
| Special-purpose project debt | — | — | 181,613 | — | 181,613 | |||||||||||
| Pension, postretirement and other employee benefits | — | — | 437,820 | — | 437,820 | |||||||||||
| Asbestos-related liability | — | 519,790 | — | — | 519,790 | |||||||||||
| Other long-term liabilities and minority interest | — | 419,134 | 699,107 | (980,656 | ) | 137,585 | ||||||||||
| Subordinated Robbins obligations | — | — | 111,674 | — | 111,674 | |||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | 210,000 | |||||||||||
| Preferred trust securities | — | — | 175,000 | — | 175,000 | |||||||||||
| TOTAL LIABILITIES | 210,268 | 1,316,887 | 3,244,265 | (1,148,204 | ) | 3,623,216 | ||||||||||
| Common stock and paid-in capital | 242,490 | 242,490 | 242,490 | (484,980 | ) | 242,490 | ||||||||||
| Accumulated deficit | (653,991 | ) | (653,669 | ) | (653,723 | ) | 1,307,392 | (653,991 | ) | |||||||
| Accumulated other comprehensive loss | (369,438 | ) | (369,438 | ) | (369,438 | ) | 738,876 | (369,438 | ) | |||||||
| TOTAL SHAREHOLDERS’ DEFICIT | (780,939 | ) | (780,617 | ) | (780,671 | ) | 1,561,288 | (780,939 | ) | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | (570,671 | ) | $ | 536,270 | $ | 2,463,594 | $ | 413,084 | $ | 2,842,277 | |||||
106
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| Operating revenues | $ | — | $ | — | $ | 3,723,815 | $ | — | $ | 3,723,815 | ||||||
| Other income | 13,650 | 54,037 | 95,692 | (85,886 | ) | 77,493 | ||||||||||
| Total revenues and other income | 13,650 | 54,037 | 3,819,507 | (85,886 | ) | 3,801,308 | ||||||||||
| Cost of operating revenues | — | — | 3,441,342 | — | 3,441,342 | |||||||||||
| Selling, general and administrative expenses | — | — | 199,949 | — | 199,949 | |||||||||||
| Other deductions and minority interest | 24 | 198 | 173,948 | — | 174,170 | |||||||||||
| Interest expense * | 13,719 | 63,256 | 104,395 | (85,886 | ) | 95,484 | ||||||||||
| Equity in net loss of subsidiaries | (156,970 | ) | (147,536 | ) | (9,416 | ) | 313,922 | — | ||||||||
| Loss before income taxes | (157,063 | ) | (156,953 | ) | (109,543 | ) | 313,922 | (109,637 | ) | |||||||
| Provision for income taxes | — | — | 47,426 | — | 47,426 | |||||||||||
| Net loss | (157,063 | ) | (156,953 | ) | (156,969 | ) | 313,922 | (157,063 | ) | |||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustments | 6,762 | 6,762 | 6,762 | (13,524 | ) | 6,762 | ||||||||||
| Minimum pension liability adjustment | ||||||||||||||||
| net of tax of $18,886 | 58,677 | 58,677 | 58,677 | (117,354 | ) | 58,677 | ||||||||||
| Comprehensive loss | $ | (91,624 | ) | $ | (91,514 | ) | $ | (91,530 | ) | $ | 183,044 | $ | (91,624 | ) | ||
| * Includes dividends on preferred securities of $18,130. | ||||||||||||||||
107
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| Operating revenues | $ | — | $ | — | $ | 3,519,177 | $ | — | $ | 3,519,177 | ||||||
| Other income | 13,650 | 50,355 | 72,069 | (80,714 | ) | 55,360 | ||||||||||
| Total revenues and other income | 13,650 | 50,355 | 3,591,246 | (80,714 | ) | 3,574,537 | ||||||||||
| Cost of operating revenues | — | — | 3,426,910 | — | 3,426,910 | |||||||||||
| Selling, general and administrative expenses | — | — | 226,524 | — | 226,524 | |||||||||||
| Other deductions and minority interest | 73 | 4,205 | 193,859 | — | 198,137 | |||||||||||
| Interest expense * | 13,749 | 52,785 | 97,208 | (80,714 | ) | 83,028 | ||||||||||
| Equity in net losses of subsidiaries | (374,547 | ) | (370,193 | ) | (4,313 | ) | 749,053 | — | ||||||||
| Loss before income taxes | (374,719 | ) | (376,828 | ) | (357,568 | ) | 749,053 | (360,062 | ) | |||||||
| Provision /(benefit) for income taxes | — | (2,322 | ) | 16,979 | — | 14,657 | ||||||||||
| Net loss prior to cumulative effect of a change in accounting principle | (374,719 | ) | (374,506 | ) | (374,547 | ) | 749,053 | (374,719 | ) | |||||||
| Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax | (150,500 | ) | (150,500 | ) | (150,500 | ) | 301,000 | (150,500 | ) | |||||||
| Net loss | (525,219 | ) | (525,006 | ) | (525,047 | ) | 1,050,053 | (525,219 | ) | |||||||
| Other comprehensive (loss)/income: | ||||||||||||||||
| Foreign currency translation adjustments | 22,241 | 22,241 | 22,241 | (44,482 | ) | 22,241 | ||||||||||
| Net loss on derivative instruments | (3,834 | ) | (3,834 | ) | (3,834 | ) | 7,668 | (3,834 | ) | |||||||
| Minimum pension liability adjustment | ||||||||||||||||
| net of tax benefit of $73,400 | (226,011 | ) | (226,011 | ) | (226,011 | ) | 452,022 | (226,011 | ) | |||||||
| Comprehensive loss | $ | (732,823 | ) | $ | (732,610 | ) | $ | (732,651 | ) | $ | 1,465,261 | $ | (732,823 | ) | ||
| * Includes dividends on preferred securities of $16,610. | ||||||||||||||||
108
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| Operating revenues | $ | — | $ | — | $ | 3,315,314 | $ | — | $ | 3,315,314 | ||||||
| Other income | 8,000 | 38,152 | 92,928 | (61,920 | ) | 77,160 | ||||||||||
| Total revenues and other income | 8,000 | 38,152 | 3,408,242 | (61,920 | ) | 3,392,474 | ||||||||||
| Cost of operating revenues | — | — | 3,164,025 | — | 3,164,025 | |||||||||||
| Selling, general and administrative expenses | — | — | 225,392 | — | 225,392 | |||||||||||
| Other deductions and minority interest | 130 | 2,195 | 129,213 | — | 131,538 | |||||||||||
| Interest expense * | 8,018 | 28,846 | 109,540 | (61,920 | ) | 84,484 | ||||||||||
| Equity in net (loss)/earnings of subsidiaries | (336,264 | ) | (343,362 | ) | 7,111 | 672,515 | — | |||||||||
| Loss before income taxes | (336,412 | ) | (336,251 | ) | (212,817 | ) | 672,515 | (212,965 | ) | |||||||
| Provision /(benefit) for income taxes | (52 | ) | — | 123,447 | — | 123,395 | ||||||||||
| Net loss | (336,360 | ) | (336,251 | ) | (336,264 | ) | 672,515 | (336,360 | ) | |||||||
| Other comprehensive (loss)/income: | ||||||||||||||||
| Foreign currency translation adjustments | (10,191 | ) | (10,191 | ) | (10,191 | ) | 20,382 | (10,191 | ) | |||||||
| Net gain on derivative instruments | 3,834 | 3,834 | 3,834 | (7,668 | ) | 3,834 | ||||||||||
| Minimum pension liability adjustment | ||||||||||||||||
| net of tax benefit of $0 | (36,770 | ) | (36,770 | ) | (36,770 | ) | 73,540 | (36,770 | ) | |||||||
| Comprehensive loss | $ | (379,487 | ) | $ | (379,378 | ) | $ | (379,391 | ) | $ | 758,769 | $ | (379,487 | ) | ||
| * Includes dividends on preferred securities of $15,750. | ||||||||||||||||
109
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| �� | ||||||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
| Net cash used by Operating Activities | $ | (93 | ) | $ | 18,811 | $ | (78,576 | ) | $ | (2,240 | ) | $ | (62,098 | ) | ||
Cash Flows from Investing Activities | ||||||||||||||||
| Change in restricted cash | — | — | 38,414 | — | 38,414 | |||||||||||
| Capital expenditures | — | — | (12,870 | ) | — | (12,870 | ) | |||||||||
| Proceeds from sale of properties | — | — | 87,159 | — | 87,159 | |||||||||||
| Increase in short-term investments | — | — | (6,808 | ) | — | (6,808 | ) | |||||||||
| Net cash provided by Investing Activities | — | — | 105,895 | — | 105,895 | |||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
| Dividends to shareholders | — | — | (2,240 | ) | 2,240 | — | ||||||||||
| Decrease in short-term debt | — | — | (14,826 | ) | — | (14,826 | ) | |||||||||
| Repayment of long-term debt | — | (11,837 | ) | (22,263 | ) | — | (34,100 | ) | ||||||||
| Other | 93 | (6,974 | ) | 4,002 | — | (2,879 | ) | |||||||||
| Net cash provided by Financing Activities | 93 | (18,811 | ) | (35,327 | ) | 2,240 | (51,805 | ) | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 27,798 | — | 27,798 | |||||||||||
Increase in cash and cash equivalents | — | — | 19,790 | — | 19,790 | |||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 344,305 | — | 344,305 | |||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 364,095 | $ | — | $ | 364,095 | ||||||
110
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
| Net cash(used)/provided by Operating Activities | $ | (172 | ) | $ | (15,109 | ) | $ | 179,036 | $ | (3,390 | ) | $ | 160,365 | |||
Cash Flows from Investing Activities | ||||||||||||||||
| Change in restricted cash | — | — | (84,793 | ) | — | (84,793 | ) | |||||||||
| Capital expenditures | — | — | (53,395 | ) | — | (53,395 | ) | |||||||||
| Proceeds from sale of properties | — | — | 6,282 | — | 6,282 | |||||||||||
| (Increase)/decrease in investment and advances | — | (350 | ) | 9,457 | — | 9,107 | ||||||||||
| Decrease in short-term investments | — | — | 93 | — | 93 | |||||||||||
| Net cash used by Investing Activities | — | (350 | ) | (122,356 | ) | — | (122,706 | ) | ||||||||
Cash Flows from Financing Activities | ||||||||||||||||
| Dividends to shareholders | — | — | (3,390 | ) | 3,390 | — | ||||||||||
| Increase in short-term debt | — | — | (7,792 | ) | — | (7,792 | ) | |||||||||
| Proceeds from long-term debt | — | 70,000 | 546 | — | 70,546 | |||||||||||
| Proceeds from lease financing obligation | — | — | 44,900 | — | 44,900 | |||||||||||
| Repayment of long-term debt | — | — | (45,591 | ) | — | (45,591 | ) | |||||||||
| Other | 172 | (54,541 | ) | 52,308 | — | (2,061 | ) | |||||||||
| Net cash provided by Financing Activities | 172 | 15,459 | 40,981 | 3,390 | 60,002 | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 22,624 | — | 22,624 | |||||||||||
Increase in cash and cash equivalents | — | — | 120,285 | — | 120,285 | |||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 224,020 | — | 224,020 | |||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 344,305 | $ | — | $ | 344,305 | ||||||
111
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
B. Convertible Subordinated Notes — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
| Net cash (used)/provided by Operating Activities | $ | (96 | ) | $ | (181,267 | ) | $ | 321,618 | $ | (228,936 | ) | $ | (88,681 | ) | ||
Cash Flows from Investing Activities | ||||||||||||||||
| Capital expenditures | — | (2,346 | ) | (31,652 | ) | — | (33,998 | ) | ||||||||
| Proceeds from sale of properties | — | — | 59,672 | — | 59,672 | |||||||||||
| Decrease in investment and advances | — | — | 16,008 | — | 16,008 | |||||||||||
| Increase in short-term investments | — | — | 1,530 | — | 1,530 | |||||||||||
| Net cash (used)/provided by Investing Activities | — | (2,346 | ) | 45,558 | — | 43,212 | ||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
| Dividends to shareholders | — | (4,888 | ) | (228,936 | ) | 228,936 | (4,888 | ) | ||||||||
| Decrease in short-term debt | — | — | (82,032 | ) | — | (82,032 | ) | |||||||||
| Proceeds from Convertible Bonds, net | 202,912 | — | — | — | 202,912 | |||||||||||
| Proceeds from long-term debt | — | 178,061 | 6,981 | — | 185,042 | |||||||||||
| Repayment of long-term debt | — | (193,062 | ) | (21,662 | ) | — | (214,724 | ) | ||||||||
| Other | (202,816 | ) | 203,502 | (1,463 | ) | — | (777 | ) | ||||||||
| Net cash provided/(used) by Financing Activities | 96 | 183,613 | (327,112 | ) | 228,936 | 85,533 | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | (7,937 | ) | — | (7,937 | ) | |||||||||
Increase in cash and cash equivalents | — | — | 32,127 | — | 32,127 | |||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 191,893 | — | 191,893 | |||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 224,020 | $ | — | $ | 224,020 | ||||||
112
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities
On January 13, 1999, FW Preferred Capital Trust I, a Delaware Business Trust, which is a 100% indirectly owned finance subsidiary of the Company, issued $175,000 in Preferred Trust Securities. The Preferred Trust Securities are fully and unconditionally guaranteed by Foster Wheeler Ltd. and Foster Wheeler LLC. Each of the guarantees is full and unconditional and joint and several. Foster Wheeler LLC has assumed the obligation to fund the debt service. 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. In accordance with this provision, the Company has deferred all quarterly distributions beginning with the distribution due on January 15, 2002. The maturity date is January 15, 2029. Foster Wheeler can redeem these Preferred Trust Securities on or after January 15, 2004. The following summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the 100% indirectly owned subsidiary guarantor and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents summarized condensed consolidating financial information as of December 26, 2003 and December 27, 2002 with respect to the financial position, and for the three years ended December 26, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.
The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The FW Preferred Capital Trust column presents the financial information of the issuer. The Guarantor Subsidiary column presents the financial information of Foster Wheeler LLC, but excludes that of Foster Wheeler Ltd. which is separately presented. The non-guarantor subsidiaries include Foster Wheeler Holdings Ltd. (previously known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.
In 2002, the Non-Guarantor Subsidiaries column in the accompanying condensed consolidating balance sheets has been reclassified to conform to current financial statement presentation. In particular, allowance for doubtful accounts on accounts receivable trade of $66,561 have been reclassified from estimated costs to complete long-term contracts $(61,561) and advance payments $(5,000) to accounts receivable trade. Accordingly, the accounts receivable trade balance is now presented net of all reserves.
113
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| ASSETS | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | — | $ | 364,095 | $ | — | $ | 364,095 | |||||||
| Accounts and notes receivable, net | — | — | 272,361 | 497,096 | (213,043 | ) | 556,414 | ||||||||||||
| Contracts in process and inventories | — | — | — | 173,293 | — | 173,293 | |||||||||||||
| Other current assets | — | — | — | 80,574 | — | 80,574 | |||||||||||||
| Total current assets | — | — | 272,361 | 1,115,058 | (213,043 | ) | 1,174,376 | ||||||||||||
| Investments in subsidiaries and others | (872,080 | ) | — | (919,588 | ) | 146,231 | 1,744,088 | 98,651 | |||||||||||
| Land, buildings & equipment (net) | — | — | — | 309,615 | — | 309,615 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 175,000 | 575,118 | 6,716 | (960,058 | ) | 6,776 | ||||||||||||
| Intangible assets (net) | — | — | — | 122,689 | — | 122,689 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | — | 495,400 | — | — | 495,400 | |||||||||||||
| Other non-current assets | — | — | 28,478 | 270,545 | — | 299,023 | |||||||||||||
| TOTAL ASSETS | $ | (662,080 | ) | $ | 175,000 | $ | 451,769 | $ | 1,970,854 | $ | 570,987 | $ | 2,506,530 | ||||||
| LIABILITIES & SHAREHOLDERS’ DEFICIT | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 412 | $ | — | $ | 78,278 | $ | 821,015 | $ | (213,043 | ) | $ | 686,662 | ||||||
| Estimated costs to complete long-term contracts | — | — | — | 552,754 | — | 552,754 | |||||||||||||
| Other current liabilities | (52 | ) | — | (1,085 | ) | 135,481 | — | 134,344 | |||||||||||
| Total current liabilities | 360 | — | 77,193 | 1,509,250 | (213,043 | ) | 1,373,760 | ||||||||||||
| Corporate and other debt | — | — | 328,163 | 67,939 | — | 396,102 | |||||||||||||
| Special-purpose project debt | — | — | — | 119,281 | — | 119,281 | |||||||||||||
| Pension, postretirement and other employee benefits | — | — | — | 295,133 | — | 295,133 | |||||||||||||
| Asbestos-related liability | — | — | 526,200 | — | — | 526,200 | |||||||||||||
| Other long-term liabilities and minority interest | — | — | 392,221 | 739,742 | (960,058 | ) | 171,905 | ||||||||||||
| Subordinated Robbins obligations | — | — | — | 111,589 | — | 111,589 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | 175,000 | — | — | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,360 | 175,000 | 1,323,777 | 2,842,934 | (1,173,101 | ) | 3,378,970 | ||||||||||||
| Common stock and paid-in capital | 242,613 | — | 242,613 | 242,613 | (485,226 | ) | 242,613 | ||||||||||||
| Accumulated deficit | (811,054 | ) | — | (810,622 | ) | (810,694 | ) | 1,621,316 | (811,054 | ) | |||||||||
| Accumulated other comprehensive loss | (303,999 | ) | — | (303,999 | ) | (303,999 | ) | 607,998 | (303,999 | ) | |||||||||
| TOTAL SHAREHOLDERS’ DEFICIT | (872,440 | ) | — | (872,008 | ) | (872,080 | ) | 1,744,088 | (872,440 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | (662,080 | ) | $ | 175,000 | $ | 451,769 | $ | 1,970,854 | $ | 570,987 | $ | 2,506,530 | ||||||
114
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| ASSETS | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | — | $ | 344,305 | $ | — | $ | 344,305 | |||||||
| Accounts and notes receivable, net | — | — | 228,428 | 567,341 | (167,548 | ) | 628,221 | ||||||||||||
| Contracts in process and inventories | — | — | — | 279,824 | — | 279,824 | |||||||||||||
| Other current assets | — | — | — | 77,497 | — | 77,497 | |||||||||||||
| Total current assets | — | — | 228,428 | 1,268,967 | (167,548 | ) | 1,329,847 | ||||||||||||
| Investments in subsidiaries and others | (780,671 | ) | — | (842,608 | ) | 150,514 | 1,561,288 | 88,523 | |||||||||||
| Land, buildings & equipment (net) | — | — | — | 407,819 | — | 407,819 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 175,000 | 595,656 | 21,944 | (980,656 | ) | 21,944 | ||||||||||||
| Intangible assets (net) | — | — | — | 122,882 | — | 122,882 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | — | 534,045 | — | — | 534,045 | |||||||||||||
| Other non-current assets | — | — | 20,749 | 316,468 | — | 337,217 | |||||||||||||
| TOTAL ASSETS | $ | (570,671 | ) | $ | 175,000 | $ | 536,270 | $ | 2,288,594 | $ | 413,084 | $ | 2,842,277 | ||||||
| LIABILITIES & SHAREHOLDERS’ DEFICIT | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 320 | $ | — | $ | 39,048 | $ | 739,001 | $ | (167,548 | ) | $ | 610,821 | ||||||
| Estimated costs to complete long-term contracts | — | — | — | 645,763 | — | 645,763 | |||||||||||||
| Other current liabilities | (52 | ) | — | (1,085 | ) | 194,348 | — | 193,211 | |||||||||||
| Total current liabilities | 268 | — | 37,963 | 1,579,112 | (167,548 | ) | 1,449,795 | ||||||||||||
| Corporate and other debt | — | — | 340,000 | 59,939 | — | 399,939 | |||||||||||||
| Special-purpose project debt | — | — | — | 181,613 | — | 181,613 | |||||||||||||
| Pension, postretirement and other employee benefits | — | — | — | 437,820 | — | 437,820 | |||||||||||||
| Asbestos-related liability | — | — | 519,790 | — | — | 519,790 | |||||||||||||
| Other long-term liabilities and minority interest | — | — | 419,134 | 699,107 | (980,656 | ) | 137,585 | ||||||||||||
| Subordinated Robbins obligations | — | — | — | 111,674 | — | 111,674 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | 175,000 | — | — | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,268 | 175,000 | 1,316,887 | 3,069,265 | (1,148,204 | ) | 3,623,216 | ||||||||||||
| Common stock and paid-in capital | 242,490 | — | 242,490 | 242,490 | (484,980 | ) | 242,490 | ||||||||||||
| Accumulated deficit | (653,991 | ) | — | (653,669 | ) | (653,723 | ) | 1,307,392 | (653,991 | ) | |||||||||
| Accumulated other comprehensive loss | (369,438 | ) | — | (369,438 | ) | (369,438 | ) | 738,876 | (369,438 | ) | |||||||||
| TOTAL SHAREHOLDERS’ DEFICIT | (780,939 | ) | — | (780,617 | ) | (780,671 | ) | 1,561,288 | (780,939 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | (570,671 | ) | $ | 175,000 | $ | 536,270 | $ | 2,288,594 | $ | 413,084 | $ | 2,842,277 | ||||||
115
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | — | $ | 3,723,815 | $ | — | $ | 3,723,815 | |||||||
| Other income | 13,650 | 18,130 | 54,037 | 77,562 | (85,886 | ) | 77,493 | ||||||||||||
| Total revenues and other income | 13,650 | 18,130 | 54,037 | 3,801,377 | (85,886 | ) | 3,801,308 | ||||||||||||
| Cost of operating revenues | — | — | — | 3,441,342 | — | 3,441,342 | |||||||||||||
| Selling, general and administrative expenses | — | — | — | 199,949 | — | 199,949 | |||||||||||||
| Other deductions and minority interest | 24 | — | 198 | 173,948 | — | 174,170 | |||||||||||||
| Interest expense * | 13,719 | 18,130 | 63,256 | 86,265 | (85,886 | ) | 95,484 | ||||||||||||
| Equity in net loss of subsidiaries | (156,970 | ) | — | (147,536 | ) | (9,416 | ) | 313,922 | — | ||||||||||
| Loss before income taxes | (157,063 | ) | — | (156,953 | ) | (109,543 | ) | 313,922 | (109,637 | ) | |||||||||
| Provision for income taxes | — | — | — | 47,426 | — | 47,426 | |||||||||||||
| Net loss | (157,063 | ) | — | (156,953 | ) | (156,969 | ) | 313,922 | (157,063 | ) | |||||||||
| Other comprehensive income: | |||||||||||||||||||
| Foreign currency translation adjustments | 6,762 | — | 6,762 | 6,762 | (13,524 | ) | 6,762 | ||||||||||||
| Minimum pension liability adjustment | |||||||||||||||||||
| net of tax of $18,886 | 58,677 | — | 58,677 | 58,677 | (117,354 | ) | 58,677 | ||||||||||||
| Comprehensive loss | $ | (91,624 | ) | $ | — | $ | (91,514 | ) | $ | (91,530 | ) | $ | 183,044 | $ | (91,624 | ) | |||
* Includes dividends on preferred securities of $18,130.
116
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | — | $ | 3,519,177 | $ | — | $ | 3,519,177 | |||||||
| Other income | 13,650 | 16,610 | 50,355 | 55,459 | (80,714 | ) | 55,360 | ||||||||||||
| Total revenues and other income | 13,650 | 16,610 | 50,355 | 3,574,636 | (80,714 | ) | 3,574,537 | ||||||||||||
| Cost of operating revenues | — | — | — | 3,426,910 | — | 3,426,910 | |||||||||||||
| Selling, general and administrative expenses | — | — | — | 226,524 | — | 226,524 | |||||||||||||
| Other deductions and minority interest | 73 | — | 4,205 | 193,859 | — | 198,137 | |||||||||||||
| Interest expense * | 13,749 | 16,610 | 52,785 | 80,598 | (80,714 | ) | 83,028 | ||||||||||||
| Equity in net losses of subsidiaries | (374,547 | ) | — | (370,193 | ) | (4,313 | ) | 749,053 | — | ||||||||||
| Loss before income taxes | (374,719 | ) | — | (376,828 | ) | (357,568 | ) | 749,053 | (360,062 | ) | |||||||||
| Provision /(benefit) for income taxes | — | — | (2,322 | ) | 16,979 | — | 14,657 | ||||||||||||
| Net loss prior to cumulative effect of a change in accounting principle | (374,719 | ) | — | (374,506 | ) | (374,547 | ) | 749,053 | (374,719 | ) | |||||||||
| Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax | (150,500 | ) | — | (150,500 | ) | (150,500 | ) | 301,000 | (150,500 | ) | |||||||||
| Net loss | (525,219 | ) | — | (525,006 | ) | (525,047 | ) | 1,050,053 | (525,219 | ) | |||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | 22,241 | — | 22,241 | 22,241 | (44,482 | ) | 22,241 | ||||||||||||
| Net loss on derivative instruments | (3,834 | ) | — | (3,834 | ) | (3,834 | ) | 7,668 | (3,834 | ) | |||||||||
| Minimum pension liability adjustment net of tax benefit of $73,400 | (226,011 | ) | — | (226,011 | ) | (226,011 | ) | 452,022 | (226,011 | ) | |||||||||
| Comprehensive loss | $ | (732,823 | ) | $ | — | $ | (732,610 | ) | $ | (732,651 | ) | $ | 1,465,261 | $ | (732,823 | ) | |||
* Includes dividends on preferred securities of $16,610.
117
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | — | $ | 3,315,314 | $ | — | $ | 3,315,314 | |||||||
| Other income | 8,000 | 15,750 | 38,152 | 77,178 | (61,920 | ) | 77,160 | ||||||||||||
| Total revenues and other income | 8,000 | 15,750 | 38,152 | 3,392,492 | (61,920 | ) | 3,392,474 | ||||||||||||
| Cost of operating revenues | — | — | — | 3,164,025 | — | 3,164,025 | |||||||||||||
| Selling, general and administrative expenses | — | — | — | 225,392 | — | 225,392 | |||||||||||||
| Other deductions and minority interest | 130 | — | 2,195 | 129,213 | — | 131,538 | |||||||||||||
| Interest expense * | 8,018 | 15,750 | 28,846 | 93,790 | (61,920 | ) | 84,484 | ||||||||||||
| Equity in net (loss)/earnings of subsidiaries | (336,264 | ) | — | (343,362 | ) | 7,111 | 672,515 | — | |||||||||||
| Loss before income taxes | (336,412 | ) | — | (336,251 | ) | (212,817 | ) | 672,515 | (212,965 | ) | |||||||||
| Provision /(benefit) for income taxes | (52 | ) | — | — | 123,447 | — | 123,395 | ||||||||||||
| Net loss | (336,360 | ) | — | (336,251 | ) | (336,264 | ) | 672,515 | (336,360 | ) | |||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | (10,191 | ) | — | (10,191 | ) | (10,191 | ) | 20,382 | (10,191 | ) | |||||||||
| Net gain on derivative instruments | 3,834 | — | 3,834 | 3,834 | (7,668 | ) | 3,834 | ||||||||||||
| Minimum pension liability adjustment net of tax benefit of $0 | (36,770 | ) | — | (36,770 | ) | (36,770 | ) | 73,540 | (36,770 | ) | |||||||||
| Comprehensive loss | $ | (379,487 | ) | $ | — | $ | (379,378 | ) | $ | (379,391 | ) | $ | 758,769 | $ | (379,487 | ) | |||
* Includes dividends on preferred securities of $15,750.
118
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash used by Operating Activities | $ | (93 | ) | $ | — | $ | 18,811 | $ | (78,576 | ) | $ | (2,240 | ) | $ | (62,098 | ) | |||
Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | — | 38,414 | — | 38,414 | |||||||||||||
| Capital expenditures | — | — | — | (12,870 | ) | — | (12,870 | ) | |||||||||||
| Proceeds from sale of properties | — | — | — | 87,159 | — | 87,159 | |||||||||||||
| Increase in short-term investments | — | — | — | (6,808 | ) | — | (6,808 | ) | |||||||||||
| Net cash provided by Investing Activities | — | — | — | 105,895 | — | 105,895 | |||||||||||||
Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | — | — | (2,240 | ) | 2,240 | — | ||||||||||||
| Decrease in short-term debt | — | — | — | (14,826 | ) | — | (14,826 | ) | |||||||||||
| Repayment of long-term debt | — | — | (11,837 | ) | (22,263 | ) | — | (34,100 | ) | ||||||||||
| Other | 93 | — | (6,974 | ) | 4,002 | — | (2,879 | ) | |||||||||||
| Net cash provided/(used) by Financing Activities | 93 | — | (18,811 | ) | (35,327 | ) | 2,240 | (51,805 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 27,798 | — | 27,798 | |||||||||||||
Increase in cash and cash equivalents | — | — | — | 19,790 | — | 19,790 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | — | 344,305 | — | 344,305 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 364,095 | $ | — | $ | 364,095 | |||||||
119
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash(used)/provided by Operating Activities | $ | (172 | ) | $ | — | $ | (15,109 | ) | $ | 179,036 | $ | (3,390 | ) | $ | 160,365 | ||||
Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | — | (84,793 | ) | — | (84,793 | ) | |||||||||||
| Capital expenditures | — | — | — | (53,395 | ) | — | (53,395 | ) | |||||||||||
| Proceeds from sale of properties | — | — | — | 6,282 | — | 6,282 | |||||||||||||
| (Increase)/decrease in investment and advances | — | — | (350 | ) | 9,457 | — | 9,107 | ||||||||||||
| Decrease in short-term investments | — | — | — | 93 | — | 93 | |||||||||||||
| Net cash used by Investing Activities | — | — | (350 | ) | (122,356 | ) | — | (122,706 | ) | ||||||||||
Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | — | — | (3,390 | ) | 3,390 | — | ||||||||||||
| Increase in short-term debt | — | — | — | (7,792 | ) | — | (7,792 | ) | |||||||||||
| Proceeds from long-term debt | — | — | 70,000 | 546 | — | 70,546 | |||||||||||||
| Proceeds from lease financing obligation | — | — | — | 44,900 | — | 44,900 | |||||||||||||
| Repayment of long-term debt | — | — | — | (45,591 | ) | — | (45,591 | ) | |||||||||||
| Other | 172 | — | (54,541 | ) | 52,308 | — | (2,061 | ) | |||||||||||
| Net cash provided by Financing Activities | 172 | — | 15,459 | 40,981 | 3,390 | 60,002 | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 22,624 | — | 22,624 | |||||||||||||
Increase in cash and cash equivalents | — | — | — | 120,285 | — | 120,285 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | — | 224,020 | — | 224,020 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 344,305 | $ | — | $ | 344,305 | |||||||
120
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 24. | Consolidating Financial Information — (Continued) |
C. Preferred Trust Securities — (Continued)
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 28, 2001
(in thousands of dollars)
| Foster Wheeler Ltd. | FW Preferred Capital Trust | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by Operating Activities | $ | (96 | ) | $ | — | $ | (181,267 | ) | $ | 321,618 | $ | (228,936 | ) | $ | (88,681 | ) | |||
Cash Flows from Investing Activities | |||||||||||||||||||
| Capital expenditures | — | — | (2,346 | ) | (31,652 | ) | — | (33,998 | ) | ||||||||||
| Proceeds from sale of properties | — | — | — | 59,672 | — | 59,672 | |||||||||||||
| Decrease in investment and advances | — | — | — | 16,008 | — | 16,008 | |||||||||||||
| Increase in short-term investments | — | — | — | 1,530 | — | 1,530 | |||||||||||||
| Net cash (used)/provided by Investing Activities | — | — | (2,346 | ) | 45,558 | — | 43,212 | ||||||||||||
Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to shareholders | — | — | (4,888 | ) | (228,936 | ) | 228,936 | (4,888 | ) | ||||||||||
| Decrease in short-term debt | — | — | — | (82,032 | ) | — | (82,032 | ) | |||||||||||
| Proceeds from Convertible Bonds, net | 202,912 | — | — | — | 202,912 | ||||||||||||||
| Proceeds from long-term debt | — | — | 178,061 | 6,981 | — | 185,042 | |||||||||||||
| Repayment of long-term debt | — | — | (193,062 | ) | (21,662 | ) | — | (214,724 | ) | ||||||||||
| Other | (202,816 | ) | — | 203,502 | (1,463 | ) | — | (777 | ) | ||||||||||
| Net cash provided/(used) by Financing Activities | 96 | — | 183,613 | (327,112 | ) | 228,936 | 85,533 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | (7,937 | ) | — | (7,937 | ) | |||||||||||
Increase in cash and cash equivalents | — | — | — | 32,127 | — | 32,127 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | — | 191,893 | — | 191,893 | |||||||||||||
Cash and Cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 224,020 | $ | — | $ | 224,020 | |||||||
121
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
Under the terms of Foster Wheeler LLC’s proposed exchange offer, Foster Wheeler LLC plans to issue 10.5% Senior Secured Notes due 2011 in exchange for a portion of its Senior Notes at 6.75% due 2005.
The proposed 10.5% Senior Secured Notes are to be fully and unconditionally guaranteed by Foster Wheeler Ltd. and the following 100% owned companies: Continental Finance Company Ltd., Energy Holdings, Inc., Equipment Consultants, Inc., Financial Services S.a.r.l., Foster Wheeler Holdings, Ltd., Foster Wheeler Asia Limited, Foster Wheeler Capital & Finance Corporation, Foster Wheeler Constructors, Inc., Foster Wheeler Development Corporation, FW Energie B.V., Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Enviresponse, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Europe Limited, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler Intercontinental Corporation, Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler Middle East Corporation, Foster Wheeler North America Corp. (“formerly known as Foster Wheeler Power Group, Inc.), Foster Wheeler Power Corporation, 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 Hungary Licensing Limited Liability Company, FW Mortshal, Inc., HFM International, Inc., PGI Holdings, 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. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The condensed consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the wholly owned subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents condensed consolidating financial information as of December 26, 2003 and December 27, 2002 with respect to the financial position, and for each of the three years in the period ended December 26, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.
The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd. which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.
Under the terms of the proposed 10.5% Senior Secured Notes, the Company has the option to add other wholly owned subsidiaries as guarantors in the future to avoid increases in the interest rate. The interest rate could increase up to 1% should the Company elect not to provide the additional guarantor subsidiaries.
122
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 33,161 | $ | 330,934 | $ | — | $ | 364,095 | |||||||
| Accounts and notes receivable, net | — | 272,361 | 113,559 | 777,142 | (606,648 | ) | 556,414 | ||||||||||||
| Contracts in process and inventories | — | — | 121,527 | 60,876 | (9,110 | ) | 173,293 | ||||||||||||
| Investment and advances | — | — | 88,641 | — | (88,641 | ) | — | ||||||||||||
| Other current assets | — | — | 4,359 | 76,215 | — | 80,574 | |||||||||||||
| Total current assets | — | 272,361 | 361,247 | 1,245,167 | (704,399 | ) | 1,174,376 | ||||||||||||
| Investments in subsidiaries and others | (872,080 | ) | (919,588 | ) | 375,116 | 138,896 | 1,376,307 | 98,651 | |||||||||||
| Land, buildings & equipment (net) | — | — | 64,315 | 245,300 | — | 309,615 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 575,118 | 114,508 | 258,490 | (1,151,340 | ) | 6,776 | ||||||||||||
| Intangible assets (net) | — | — | 101,664 | 21,025 | — | 122,689 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | 495,400 | — | — | — | 495,400 | |||||||||||||
| Other non-current assets | — | 28,478 | 83,898 | 186,647 | — | 299,023 | |||||||||||||
| TOTAL ASSETS | $ | (662,080 | ) | $ | 451,769 | $ | 1,100,748 | $ | 2,095,525 | $ | (479,432 | ) | $ | 2,506,530 | |||||
Liabilities & Shareholders’ Deficit | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 412 | $ | 78,278 | $ | 706,397 | $ | 517,333 | $ | (615,758 | ) | $ | 686,662 | ||||||
| Estimated costs to complete long-term contracts | — | — | 162,168 | 390,586 | — | 552,754 | |||||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 14,385 | 121,096 | — | 134,344 | |||||||||||
| Total current liabilities | 360 | 77,193 | 882,950 | 1,029,015 | (615,758 | ) | 1,373,760 | ||||||||||||
| Corporate and other debt | — | 328,163 | 44,120 | 23,819 | — | 396,102 | |||||||||||||
| Special-purpose project debt | — | — | — | 119,281 | — | 119,281 | |||||||||||||
| Pension, postretirement and other employee benefits | — | — | 216,281 | 78,852 | — | 295,133 | |||||||||||||
| Asbestos-related liability | — | 526,200 | — | — | — | 526,200 | |||||||||||||
| Other long-term liabilities and minority interest | — | 392,221 | 717,888 | 228,401 | (1,166,605 | ) | 171,905 | ||||||||||||
| Subordinated Robbins obligations | — | — | 111,589 | — | — | 111,589 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | — | — | 175,000 | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,360 | 1,323,777 | 1,972,828 | 1,654,368 | (1,782,363 | ) | 3,378,970 | ||||||||||||
| Common stock and paid-in capital | 242,613 | 242,613 | 242,613 | 465,451 | (950,677 | ) | 242,613 | ||||||||||||
| Accumulated deficit | (811,054 | ) | (810,622 | ) | (810,694 | ) | 174,312 | 1,447,004 | (811,054 | ) | |||||||||
| Accumulated other comprehensive loss | (303,999 | ) | (303,999 | ) | (303,999 | ) | (198,606 | ) | 806,604 | (303,999 | ) | ||||||||
| TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY | (872,440 | ) | (872,008 | ) | (872,080 | ) | 441,157 | 1,302,931 | (872,440 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY | $ | (662,080 | ) | $ | 451,769 | $ | 1,100,748 | $ | 2,095,525 | $ | (479,432 | ) | $ | 2,506,530 | |||||
123
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 27, 2002
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 20,962 | $ | 323,343 | $ | — | $ | 344,305 | |||||||
| Accounts and notes receivable, net | — | 228,428 | 168,076 | 786,991 | (555,274 | ) | 628,221 | ||||||||||||
| Contracts in process and inventories | — | — | 177,115 | 110,959 | (8,250 | ) | 279,824 | ||||||||||||
| Investment and advances | — | — | 292,654 | — | (292,654 | ) | — | ||||||||||||
| Other current assets | — | — | 39,924 | 38,102 | (529 | ) | 77,497 | ||||||||||||
| Total current assets | — | 228,428 | 698,731 | 1,259,395 | (856,707 | ) | 1,329,847 | ||||||||||||
| Investments in subsidiaries and others | (780,671 | ) | (842,608 | ) | 241,131 | 128,808 | 1,341,863 | 88,523 | |||||||||||
| Land, buildings & equipment (net) | — | — | 103,489 | 304,330 | — | 407,819 | |||||||||||||
| Notes and accounts receivable long-term | 210,000 | 595,656 | 122,506 | 253,167 | (1,159,385 | ) | 21,944 | ||||||||||||
| Intangible assets (net) | — | — | 104,349 | 18,533 | — | 122,882 | |||||||||||||
| Asbestos-related insurance recovery receivable | — | 534,045 | — | — | — | 534,045 | |||||||||||||
| Other non-current assets | — | 20,749 | 107,174 | 209,296 | (2 | ) | 337,217 | ||||||||||||
| TOTAL ASSETS | $ | (570,671 | ) | $ | 536,270 | $ | 1,377,380 | $ | 2,173,529 | $ | (674,231 | ) | $ | 2,842,277 | |||||
Liabilities & Shareholders’ (Deficit)/Equity | |||||||||||||||||||
| Accounts payable and accrued expenses | $ | 320 | $ | 39,048 | $ | 749,113 | $ | 386,393 | $ | (564,053 | ) | $ | 610,821 | ||||||
| Estimated costs to complete long-term contracts | — | — | 279,739 | 366,024 | — | 645,763 | |||||||||||||
| Other current liabilities | (52 | ) | (1,085 | ) | 11,610 | 182,738 | — | 193,211 | |||||||||||
| Total current liabilities | 268 | 37,963 | 1,040,462 | 935,155 | (564,053 | ) | 1,449,795 | ||||||||||||
| Corporate and other debt | — | 340,000 | 43,678 | 16,261 | — | 399,939 | |||||||||||||
| Special-purpose project debt | — | — | — | 181,613 | — | 181,613 | |||||||||||||
| Pension, postretirement and other employee | — | — | — | — | — | ||||||||||||||
| benefits | — | — | 294,133 | 143,687 | — | 437,820 | |||||||||||||
| Asbestos-related liability | — | 519,790 | — | — | — | 519,790 | |||||||||||||
| Other long-term liabilities and minority interest | — | 419,134 | 668,104 | 211,408 | (1,161,061 | ) | 137,585 | ||||||||||||
| Subordinated Robbins obligations | — | — | 111,674 | — | — | 111,674 | |||||||||||||
| Convertible subordinated notes | 210,000 | — | — | — | — | 210,000 | |||||||||||||
| Preferred trust securities | — | — | — | 175,000 | — | 175,000 | |||||||||||||
| TOTAL LIABILITIES | 210,268 | 1,316,887 | 2,158,051 | 1,663,164 | (1,725,114 | ) | 3,623,216 | ||||||||||||
| Common stock and paid-in capital | 242,490 | 242,490 | 242,490 | 571,429 | (1,056,409 | ) | 242,490 | ||||||||||||
| (Accumulated deficit)/retained earnings | (653,991 | ) | (653,669 | ) | (653,723 | ) | 183,751 | 1,123,641 | (653,991 | ) | |||||||||
| Accumulated other comprehensive loss | (369,438 | ) | (369,438 | ) | (369,438 | ) | (244,775 | ) | 983,651 | (369,438 | ) | ||||||||
| TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY | (780,939 | ) | (780,617 | ) | (780,671 | ) | 510,405 | 1,050,883 | (780,939 | ) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY | $ | (570,671 | ) | $ | 536,270 | $ | 1,377,380 | $ | 2,173,529 | $ | (674,231 | ) | $ | 2,842,277 | |||||
124
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating Revenues | $ | — | $ | — | $ | 942,720 | $ | 2,872,147 | $ | (91,052 | ) | $ | 3,723,815 | ||||||
| Other Income | 13,650 | 54,037 | 52,592 | 95,191 | (137,977 | ) | 77,493 | ||||||||||||
| Total revenues and other income | 13,650 | 54,037 | 995,312 | 2,967,338 | (229,029 | ) | 3,801,308 | ||||||||||||
| Cost of operating revenues | — | — | 880,982 | 2,656,912 | (96,552 | ) | 3,441,342 | ||||||||||||
| Selling, general and administrative expenses | — | — | 85,237 | 114,602 | 110 | 199,949 | |||||||||||||
| Other deductions and minority interest | 24 | 198 | 140,348 | 65,538 | (31,938 | ) | 174,170 | ||||||||||||
| Interest expense * | 13,719 | 63,256 | 78,352 | 40,806 | (100,649 | ) | 95,484 | ||||||||||||
| Equity in net loss of subsidiaries | (156,970 | ) | (147,536 | ) | 50,494 | — | 254,012 | — | |||||||||||
| (Loss)/earnings before income taxes | (157,063 | ) | (156,953 | ) | (139,113 | ) | 89,480 | 254,012 | (109,637 | ) | |||||||||
| Provision for income taxes | — | — | 17,857 | 29,569 | — | 47,426 | |||||||||||||
| Net (loss)/earnings | (157,063 | ) | (156,953 | ) | (156,970 | ) | 59,911 | 254,012 | (157,063 | ) | |||||||||
| Other comprehensive income: | |||||||||||||||||||
| Foreign currency translation adjustment | 6,762 | 6,762 | 6,762 | 11,597 | (25,121 | ) | 6,762 | ||||||||||||
| Minimum pension liability adjustment net of tax of $18,886 | 58,677 | 58,677 | 58,677 | 44,483 | (161,837 | ) | 58,677 | ||||||||||||
| Comprehensive (loss)/income | $ | (91,624 | ) | $ | (91,514 | ) | $ | (91,531 | ) | $ | 115,991 | $ | 67,054 | $ | (91,624 | ) | |||
* Includes dividends on preferred securities of $18,130.
125
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | 1,392,043 | $ | 2,228,851 | $ | (101,717 | ) | $ | 3,519,177 | ||||||
| Other income | 13,650 | 50,355 | 40,229 | 71,907 | (120,781 | ) | 55,360 | ||||||||||||
| Total revenues and other income | 13,650 | 50,355 | 1,432,272 | 2,300,758 | (222,498 | ) | 3,574,537 | ||||||||||||
| Cost of operating revenues | — | — | 1,440,872 | 2,087,756 | (101,718 | ) | 3,426,910 | ||||||||||||
| Selling, general and administrative expenses | — | — | 127,350 | 99,174 | — | 226,524 | |||||||||||||
| Other deductions and minority interest | 73 | 4,205 | 95,683 | 122,936 | (24,760 | ) | 198,137 | ||||||||||||
| Interest expense * | 13,749 | 52,785 | 69,209 | 43,305 | (96,020 | ) | 83,028 | ||||||||||||
| Equity in net losses of subsidiaries | (374,547 | ) | (370,193 | ) | (65,238 | ) | — | 809,978 | — | ||||||||||
| Loss before income taxes | (374,719 | ) | (376,828 | ) | (366,080 | ) | (52,413 | ) | 809,978 | (360,062 | ) | ||||||||
| Provision /(benefit) for income taxes | — | (2,322 | ) | 8,467 | 8,512 | — | 14,657 | ||||||||||||
| Net loss prior to cumulative effect of a change in accounting principle | (374,719 | ) | (374,506 | ) | (374,547 | ) | (60,925 | ) | 809,978 | (374,719 | ) | ||||||||
| Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax | (150,500 | ) | (150,500 | ) | (150,500 | ) | (24,800 | ) | 325,800 | (150,500 | ) | ||||||||
| Net loss | (525,219 | ) | (525,006 | ) | (525,047 | ) | (85,725 | ) | 1,135,778 | (525,219 | ) | ||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | 22,241 | 22,241 | 22,241 | 21,142 | (65,624 | ) | 22,241 | ||||||||||||
| Net (loss)/gain on derivative instruments | (3,834 | ) | (3,834 | ) | (3,834 | ) | 284 | 7,384 | (3,834 | ) | |||||||||
| Minimum pension liability adjustment net of tax benefit of $73,400 | (226,011 | ) | (226,011 | ) | (226,011 | ) | (170,303 | ) | 622,325 | (226,011 | ) | ||||||||
| Comprehensive loss | $ | (732,823 | ) | $ | (732,610 | ) | $ | (732,651 | ) | $ | (234,602 | ) | $ | 1,699,863 | $ | (732,823 | ) | ||
* Includes dividends on preferred securities of $16,610.
126
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended December 28, 2001
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Operating revenues | $ | — | $ | — | $ | 1,500,541 | $ | 2,002,529 | $ | (187,756 | ) | $ | 3,315,314 | ||||||
| Other income | 8,000 | 38,152 | 57,359 | 83,585 | (109,936 | ) | 77,160 | ||||||||||||
| Total revenues and other income | 8,000 | 38,152 | 1,557,900 | 2,086,114 | (297,692 | ) | 3,392,474 | ||||||||||||
| Cost of operating revenues | — | — | 1,506,801 | 1,823,980 | (166,756 | ) | 3,164,025 | ||||||||||||
| Selling, general and administrative expenses | — | — | 124,706 | 100,686 | — | 225,392 | |||||||||||||
| Other deductions and minority interest | 130 | 2,195 | 106,802 | 85,941 | (63,530 | ) | 131,538 | ||||||||||||
| Interest expense * | 8,018 | 28,846 | 42,050 | 72,976 | (67,406 | ) | 84,484 | ||||||||||||
| Equity in net losses of subsidiaries | (336,264 | ) | (343,362 | ) | (1,406 | ) | — | 681,032 | — | ||||||||||
| Loss before income taxes | (336,412 | ) | (336,251 | ) | (223,865 | ) | 2,531 | 681,032 | (212,965 | ) | |||||||||
| Provision /(benefit) for income taxes | (52 | ) | — | 112,399 | 11,048 | — | 123,395 | ||||||||||||
| Net loss | (336,360 | ) | (336,251 | ) | (336,264 | ) | (8,517 | ) | 681,032 | (336,360 | ) | ||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||||
| Foreign currency translation adjustments | (10,191 | ) | (10,191 | ) | (10,191 | ) | (22,139 | ) | 42,521 | (10,191 | ) | ||||||||
| Net (loss)/gain on derivative instruments | 3,834 | 3,834 | 3,834 | (284 | ) | (7,384 | ) | 3,834 | |||||||||||
| Minimum pension liability adjustment net of tax of $0 | (36,770 | ) | (36,770 | ) | (36,770 | ) | — | 73,540 | (36,770 | ) | |||||||||
| Comprehensive loss | $ | (379,487 | ) | $ | (379,378 | ) | $ | (379,391 | ) | $ | (30,940 | ) | $ | 789,709 | $ | (379,487 | ) | ||
* Includes dividends on preferred securities of $15,750
127
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by Operating Activities | $ | (93 | ) | $ | 18,811 | $ | (165,620 | ) | $ | 124,483 | $ | (39,679 | ) | $ | (62,098 | ) | |||
| Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | 15,524 | 22,890 | — | 38,414 | |||||||||||||
| Capital Expenditures | — | — | (105 | ) | (12,765 | ) | — | (12,870 | ) | ||||||||||
| Proceeds from sale of assets | — | — | 79,701 | 7,458 | — | 87,159 | |||||||||||||
| (Increase)/decrease in investment and advances | — | — | 23,465 | (23,465 | ) | — | — | ||||||||||||
| Increase in short-term investments | — | — | — | (6,808 | ) | — | (6,808 | ) | |||||||||||
| Net cash (used)/provided by Investing Activities | — | — | 118,585 | (12,690 | ) | — | 105,895 | ||||||||||||
| Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to Common Stockholders | — | — | — | (39,679 | ) | 39,679 | — | ||||||||||||
| Decrease in short-term debt | — | — | — | (14,826 | ) | — | (14,826 | ) | |||||||||||
| Repayment of long-term debt | — | (11,837 | ) | (1,580 | ) | (20,683 | ) | — | (34,100 | ) | |||||||||
| Other | 93 | (6,974 | ) | 60,814 | (56,812 | ) | — | (2,879 | ) | ||||||||||
| Net cash provided/(used) by Financing Activities | 93 | (18,811 | ) | 59,234 | (132,000 | ) | 39,679 | (51,805 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | 27,798 | — | 27,798 | |||||||||||||
| Increase in cash and cash equivalents | — | — | 12,199 | 7,591 | — | 19,790 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 20,962 | 323,343 | — | 344,305 | |||||||||||||
| Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 33,161 | $ | 330,934 | $ | — | $ | 364,095 | |||||||
128
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by Operating Activities | $ | (172 | ) | $ | (15,109 | ) | $ | 233,224 | $ | (42,073 | ) | $ | (15,505 | ) | $ | 160,365 | |||
| Cash Flows from Investing Activities | |||||||||||||||||||
| Change in restricted cash | — | — | (15,900 | ) | (68,893 | ) | — | (84,793 | ) | ||||||||||
| Capital Expenditures | — | — | (40,932 | ) | (12,463 | ) | — | (53,395 | ) | ||||||||||
| Proceeds from sale of assets | — | — | 1,783 | 4,499 | — | 6,282 | |||||||||||||
| (Increase)/decrease in investment and advances | — | (350 | ) | (21,049 | ) | 30,506 | — | 9,107 | |||||||||||
| Decrease in short-term investments | — | — | — | 93 | — | 93 | |||||||||||||
| Net cash used by Investing Activities | — | (350 | ) | (76,098 | ) | (46,258 | ) | — | (122,706 | ) | |||||||||
| Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to Common Stockholders | — | — | — | (15,505 | ) | 15,505 | — | ||||||||||||
| Decrease in short-term debt | — | — | — | (7,792 | ) | — | (7,792 | ) | |||||||||||
| Proceeds from long-term debt | — | 70,000 | — | 546 | — | 70,546 | |||||||||||||
| Proceeds from lease financing obligation | — | — | 44,900 | — | — | 44,900 | |||||||||||||
| Repayment of long-term debt | — | — | (24,440 | ) | (21,151 | ) | — | (45,591 | ) | ||||||||||
| Other | 172 | (54,541 | ) | (200,288 | ) | 252,596 | — | (2,061 | ) | ||||||||||
| Net cash provided/(used) by Financing Activities | 172 | 15,459 | (179,828 | ) | 208,694 | 15,505 | 60,002 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | 357 | 22,267 | �� | — | 22,624 | ||||||||||||
| Increase/(decrease) in cash and cash equivalents | — | — | (22,345 | ) | 142,630 | — | 120,285 | ||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 43,307 | 180,713 | — | 224,020 | |||||||||||||
| Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 20,962 | $ | 323,343 | $ | — | $ | 344,305 | |||||||
129
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of dollars, except per share amount)
24. | Consolidating Financial Information – (Continued) |
D. | Proposed 10.5% Senior Secured Notes due 2011 |
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 28, 2001
(in thousands of dollars)
Foster Wheeler Ltd. | Foster Wheeler LLC | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||||
| Net cash (used)/provided by Operating Activities | $ | (96 | ) | $ | (181,267 | ) | $ | 455,803 | $ | (111,597 | ) | $ | (251,524 | ) | $ | (88,681 | ) | ||
| Cash Flows from Investing Activities | |||||||||||||||||||
| Capital Expenditures | — | (2,346 | ) | (17,074 | ) | (14,578 | ) | — | (33,998 | ) | |||||||||
| Proceeds from sale of assets | — | — | 190 | 59,482 | — | 59,672 | |||||||||||||
| (Increase)/decrease in investment and advances | — | — | 77,838 | (61,830 | ) | — | 16,008 | ||||||||||||
| Decrease in short-term investments | — | — | — | 1,530 | — | 1,530 | |||||||||||||
| Net cash (used)/provided by Investing Activities | — | (2,346 | ) | 60,954 | (15,396 | ) | — | 43,212 | |||||||||||
| Cash Flows from Financing Activities | |||||||||||||||||||
| Dividends to Common Stockholders | — | (4,888 | ) | (228,936 | ) | (22,588 | ) | 251,524 | (4,888 | ) | |||||||||
| Decrease in short-term debt | — | — | (76,250 | ) | (5,782 | ) | — | (82,032 | ) | ||||||||||
| Proceeds from Convertible Bonds, net | 202,912 | — | — | — | — | 202,912 | |||||||||||||
| Proceeds from long-term debt | — | 178,061 | (285,000 | ) | 291,981 | — | 185,042 | ||||||||||||
| Repayment of long-term debt | — | (193,062 | ) | (1,601 | ) | (20,061 | ) | — | (214,724 | ) | |||||||||
| Other | (202,816 | ) | 203,502 | 79,598 | (81,061 | ) | — | (777 | ) | ||||||||||
| Net cash provided/(used) by Financing Activities | 96 | 183,613 | (512,189 | ) | 162,489 | 251,524 | 85,533 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | (923 | ) | (7,014 | ) | — | (7,937 | ) | ||||||||||
| Increase in cash and cash equivalents | — | — | 3,645 | 28,482 | — | 32,127 | |||||||||||||
| Cash and Cash equivalents, beginning of year | — | — | 39,662 | 152,231 | — | 191,893 | |||||||||||||
| Cash and Cash equivalents, end of year | $ | — | $ | — | $ | 43,307 | $ | 180,713 | $ | — | $ | 224,020 | |||||||
130
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 25. | Related Party Transactions |
Mr. Kenneth A. Hiltz served as Chief Financial Officer of Foster Wheeler Ltd. from April 7, 2003 until January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to provide financial management and consulting services. Mr. Hiltz is also a principal with AlixPartners, LLC. Mr. Ryan J. Esko, an employee of AlixPartners, served as Treasurer of the Company from November 26, 2002 to January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to also provide financial management services to the Company. The Company paid AlixPartners, LLC approximately $743 for Mr. Hiltz’s services and $1,017 for Mr. Esko’s services during 2003 based upon the agreement terms. An additional $8,613 was paid to AlixPartners for financial management and consulting services.
| 26. | Subsequent Events |
The Company entered into an agreement in the first quarter of 2004 to sell a domestic corporate office building for estimated net cash proceeds of $17,000, which approximates carrying value. The Company recorded an impairment loss of $15,100 on this building in the third quarter of 2003 in anticipation of a sale. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building is included in land, buildings, and equipment on the consolidated balance sheet. The sale is expected to close in the second quarter of 2004. Under the terms of the Senior Credit Facility, 50% of the net proceeds of this transaction will be paid to the lenders.
131
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amount)
| 26. | Subsequent Events — (Continued) |
Included on the following pages are the financial statements for certain Foster Wheeler Ltd. indirectly wholly owned subsidiary companies. The Company is required to provide these financial statements under Regulation S-X Rule 3-16 of the Exchange Act, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.” The stock and/or debt of these subsidiaries collateralize the Company’s $200,000 Senior Notes at 6.75% as described in Note 9 of Foster Wheeler Ltd.’s consolidated financial statements appearing in this Item 8.
132
FOSTER WHEELER LLC
Consolidated Financial Statements
For the three years ended December 26, 2003
133
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of operations and comprehensive loss, of cash flows and of changes in member’s deficit present fairly, in all material respects, the financial position of Foster Wheeler LLC and Subsidiaries (the “Company”), an indirect wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 26, 2003 and December 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2003 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”
The accompanying consolidated financial statements have been prepared assuming the Company and 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 three years in the period ended December 26, 2003 and has a shareholders’ deficit of $872,400,000 at December 26, 2003. The Parent has substantial debt obligations and during 2003 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. 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 complete planned restructuring activities, 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 maintenance of credit facilities and bonding capacity adequate to conduct 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 Company. 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 10, 2004
134
FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended
(in thousands of dollars)
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| Revenues: | ||||||||||
| Operating revenues | $ | 3,723,815 | $ | 3,519,177 | $ | 3,315,314 | ||||
| Other income (including interest: | ||||||||||
| 2003 — $10,130; 2002 — $12,251; 2001 — $9,060) | 77,493 | 55,360 | 77,160 | |||||||
| Total revenues and other income | 3,801,308 | 3,574,537 | 3,392,474 | |||||||
| Costs and expenses: | ||||||||||
| Cost of operating revenues | 3,441,342 | 3,426,910 | 3,164,025 | |||||||
| Selling, general and administrative expenses | 199,949 | 226,524 | 225,392 | |||||||
| Other deductions | 168,416 | 193,043 | 126,345 | |||||||
| Minority interest | 5,715 | 4,981 | 5,043 | |||||||
| Interest expense | 77,283 | 66,318 | 68,716 | |||||||
| Dividends on preferred security of subsidiary trust | 18,130 | 16,610 | 15,750 | |||||||
| Total costs and expenses | 3,910,835 | 3,934,386 | 3,605,271 | |||||||
| Loss before income taxes | (109,527 | ) | (359,849 | ) | (212,797 | ) | ||||
| Provision for income taxes | 47,426 | 14,657 | 123,454 | |||||||
| Net loss prior to cumulative effect of a change in accounting principle | (156,953 | ) | (374,506 | ) | (336,251 | ) | ||||
| Cumulative effect of a change in accounting principle for goodwill, net of $0 tax | — | (150,500 | ) | — | ||||||
| Net loss | (156,953 | ) | (525,006 | ) | (336,251 | ) | ||||
| Other comprehensive (loss)/income: | ||||||||||
| Cumulative effect of prior years (to December 29, 2000 of a change in accounting principle for derivative instruments designated as cash flow hedges | — | — | 6,300 | |||||||
| Change in gain on derivative instruments designated as cash flow hedges | — | (3,834 | ) | (2,466 | ) | |||||
| Foreign currency translation adjustment | 6,762 | 22,241 | (10,191 | ) | ||||||
| Minimum pension liability adjustment net of tax provision/(benefit): 2003 — $18,886; 2002 — $(73,400); 2001 — $0 | 58,677 | (226,011 | ) | (36,770 | ) | |||||
| Comprehensive loss | $ | (91,514 | ) | $ | (732,610 | ) | $ | (379,378 | ) | |
See notes to consolidated financial statements.
135
FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands of dollars)
December 26, 2003 | December 27, 2002 | ||||||
ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 364,095 | $ | 344,305 | |||
| Short-term investments | 13,390 | 271 | |||||
| Accounts and notes receivable, net: | |||||||
| Trade | 451,010 | 543,055 | |||||
| Other | 105,889 | 85,547 | |||||
| Contracts in process | 166,503 | 270,492 | |||||
| Inventories | 6,790 | 9,332 | |||||
| Prepaid, deferred and refundable income taxes | 37,160 | 41,155 | |||||
| Prepaid expenses | 30,024 | 36,071 | |||||
| Total current assets | 1,174,861 | 1,330,228 | |||||
| Land, buildings and equipment | 622,729 | 769,680 | |||||
| Less accumulated depreciation | 313,114 | 361,861 | |||||
| Net book value | 309,615 | 407,819 | |||||
| Restricted cash | 52,685 | 84,793 | |||||
| Notes and accounts receivable — long-term | 6,776 | 21,944 | |||||
| Investment and advances | 98,651 | 88,523 | |||||
| Goodwill, net | 51,121 | 50,214 | |||||
| Other intangible assets, net | 71,568 | 72,668 | |||||
| Prepaid pension cost and related benefit assets | 7,240 | 26,567 | |||||
| Asbestos-related insurance recovery receivable | 495,400 | 534,045 | |||||
| Other assets | 182,151 | 156,279 | |||||
| Deferred income taxes | 56,947 | 69,578 | |||||
TOTAL ASSETS | $ | 2,507,015 | $ | 2,842,658 | |||
LIABILITIES AND MEMBER’S DEFICIT | |||||||
| Current Liabilities: | |||||||
| Current installments on long-term debt | $ | 20,979 | $ | 31,562 | |||
| Bank loans | 121 | 14,474 | |||||
| Accounts payable | 305,286 | 283,940 | |||||
| Accrued expense | 381,370 | 326,881 | |||||
| Estimated costs to complete long-term contracts | 552,754 | 645,763 | |||||
| Advance payment by customers | 50,248 | 82,658 | |||||
| Income taxes | 63,055 | 64,576 | |||||
| Total current liabilities | 1,373,813 | 1,449,854 | |||||
| Corporate and other debt less current installment | 333,729 | 341,702 | |||||
| Special-purpose project debt less current installments | 119,281 | 181,613 | |||||
| Capital lease obligations | 62,373 | 58,237 | |||||
| Deferred income taxes | 9,092 | 8,333 | |||||
| Pension, postretirement and other employee benefits | 295,133 | 437,820 | |||||
| Asbestos-related liability | 526,200 | 519,790 | |||||
| Other long-term liabilities and minority interest | 124,792 | 109,361 | |||||
| Subordinated Robbins exit funding obligations less current installment | 111,589 | 111,674 | |||||
| Notes payable to affiliates | 210,000 | 210,000 | |||||
| Mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures | 175,000 | 175,000 | |||||
| Deferred accrued interest expense-mandatory redeemable interest securities | 38,021 | 19,891 | |||||
| Commitments and contingencies | — | — | |||||
| TOTAL LIABILITIES | 3,379,023 | 3,623,275 | |||||
| Member’s Deficit: | |||||||
| Membership interests and contributed capital | 242,613 | 242,490 | |||||
| Accumulated deficit | (810,622 | ) | (653,669 | ) | |||
| Accumulated other comprehensive loss | (303,999 | ) | (369,438 | ) | |||
| TOTAL MEMBER’S DEFICIT | (872,008 | ) | (780,617 | ) | |||
TOTAL LIABILITIES AND MEMBER’S DEFICIT | $ | 2,507,015 | $ | 2,842,658 | |||
See notes to consolidated financial statements
136
FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S DEFICIT
(in thousands of dollars)
December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| Membership Interests | ||||||||||
| Balance at beginning of year | $ | 1 | $ | 1 | $ | 1 | ||||
| Balance at end of year | 1 | 1 | 1 | |||||||
| Contributed Capital | ||||||||||
| Balance at beginning of year | 242,489 | 242,161 | 241,545 | |||||||
| Other | 123 | 328 | 616 | |||||||
| Balance at end of year | 242,612 | 242,489 | 242,161 | |||||||
| (Accumulated Deficit) / Retained Earnings | ||||||||||
| Balance at beginning of year | (653,669 | ) | (128,663 | ) | 212,476 | |||||
| Net loss for the year | (156,953 | ) | (525,006 | ) | (336,251 | ) | ||||
| Cash dividends paid | (4,888 | ) | ||||||||
| Balance at end of year | (810,622 | ) | (653,669 | ) | (128,663 | ) | ||||
| Accumulated Other Comprehensive Loss | ||||||||||
| Balance at beginning of year | (369,438 | ) | (161,834 | ) | (118,707 | ) | ||||
| Cumulative effect on prior years (to December 29, 2000) of a change in accounting principle for derivative instruments designated as cash flow hedges | — | — | 6,300 | |||||||
| Change in net gain on derivative instruments designated as cash flow hedges | — | (3,834 | ) | (2,466 | ) | |||||
| Change in accumulated translation adjustment during the year | 6,762 | 22,241 | (10,191 | ) | ||||||
| Minimum pension liability (net of tax provision/(benefit): | ||||||||||
| 2003 — $15,700; 2002 — $73,400; 2001 — $0) | 58,677 | (226,011 | ) | (36,770 | ) | |||||
| Balance at end of year | (303,999 | ) | (369,438 | ) | (161,834 | ) | ||||
| Total Shareholders’ Deficit | $ | (872,008 | ) | $ | (780,617 | ) | $ | (48,335 | ) | |
See notes to consolidated financial statements.
137
FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended
(in thousands of dollars)
December 26, 2003 | December 27, 2002 | December 28, 2001 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (156,953 | ) | $ | (525,006 | ) | $ | (336,251 | ) | ||
| Adjustments to reconcile net loss to cash flows from | |||||||||||
| operating activities: | |||||||||||
| Cumulative effect of a change in accounting principle | — | 150,500 | — | ||||||||
| Provision for impairment loss | 15,100 | 18,700 | — | ||||||||
| Provision for restructuring | — | — | 41,570 | ||||||||
| Depreciation and amortization | 35,574 | 44,425 | 55,750 | ||||||||
| Deferred tax | 19,774 | (28,355 | ) | 137,801 | |||||||
| (Gain)/provision for loss on sale of cogeneration plants | (4,300 | ) | 54,500 | 40,300 | |||||||
| Provision for asbestos claims | 68,081 | 26,200 | — | ||||||||
| Claims (recoveries)/write downs and related contract provisions | (1,500 | ) | 136,200 | 37,000 | |||||||
| Contract reserves and receivable provisions | 32,300 | 80,500 | 123,600 | ||||||||
| Dividends on Preferred Trust securities | 18,130 | 16,610 | 3,484 | ||||||||
| Gain on sale of land, building and equipment | (17,970 | ) | (1,269 | ) | (10,174 | ) | |||||
| Earnings on equity interests, net of dividends | (9,145 | ) | (4,262 | ) | (4,658 | ) | |||||
| Other equity earnings, net of dividends | (3,312 | ) | (1,850 | ) | (1,544 | ) | |||||
| Other noncash items | (2,884 | ) | (14,827 | ) | (2,787 | ) | |||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | 77,959 | 192,588 | (96,775 | ) | |||||||
| Contracts in process and inventories | 47,353 | 53,361 | (88,044 | ) | |||||||
| Accounts payable and accrued expenses | 11,265 | (153,565 | ) | 35,338 | |||||||
| Estimated costs to complete long-term contracts | (142,914 | ) | 62,870 | (25,026 | ) | ||||||
| Advance payments by customers | (38,287 | ) | 18,206 | 5,399 | |||||||
| Income taxes | 2,499 | 15,535 | (14,206 | ) | |||||||
| Other assets and liabilities | (12,868 | ) | 19,304 | 10,542 | |||||||
| Net cash (used)/provided by operating activities | (62,098 | ) | 160,365 | (88,681 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Change in restricted cash | 38,414 | (84,793 | ) | — | |||||||
| Capital expenditures | (12,870 | ) | (53,395 | ) | (33,998 | ) | |||||
| Proceeds from sale of assets | 87,159 | 6,282 | 59,672 | ||||||||
| Decrease in investments and advances | — | 9,107 | 16,008 | ||||||||
| (Increase)/decrease in short-term investments | (6,808 | ) | 93 | 1,530 | |||||||
| Net cash provided/(used) by investing activities | 105,895 | (122,706 | ) | 43,212 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Dividends to common shareholders | — | — | (4,888 | ) | |||||||
| Partnership distribution | (2,879 | ) | (2,061 | ) | (1,367 | ) | |||||
| Repurchase of common stock | — | — | (37 | ) | |||||||
| Proceeds from convertible subordinated notes | — | — | 202,912 | ||||||||
| Proceeds from the exercise of stock options | — | — | 627 | ||||||||
| Decrease in short-term debt | (14,826 | ) | (7,792 | ) | (82,032 | ) | |||||
| Proceeds from long-term debt | — | 70,546 | 185,042 | ||||||||
| Proceeds from lease financing obligation | — | 44,900 | — | ||||||||
| Repayment of long-term debt | (34,100 | ) | (45,591 | ) | (214,724 | ) | |||||
| Net cash (used)/provided by financing activities | (51,805 | ) | 60,002 | 85,533 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 27,798 | 22,624 | (7,937 | ) | |||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 19,790 | 120,285 | 32,127 | ||||||||
| Cash and cash equivalents at beginning of year | 344,305 | 224,020 | 191,893 | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 364,095 | $ | 344,305 | $ | 224,020 | |||||
| Cash paid during the year for: | |||||||||||
| Interest (net of amount capitalized) | $ | 63,194 | $ | 60,973 | $ | 74,201 | |||||
| Income taxes | $ | 17,588 | $ | 13,508 | $ | 15,543 | |||||
See notes to consolidated financial statements.
138
FOSTER WHEELER LLC 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 LLC (the “Company” or “Foster Wheeler”) was formed on February 9, 2001 as a Delaware Limited Liability Company. Pursuant to a reorganization, which occurred on May 25, 2001, Foster Wheeler Corporation was merged into Foster Wheeler LLC and the assets (primarily investments in subsidiaries which design, engineer and construct petroleum, chemical, petrochemical and alternative fuel facilities and related infrastructures and design, manufacture and erect steam generating and auxiliary equipment for power stations and industrial markets worldwide) and liabilities of Foster Wheeler Corporation were recorded by Foster Wheeler LLC at historical cost. The Company is a wholly owned subsidiary of Foreign Holdings Ltd. who, in turn, is a wholly owned subsidiary of Foster Wheeler Ltd. Foster Wheeler LLC is a holding company which owns the stock of substantially all subsidiary companies in the Foster Wheeler group.
The business of the Company falls within two business groups. The Engineering and Construction Group (the “E&C Group”) designs, engineers, and constructs 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, pollution control equipment and water treatment facilities. The E&C Group provides direct technical and management services, and purchases equipment, materials and services from third party vendors and subcontractors. The group has industry leading technology in delayed coking, solvent de-asphalting and hydrogen production. The E&C Group also 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 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 full plant construction, 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 builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries. The Energy Group generates revenues from construction and operating activities pursuant to long-term sale of project outputs (i.e., electricity contracts), operating and maintenance agreements and from returns on its equity positions.
| 2. | 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. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the three-year period ended December 26, 2003, and has a member’s deficit of $872,008. The Company has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. As described in more detail below, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that the Company will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants.
139
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Going Concern — (Continued) |
The Company’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. The Company’s current cash flow forecasts indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004.
As of December 26, 2003, the Company had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily from distributions from foreign subsidiaries. As of December 26, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities. The amount of restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
The Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. The Company’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, the Company repatriated approximately $100,000 from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.
As part of its debt restructuring plan, Foster Wheeler Ltd. and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003 and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.
On February 5, 2004, Foster Wheeler Ltd. announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. Foster Wheeler Ltd. is offering a mix of equity as well as debt with longer maturities in exchange for these securities. Foster Wheeler Ltd. anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that Foster Wheeler Ltd. will complete the exchange offer on acceptable terms, or at all.
140
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Going Concern — (Continued) |
Failure by the Company to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that Company will be in compliance with these covenants throughout 2004.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. As of December 26, 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in the Company’s liquidity forecast for 2004.
Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain 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 revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 as of December 26, 2003) 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.
The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company, for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation is included in capital lease obligations in the accompanying consolidated statement of financial position.
In the third quarter of 2002, the Company entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special-purpose subsidiary, Foster Wheeler Funding II LLC (“FW Funding”) as described below. FW Funding is included in the consolidated financial statements of the Company.
141
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Going Concern — (Continued) |
FW Funding is a party to a Purchase, Sale and Contribution Agreement (“PSCA”) with six of the Company’s wholly owned domestic subsidiaries. Pursuant to PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. FW Funding simultaneously entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly unused line fee equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced 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.
No borrowings were outstanding under this facility as of December 26, 2003 or December 27, 2002. As of December 26, 2003, FW Funding held $94,200 of trade accounts receivable, net of allowances, which are included in the consolidated statement of financial position.
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of the Company debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003. The Company would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 18, 2003, Foster Wheeler Ltd. received a formal notice from the New York Stock Exchange (“NYSE”) indicating that Foster Wheeler Ltd. was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. Following discussions with Foster Wheeler Ltd. in May 2003, the NYSE permitted Foster Wheeler Ltd.’s securities to continue to be listed subject to its return to compliance with the continued listing standard within 18 months of receipt of the notice and further subject to quarterly review by the NYSE. At that time, Foster Wheeler Ltd.’s ticker symbol was designated with the suffix “bc” indicating that it was below compliance with the NYSE listing standards. Following its most recent review, the NYSE determined to de-list Foster Wheeler Ltd. as of November 14, 2003 based on its inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. Foster Wheeler Ltd.’s common stock now trades on the Pink Sheets and its common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler Ltd. has relied on an exemption from this rule provided to NYSE-listed companies. Due to Foster Wheeler Ltd. being de-listed, this exemption is no longer available. To address this issue, Foster Wheeler Ltd. obtained the consent of the BMA to transfers between non-residents for so long as its shares continue to be quoted in the Pink Sheets or on the OTCBB. Foster Wheeler Ltd. believes that this consent will continue to be available.
142
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies |
Principles of Consolidation — The consolidated financial statements include the accounts of Foster Wheeler LLC 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 operations and December 31 for foreign operations. For domestic operations, the years 2003, 2002 and 2001 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 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, asbestos litigation and expected recoveries and contingencies, among others. At December 26, 2003, December 27, 2002 and December 28, 2001, the Company had claims of $0, $9,000 and $135,000, respectively. The decrease in recorded claims in 2002 resulted from the collection of $11,000 and a provision recorded for the balance. In 2002, the Company revised its estimates 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 in long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual task for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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.
Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.
143
FOSTER WHEELER LLC 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 $305,300 are maintained by foreign subsidiaries as of December 26, 2003. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.
Restricted Cash — Restricted cash at December 26, 2003 consists of approximately $4,000 held primarily by special purpose entities and restricted for debt service payments, approximately $44,900 that was required to collateralize letters of credit and bank guarantees, and approximately $3,800 of client escrow funds. Domestic restricted cash totals approximately $4,700 which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $48,000 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.
Restricted Net Assets — One of the Company’s subsidiaries has entered into a bonding arrangement with a bank, which contains covenants limiting its ability to make distributions to the Company. The covenants include a restriction on the distribution of dividends to 75% of statutory earnings and the requirement to maintain an equity ratio (calculated as equity divided by the sum of the equity and total liabilities) of at least 30%. In addition, the subsidiary is not permitted to make intercompany loans to the Company. As a result, the net assets of the subsidiary can only be distributed annually through dividends after the subsidiary’s statutory financial statements have been issued. As of December 26, 2003 and December 27, 2002, $37,148 and $30,638, respectively, of the subsidiary’s retained earnings are considered restricted.
Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under 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 2003, 2002 and 2001, unrealized gains and losses were immaterial.
2003 | 2002 | 2001 | ||||||||
| Proceeds from sales of short-term investments | $ | — | $ | — | $ | 2,000 | ||||
| Gain/(loss) | $ | — | $ | — | $ | — | ||||
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.
Other Accounts and Notes Receivable — Non-trade accounts and notes receivable consist primarily of:
2003 | 2002 | ||||||
| Insurance claims receivable | $ | 60,000 | $ | 35,000 | |||
| Foreign refundable value-added tax | $ | 13,600 | 6,800 | ||||
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.
Effective December 29, 2001, 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.
144
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies — (Continued) |
The Company recorded an impairment loss of $15,100 on a corporate office building in the third quarter of 2003 in anticipation of a sale, in accordance with SFAS No. 144. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building is included in land, buildings, and equipment on the consolidated balance sheet.
In 2002, the Company recorded losses of $35,500 in anticipation of a sale of its Hudson Falls waste-to-energy facility. This facility was sold in October, 2003. A loss of $19,000 was also recorded in 2002 on the Charleston waste-to-energy facility. This facility was sold in October 2002. These losses were recorded in other deductions on the consolidated statement of operations and comprehensive loss.
During the third quarter of 2002, management of the Energy Group approved a plan to convert the use of its domestic manufacturing facility to focus on the after-market service business and wind down the facility’s fabrication of new power generation equipment due to cost competitive considerations. The plan was subject to discussions with the local labor unions. In accordance with SFAS No. 144, the facility was tested for impairment using estimated future cash flows based on the revised use of the facility. The review indicated impairment in the facility’s carrying value of $13,400. The Company recorded the impairment loss in the third quarter of 2002 and the impairment is reflected in the cost of operating revenues as depreciation in the accompanying consolidated statement of operations and comprehensive income/(loss). During the fourth quarter of 2002, the Company decided to take the necessary steps to mothball the facility. Additional charges of $5,300 were recorded in December 2002.
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 cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. 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 equity method.
Income Taxes — 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 $177,500 as of December 26, 2003. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.
145
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies — (Continued) |
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.
2003 | 2002 | 2001 | ||||||||
| Cumulative translation adjustment at beginning of year | $ | (85,157 | ) | $ | (107,398 | ) | $ | (97,207 | ) | |
| Current year foreign currency adjustment | 6,762 | 22,241 | (10,191 | ) | ||||||
| Cumulative translation adjustment at end of year | $ | (78,395 | ) | $ | (85,157 | ) | $ | (107,398 | ) | |
2003 | 2002 | 2001 | ||||||||
| Foreign currency transaction gains | $ | 1,700 | $ | 2,900 | $ | 3,400 | ||||
| Foreign currency transaction gains, net of tax | 1,100 | 1,900 | 2,200 | |||||||
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, “Accounting for Derivative Instruments and Hedging Activities.” At December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded approximately a $3,400 after tax loss in 2003 and a $5,500 after tax gain in 2002.
Inventories— Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
Intangible Assets— Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.
Effective December 29, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which supersedes APB Opinion No. 17, “Intangible Assets.” The statement requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually. The Company tests for impairment at the reporting unit level as defined in SFAS No. 142. Goodwill was allocated to the reporting units based on the original purchase price allocation. This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. Impairment losses have been measured as of December 29, 2001 and recognized as the cumulative effect of a change in accounting principle in 2002. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144.
As of December 26, 2003 and December 27, 2002, the Company had unamortized goodwill of $51,121 and $50,214, respectively. The increase in goodwill of $907 resulted from foreign currency exchange gains. All of the goodwill at December 26, 2003, and all but $27 of the goodwill at December 27, 2002 related to the Energy Group. As of December 28, 2001, the Company had unamortized goodwill of $200,152. The reduction in goodwill in 2002 is due to the $150,500 impairment losses discussed below, offset by foreign currency translation adjustments of $562. In accordance with SFAS No. 142, the Company is no longer amortizing goodwill and in 2003, the fair value of the reporting units exceeded the carrying amounts. The Company recognized $150,500 of impairment losses in 2002 related to the goodwill as a cumulative effect of a change in accounting principle. Of this total, $24,800 was associated with the Camden waste-to-energy facility and $77,000 was associated with the North American Power unit included in the operations of the Energy Group. The fair value of the facility and the operating unit were estimated using the expected present value of future cash flows. The remaining $48,700 relates to Foster Wheeler Environmental Corporation in the E & C Group. An impairment of the goodwill on this subsidiary was initially determined based upon indications of its market value from potential buyers. Based upon the market value, it was determined under step one that a potential impairment existed. The Company then completed step two and determined that a full write down of the goodwill was required. All of the other reporting units were also subjected to the first step of the goodwill impairment test.
146
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies — (Continued) |
As of December 26, 2003 and December 27, 2002, the Company had unamortized identifiable intangible assets of $71,568 and $72,668, respectively. The following table details amounts relating to those assets.
| As of December 26, 2003 | As of December 27, 2002 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
| Patents | $ | 36,703 | $ | (13,802 | ) | $ | 35,695 | $ | (11,973 | ) | |||
| Trademarks | 61,943 | (13,276 | ) | 60,378 | (11,432 | ) | |||||||
| Total | $ | 98,646 | $ | (27,078 | ) | $ | 96,073 | $ | (23,405 | ) | |||
Amortization expense related to patents and trademarks for 2003, 2002, and 2001 was $3,675, $3,535, and $3,165, respectively. Amortization expense is expected to approximate $3,500 each year in the next five years.
The following table presents the current and prior years reported amounts adjusted to eliminate the effect of goodwill amortization in accordance with SFAS No. 142.
December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| Reported net loss | $ | (156,953 | ) | $ | (525,006 | ) | $ | (336,251 | ) | |
| Add back: goodwill amortization | — | — | 5,369 | |||||||
| Adjusted net loss | $ | (156,953 | ) | $ | (525,006 | ) | $ | (330,882 | ) | |
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 provisions of Statement of Financial Accounting Standards (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 for the stock option plans. Had compensation cost for Foster Wheeler Ltd.’s stock option plans been determined based on the fair value at the grant date for awards in 2003, 2002 and 2001 consistent with the provisions of SFAS No. 123, the Company’s net loss would have been increased to the pro forma amounts indicated below:
2003 | 2002 | 2001 | ||||||||
| Net loss — as reported | $ | (156,953 | ) | $ | (525,006 | ) | $ | (336,251 | ) | |
| Deduct: Total stock-based employee compensation | ||||||||||
| expense determined under fair value based method | ||||||||||
| for awards net of taxes of $5 in 2003, $390 in 2002 and | ||||||||||
| $154 in 2001. | 93 | 3,602 | 5,868 | |||||||
| Net loss — pro forma | $ | (157,046 | ) | $ | (528,608 | ) | $ | (342,119 | ) | |
147
FOSTER WHEELER LLC 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:
2003 | 2002 | 2001 | ||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 1.36 | % | ||||
| Expected volatility | 88.23 | % | 83.62 | % | 79.20 | % | ||||
| Risk free interest rate | 3.22 | % | 2.90 | % | 4.23 | % | ||||
| Expected life (years) | 5.0 | 5.0 | 5.0 | |||||||
Under the 1995 Stock Option Plan approved by the shareholders of Foster Wheeler Ltd. 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. In April 1990, the shareholders of Foster Wheeler Ltd. approved a Stock Option Plan for Directors of the Company. On April 29, 1997, the shareholders of Foster Wheeler Ltd. approved an amendment of the Directors’ Stock Option Plan, which authorizes the granting of options on 400,000 shares of common stock to non-employee directors of Foster Wheeler Ltd., who will automatically receive an option to acquire 3,000 shares each year.
These plans provide that shares granted come 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 granted.
Foster Wheeler Ltd. also granted 1,300,000 inducement options in 2001 to its chief executive officer in connection with an employment agreement and a further 1,000,000 options in 2002 based upon an amendment to his employment agreement. The 2001 options vest 20% each year over the term of the agreement, while the 2002 options vest one-forty-eighth (1/48) on the date of grant and 1/48 on the first day of each successive month thereafter. Foster Wheeler Ltd granted 255,000 inducement options to its president and chief executive officer of Foster Wheeler North America Corp. (a wholly owned subsidiary formerly known as “Foster Wheeler Power Group, Inc.”) in connection with his employment agreement in 2002 and granted a further 100,000 inducement option to him in 2003. The 2002 options vest ratably over five years, while the 2003 options vest ratably over four years. The price of the options granted pursuant to these agreements was fair market value on the date of the grant. The options granted under these agreements expire 10 years from the date granted.
In 2002, Foster Wheeler Ltd. granted 250,000 options to one of its consultants. The price of the options granted was fair market value on the date of the grant. The options fully vested on March 31, 2003 and expire ten years from the date of grant. In accordance with SFAS No. 123, the Company recognized $123 and $328 of expense related to these options in 2003 and 2002, respectively. As these options are not part of Foster Wheeler Ltd.’s employee stock option plans, they are not included in the information presented on the following page.
148
FOSTER WHEELER LLC 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 2003, 2002, and 2001 is as follows (presented in actual number of shares):
2003 | 2002 | 2001 | |||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Weighted Average Exercise Price | |||||||||||||||
| Options outstanding, beginning of year | 8,201,099 | $ | 9.76 | 4,724,621 | $ | 16.25 | 2,924,621 | $ | 23.36 | ||||||||||
| Options exercised | — | — | — | (66,000 | ) | 9.51 | |||||||||||||
| Options granted | 117,145 | 1.20 | 3,600,361 | 1.64 | 1,909,250 | 5.21 | |||||||||||||
| Options cancelled or expired | (450,589 | ) | 6.80 | (123,883 | ) | 21.66 | (43,250 | ) | 19.84 | ||||||||||
| Options outstanding, end of year | 7,867,655 | $ | 9.80 | 8,201,099 | $ | 9.76 | 4,724,621 | $ | 16.25 | ||||||||||
| Option price range at end of year | $ | 1.17 | to | $ | 1.46 | to | $ | 4.985 | to | ||||||||||
| $ | 44.0625 | $ | 44.0625 | $ | 44.0625 | ||||||||||||||
| Option price range for exercised shares | — | — | $ | 9.00 | to | ||||||||||||||
| $ | 15.0625 | ||||||||||||||||||
| Options available for grant at end of year | 506,846 | 445,069 | 430,180 | ||||||||||||||||
| Weighted-average fair value of options | |||||||||||||||||||
| granted during the year | $ | 0.84 | $ | 1.11 | $ | 3.15 | |||||||||||||
| Options exercisable at end of year | 4,588,894 | 3,338,752 | 2,414,547 | ||||||||||||||||
| Weighted-average price of exercisable | |||||||||||||||||||
| options at end of year | $ | 14.80 | $ | 19.93 | $ | 26.09 | |||||||||||||
The following table summarizes information about fixed-price stock options outstanding as of December 26, 2003:
Options Outstanding | Options Exercisable | ||||||||||||
| Range of Exercise Prices | Number Outstanding at 12/26/03 | Weighted- Averaged Remaining Contractual Life | Weighted- Averaged Exercise Price | Number Exercisable at 12/26/03 | Weighted- Averaged Exercise Price | ||||||||
| $32.9375 to $40.0625 | 140,834 | 1 year | $ | 35.47 | 140,834 | $ | 35.47 | ||||||
| 29.75 to 30.00 | 347,167 | 2 years | 29.88 | 347,167 | 29.88 | ||||||||
| 42.1875 to 44.0625 | 231,584 | 3 years | 42.33 | 231,584 | 42.33 | ||||||||
| 36.9375 | 341,500 | 4 years | 36.94 | 341,500 | 36.94 | ||||||||
| 27.63 | 382,000 | 5 years | 27.63 | 382,000 | 27.63 | ||||||||
| 13.50 to 15.0625 | 608,000 | 6 years | 14.12 | 608,000 | 14.12 | ||||||||
| 6.34375 to 10.00 | 574,486 | 7 years | 8.72 | 448,486 | 8.36 | ||||||||
| 4.985 to 5.6875 | 1,875,500 | 8 years | 5.20 | 1,040,167 | 5.34 | ||||||||
| 1.46 to 1.64 | 3,249,439 | 9 years | 1.62 | 1,049,156 | 1.62 | ||||||||
| 1.17 to 1.205 | 117,145 | 10 years | 1.20 | — | — | ||||||||
| $1.17 to $44.0625 | 7,867,655 | 4,588,894 | |||||||||||
Recent Accounting Developments — In November 2002, the FASB issued FASB Interpretation (“FIN”) 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 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded.
149
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies — (Continued) |
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:
a. Product warranties
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 annual periods ending after December 15, 2002. The Company in its 2002 Form 10-K implemented the disclosure requirements of this interpretation. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and | |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. | |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements. Management does, however, believe that a subsidiary trust which issued mandatory redeemable preferred securities will need to be de-consolidated in 2004 under this interpretation. This will have no impact on the Company’s consolidated debt as the intercompany debt to the subsidiary trust will become third party debt upon de-consolidation.
150
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Summary of Significant Accounting Policies — (Continued) |
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” The FSP permits employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). Without the FSP, plan sponsors would be required under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date President Bush signed the Act into law. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB on how to account for the federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. In accordance with the FSP, the Company has not reflected the impact of the Act on any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the consolidated financial statements or accompanying notes. Specific authoritative guidance on the accounting for the federal subsidy is pending, and that guidance, when issued, could require the Company to change previously reported information. The Company is currently assessing the impact of the Act and whether its postretirement plan should be amended in consideration of the new legislation.
| 4. | Research and Development |
For the years 2003, 2002, and 2001, approximately $6,200, $10,300 and $12,300, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $10,200, $18,100, and $39,200, respectively, were spent on customer-sponsored research activities.
151
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 5. | Accounts and Notes Receivable |
The following table shows the components of trade accounts and notes receivable:
December 26, 2003 | December 27, 2002 | |||||||
| From long-term contracts: | ||||||||
| Amounts billed due within one year | $ | 332,135 | $ | 410,214 | ||||
| Retention: | ||||||||
| Billed: | ||||||||
| Estimated to be due in: | ||||||||
| 2003 | — | 58,042 | ||||||
| 2004 | 30,502 | 25,481 | ||||||
| 2005 | 21,338 | 4,978 | ||||||
| 2006 | 656 | — | ||||||
| Total billed | 52,496 | 88,501 | ||||||
| Unbilled: | ||||||||
| Estimated to be due in: | ||||||||
| 2003 | — | 97,997 | ||||||
| 2004 | 79,937 | 4 | ||||||
| 2005 | 669 | — | ||||||
| 2006 | — | — | ||||||
| 2007 | 2,699 | — | ||||||
| Total unbilled | 83,305 | 98,001 | ||||||
| Total retentions | 135,801 | 186,502 | ||||||
| Total receivables from long-term contracts | 467,936 | 596,716 | ||||||
| Other trade accounts and notes receivable | 20,480 | 19,387 | ||||||
| 488,416 | 616,103 | |||||||
| Less allowance for doubtful accounts | 37,406 | 73,048 | ||||||
| Accounts receivable, net | $ | 451,010 | $ | 543,055 | ||||
In the third quarter of 2002, the Company entered into a receivables securitization facility that matures on August 15, 2005 and is secured by a portion of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special purpose subsidiary, Foster Wheeler Funding II LLC (“FW Funding”) as described below. FW Funding is included in the consolidated financial statements of the Company.
FW Funding entered a Purchase, Sale and Contribution Agreement (“PSCA”) with six of the Company’s wholly owned domestic subsidiaries. Pursuant to the PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. FW Funding also entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as security. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly unused line fee equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced 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.
152
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 5. | Accounts and Notes Receivable — (Continued) |
No amounts were outstanding under this facility as of December 26, 2003 or December 27, 2002. FW Funding may increase or decrease, at its discretion, its use of the facility on a weekly basis subject to the availability of sufficient eligible trade accounts receivable and the facility’s maximum amount of $40,000. As of December 26, 2003, FW Funding held $94,200 of trade accounts receivable, net of allowances, which are included in the consolidated statement of financial position and had approximately $11,900 of availability under the facility.
| 6. | Contracts in Process and Inventories |
The following table shows the elements included in contracts in process as related to long-term contracts:
2003 | 2002 | ||||||
| Contracts in Process | |||||||
| Costs plus accrued profits less earned revenues on contracts currently in process | $ | 238,645 | $ | 336,074 | |||
| Less progress payments | 72,142 | 65,582 | |||||
Net | $ | 166,503 | $ | 270,492 | |||
Costs of inventories are shown below:
2003 | 2002 | ||||||
| Inventories | |||||||
| Materials and supplies | $ | 5,098 | $ | 9,102 | |||
| Finished goods | 1,692 | 230 | |||||
| Total | $ | 6,790 | $ | 9,332 | |||
| 7. | Land, Buildings and Equipment |
Land, buildings and equipment are stated at cost and are set forth below:
2003 | 2002 | ||||||
| Land and land improvements | $ | 24,057 | $ | 23,806 | |||
| Buildings | 142,608 | 151,462 | |||||
| Equipment | 450,941 | 590,295 | |||||
| Construction in progress | 5,123 | 4,117 | |||||
| Total | $ | 622,729 | $ | 769,680 | |||
Depreciation expense for the years 2003, 2002, and 2001 was $31,214, $54,492, and $44,348, respectively.
| 8. | Pensions and Other Postretirement Benefits |
Pension Benefits — Domestic and certain foreign subsidiaries of the Company have several pension plans covering substantially all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation; the domestic plans are noncontributory. Effective January 1, 1999, a cash balance program was established for the domestic plan. The pension benefit under the previous formulas remain the same for current employees if so elected, however, new employees are offered only the cash balance program. The cash balance plan resembles a savings account. Amounts are credited based on age and a percentage of earnings. At termination or retirement, the employee receives the balance in the account in a lump-sum. Under the cash balance program, future increases in employee earnings will not apply to prior service costs. It is the Company’s policy to fund the plans on a current basis to the extent deductible under existing Federal tax regulations. Such contributions, when made, are intended to provide not only for benefits attributed to service to date, but also those expected to be earned in the future. The Company also has a non-qualified, unfunded supplemental executive retirement plan (“SERP”) which covers certain employees. The Company froze the SERP and, in April 2003, issued letters of credit totaling $2,250 to certain employees to support its obligations under the SERP. In the third quarter of 2003, cash payments of approximately $500 were made to select SERP participants.
153
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 8. | Pensions and Other Postretirement Benefits — (Continued) |
On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors.
The principal changes consist of the following: the domestic pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan was frozen and will be available on a subsidized premium basis only to currently active employees who reached the age of 40 on May 31, 2003; and the 401(k) plan was enhanced to increase the level of employer matching contribution. The net effect of these changes is expected to positively impact the financial condition of the Company through reduced costs and reduced cash outflow in future years.
Through the year ended December 26, 2003, the Company recognized a cumulative minimum liability in its financial statements for both domestic and foreign underfunded plans in the amount of $311,746 resulting in a cumulative pretax charge to Other Comprehensive Loss. This represents a reduction in the minimum liability of $58,903 from the prior year, including the impact of foreign currency translation. 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.
Domestic subsidiaries of the Company have a 401(k) plan for salaried employees. For the year 2003, the Company contributed a 100% match of the first 3% and a 50% match of the next 3% of base pay of employee contributions, subject to the annual IRS limit, which amounted to a cost of $4,066. For the years 2002 and 2001, the Company contributed a 50% match of the first 6% of base pay of employee contributions, subject to the annual IRS limit which amounted to a cost of $5,507and $5,008, respectively.
Other Benefits — In addition to providing pension benefits, some of the Company’s domestic subsidiaries provide certain health care and life insurance benefits for retired employees. Employees may become eligible for these benefits if they qualify for and commence normal or early retirement pension benefits as defined in the pension plan while working for the Company. Benefits are provided through insurance companies. Additionally, some of the Company’s domestic subsidiaries also have a plan which provides coverage for an employee’s beneficiary upon the death of the employee.
154
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 8. | Pensions and Other Postretirement Benefits — (Continued) |
The following chart contains the disclosures for pension and other benefits for the years 2003, 2002 and 2001.
Pension Benefits | Other Benefits | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||
| Projected Benefit Obligation (PBO) | ||||||||||||||
| PBO at beginning of period | $ | 820,173 | $ | 641,100 | $ | 133,392 | $ | 118,959 | ||||||
| Service cost | 20,776 | 29,044 | 741 | 2,785 | ||||||||||
| Interest cost | 46,861 | 40,874 | 9,205 | 8,255 | ||||||||||
| Plan participants contributions | 7,147 | 5,690 | — | — | ||||||||||
| Plan amendments | 1,961 | 3,091 | (55,201 | ) | (8,510 | ) | ||||||||
| Actuarial loss | 31,508 | 106,005 | 21,277 | 23,035 | ||||||||||
| Benefits paid | (48,818 | ) | (37,120 | ) | (11,910 | ) | (8,733 | ) | ||||||
| Curtailments | (35,719 | ) | — | (2,598 | ) | — | ||||||||
| Special termination benefits/other | (3,683 | ) | (8,514 | ) | — | (2,399 | ) | |||||||
| Foreign currency exchange rate changes | 54,691 | 40,003 | — | — | ||||||||||
| PBO at end of period | $ | 894,897 | $ | 820,173 | $ | 94,906 | $ | 133,392 | ||||||
| Plan Assets | ||||||||||||||
| Fair value of plan assets beginning of period | $ | 487,304 | $ | 521,195 | $ | — | $ | — | ||||||
| Actual return on plan assets | 90,179 | (62,743 | ) | — | — | |||||||||
| Employer contributions | 44,988 | 41,917 | 11,910 | 8,733 | ||||||||||
| Plan participants contributions | 7,147 | 5,690 | — | — | ||||||||||
| Benefits paid | (48,818 | ) | (37,120 | ) | (11,910 | ) | (8,733 | ) | ||||||
| Other | 2,136 | (9,819 | ) | — | — | |||||||||
| Foreign currency exchange rate changes | 39,766 | 28,184 | — | — | ||||||||||
| Fair value of plan assets at end of period | $ | 622,702 | $ | 487,304 | $ | — | $ | — | ||||||
| Funded Status | ||||||||||||||
| Funded status | $ | (272,195 | ) | $ | (332,869 | ) | $ | (94,906 | ) | $ | (133,392 | ) | ||
| Unrecognized net actuarial loss/(gain) | 377,046 | 436,100 | 47,614 | (14,846 | ) | |||||||||
| Unrecognized prior service cost | 9,732 | 12,507 | (62,453 | ) | 31,308 | |||||||||
| Adjustment for the minimum liability | (311,746 | ) | (370,649 | ) | — | — | ||||||||
| Accrued benefit cost | $ | (197,163 | ) | $ | (254,911 | ) | $ | (109,745 | ) | $ | (116,930 | ) | ||
Pension Benefits | Other Benefits | |||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||
| Net Periodic Benefit Cost | ||||||||||||||||||||
| Service cost | $ | 20,776 | $ | 29,044 | $ | 27,248 | $ | 741 | $ | 2,785 | $ | 996 | ||||||||
| Interest cost | 46,861 | 40,874 | 37,856 | 9,205 | 8,255 | 7,227 | ||||||||||||||
| Expected return on plan assets | (38,836 | ) | (42,700 | ) | (51,819 | ) | — | — | — | |||||||||||
| Amortization of transition asset | 71 | 63 | 56 | — | — | — | ||||||||||||||
| Amortization of prior service cost | 1,643 | 1,810 | 1,692 | (1,485 | ) | (2,853 | ) | (2,206 | ) | |||||||||||
| Other | 32,106 | 15,453 | 5,020 | (3,340 | ) | (5,013 | ) | 4,396 | ||||||||||||
| SFAS No.87 net periodic pension cost | 62,621 | 44,544 | 20,053 | 5,121 | 3,174 | 10,413 | ||||||||||||||
| SFAS No.88 cost* | 1,108 | 1,908 | 1,900 | — | — | — | ||||||||||||||
| Total net periodic pension cost | $ | 63,729 | $ | 46,452 | $ | 21,953 | $ | 5,121 | $ | 3,174 | $ | 10,413 | ||||||||
| Weighted-Average Assumptions-Net | ||||||||||||||||||||
Periodic Benefit Cost | ||||||||||||||||||||
| Discount Rate | 5.7 | % | 6.3 | % | 6.4 | % | 6.625 | % | 7.40 | % | 7.75 | % | ||||||||
| Long-term rate of return | 7.9 | % | 8.2 | % | 9.3 | % | ||||||||||||||
| Salary scale | 3.3 | % | 4.0 | % | 4.2 | % | ||||||||||||||
| Weighted-Average Assumptions- | ||||||||||||||||||||
Benefit Obligations | ||||||||||||||||||||
| Discount Rate | 5.6 | % | 6.0 | % | 6.0 | % | 6.625 | % | ||||||||||||
| Salary scale | 3.4 | % | 3.9 | % | ||||||||||||||||
155
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 8. | Pensions and Other Postretirement Benefits — (Continued) |
*Under the provision of SFAS No. 88 “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” charges were recorded for a provision for the impact of freezing of the domestic pension plans in 2003, a provision for the mothballing of a domestic manufacturing facility of $900, a provision for employee terminations as part of the workforce reduction of $100, and a provision for the retirement of the Company’s Vice President of Human Resources of approximately $900 in 2002; a provision for the retirement of the Company’s Chief Executive Officer resulted in a charge of $1,900 in 2001.
| Health care cost trend: | ||||
| 2003 | 8.5 | % | ||
| Decline to 2010 | 5.0 | % | ||
Assumed health care cost trend rates have a significant effect on the amounts reported for the other benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| 1-Percentage Point Increase | 1-Percentage Point Decrease | ||||||
| Effect on total of service and interest cost components | $ | 569 | $ | (495 | ) | ||
| Effect on accumulated postretirement benefit obligations | $ | 5,207 | $ | (4,587 | ) |
Plan measurement date
The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.
Accumulated benefit obligation
The accumulated benefit obligations (ABO) for the Company’s plans totaled approximately $812,000 and $738,000 at year end 2003 and 2002, respectively. As previously discussed, the Company has recorded a net cumulative charge to other comprehensive loss for the years 2000 through 2003 due to the (ABO) exceeding the fair value of plan assets.
Investment policy
Each of the Company’s plans is governed by a written investment policy.
The investment policy of the U.K. plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.
The investment policy of the U.S. plans allocates assets in accordance with the policy guidelines. The asset mix target for the plans is 70% equities and 30% fixed income securities. The investment policy is currently undergoing a review by the Company to ensure investment strategy is aligned with plan liabilities, considering the changes to the domestic benefits program made in 2003.
The investment policy of the Canadian plans uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.
Long-term rate of return assumptions
The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted average expected long-term rate of return on plan assets has declined from 9.3% to 7.9% over the past three years.
156
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 8. | Pensions and Other Postretirement Benefits — (Continued) |
2003 | 2002 | ||||||
| Plan Asset Allocation | |||||||
| U.K. Plans | |||||||
| U.K. equities | 38 | % | 39 | % | |||
| Non-U.K. equities | 25 | % | 24 | % | |||
| U.K. fixed income securities | 32 | % | 34 | % | |||
| Non-U.K. fixed income securities | 0 | % | 0 | % | |||
| Other | 5 | % | 3 | % | |||
| Total | 100 | % | 100 | % | |||
| U.S. Plans | |||||||
| U.S. equities | 44 | % | 39 | % | |||
| Non-U.S. equities | 24 | % | 19 | % | |||
| U.S. fixed income securities | 20 | % | 25 | % | |||
| Non-U.S. fixed income securities | 1 | % | 1 | % | |||
| Other | 11 | % | 16 | % | |||
| Total | 100 | % | 100 | % | |||
| Canadian Plans | |||||||
| Canandian equities | 23 | % | 24 | % | |||
| Non-Canadian equities | 26 | % | 25 | % | |||
| Canadian fixed income securities | 44 | % | 45 | % | |||
| Non-Canadian fixed income securities | 0 | % | 0 | % | |||
| Other | 7 | % | 6 | % | |||
| Total | 100 | % | 100 | % | |||
Contributions
The Company expects to contribute a total of approximately $64,700 to its foreign and domestic pension plans in 2004.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, are expected to be paid on the domestic defined benefit plans.
Pension Benefits | Other Benefits | ||||||
| 2004 | $ | 22,200 | $ | 7,900 | |||
| 2005 | 20,600 | 7,900 | |||||
| 2006 | 20,700 | 8,000 | |||||
| 2007 | 20,800 | 8,000 | |||||
| 2008 | 21,200 | 8,000 | |||||
| 2009-2013 | 109,900 | 38,000 | |||||
| 9. | Bank Loans |
The approximate weighted-average interest rates on borrowings outstanding (primarily foreign) at the end of 2003 and 2002 were 4.91% and 4.38%, respectively.
Unused lines of credit for short-term bank borrowings aggregated $8,255 at year-end 2003, all of which were available outside the United States and Canada in various currencies at interest rates consistent with market conditions in the respective countries.
Interest costs incurred (including dividends on preferred security) in 2003, 2002, and 2001 were $95,720, $84,296, and $85,184, respectively, of which $307, $1,368, and $718, respectively, were capitalized.
157
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 10. | Corporate and Other Debt and Notes Payable to Affiliate |
Corporate Debt — The Company has $200,000 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 Senior 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 Senior Notes due November 15, 2005. In connection with the Company’s finalizing the Senior Credit Facility, Foster Wheeler Ltd. and the following 100% owned companies issued guarantees in favor of the holders of the Senior Notes: Equipment Consultants, Inc., Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), 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 North America Corp. (formerly known as “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. The Company and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd.
Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain 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 revolving portion of the Senior Credit Facility. As permitted by Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 at December 26, 2003) 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 included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The term loan and revolving loans bear interest at the Company’s option of (a) LIBOR plus 6.00% or (b) the Base Rate plus 5.00%. The “Base Rate” means the higher of (i) the Bank of America prime rate or (ii) the Federal Funds rate plus 0.5%.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 pretax charges related to specific contingencies may be excluded from the covenant calculation, if incurred, through December 31, 2003.
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
158
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 10. | Corporate and Other Debt and Notes Payable to Affiliate — (Continued) |
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in the Company’s liquidity forecast for 2004.
As of December 26, 2003, $128,163 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 26, 2003, $105,777 of standby letters of credit was outstanding.
Corporate and other debt consisted of the following:
2003 | 2002 | ||||||
| Senior Credit Facility (average interest rate 7.16%) | $ | 128,163 | $ | 140,000 | |||
| Senior Notes at 6.75% due November 15, 2005 | 200,000 | 200,000 | |||||
| Other | 5,637 | 6,707 | |||||
| 333,800 | 346,707 | ||||||
| Less: Current portion | 71 | 5,005 | |||||
| $ | 333,729 | $ | 341,702 | ||||
| Principal payments are payable in annual installments of: | |||||||
| 2004 | $ | — | |||||
| 2005 | 333,039 | ||||||
| 2006 | 647 | ||||||
| 43 | |||||||
| 2007 | |||||||
| $ | 333,729 | ||||||
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 $14,927 and $14,917 for 2003 and 2002, respectively. The Company has issued a guarantee in favor of the holders of the convertible subordinated notes.
For the years ended December 26, 2003 and December 27, 2002, the Company recorded $14,927 and $14,917, 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 26, 2003 and December 27, 2002, respectively, were unpaid and included in accrued expenses on the accompanying consolidated statement of financial position.
| 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 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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the years ended December 26, 2003 and December 27, 2002 $5,160 pretax ($3,400 after tax) net loss and $8,470 pretax ($5,500 after tax) net gains on derivative instruments, respectively, which were recorded as reductions in cost of operating revenues on the consolidated statement of operations and comprehensive loss. 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 26, 2003, approximately $67,100 was owed to the Company by counterparties and $17,800 was owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive loss 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.
159
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 11. | Derivative Financial Instruments — (Continued) |
The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.
| 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 at 7¼% interest, due October 15, 2009 of $12,130 and October 15, 2024 of $77,155 | $ | 89,285 | ||
| 1999D Accretion Bonds at 7% Interest, due October 15, 2009 | 23,994 | |||
| Total | $ | 113,279 | ||
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 | ||||||||||
Year | Due 2009 | Due 2024 | Total | |||||||
| 2004 | $ | 1,690 | $ | 1,690 | ||||||
| 2005 | 1,810 | 1,810 | ||||||||
| 2006 | 1,940 | 1,940 | ||||||||
| 2007 | 2,080 | 2,080 | ||||||||
| 2008 | 2,225 | 2,225 | ||||||||
| 2009 | 2,385 | 2,385 | ||||||||
| 2023 | $ | 37,230 | 37,230 | |||||||
| 2024 | 39,925 | 39,925 | ||||||||
| Total | $ | 12,130 | $ | 77,155 | $ | 89,285 | ||||
1999D Bonds — The 1999D Accretion Bonds were originally issued for $18,000. The total amount due on October 15, 2009 is $35,817.
| 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 $38,021. 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.
160
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 14. | Special-Purpose Project Debt — (Continued) |
2003 | 2002 | ||||||||
| Note payable, interest varies based on one of several money market rates (2003-year-end rate 1.985%), due semiannually through July 30, 2006 | $ | 21,887 | (1) | $ | 27,907 | ||||
| Senior Secured Notes, interest 11.443%, due annually April 15, 2004 through 2015 | 37,782 | (2) | 40,077 | ||||||
| Solid Waste Disposal and Resource Recovery System Revenue Bonds, interest 7.125% to 7.5%, due annually December 1, 2004 through 2010 | 77,508 | (3) | 88,920 | ||||||
| Resource Recovery Revenue Bonds, interest 7.9% to 10%, due annually December 15, 2003 through 2012 | — | 48,936 | (4) | ||||||
| 137,177 | 205,840 | ||||||||
| Less: Current portion | 17,896 | 24,227 | |||||||
| Total | $ | 119,281 | $ | 181,613 | |||||
| (1) | The note payable for $21,887 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 $37,782 were issued for 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. |
| (3) | The Solid Waste Disposal and Resource Recovery System Revenue Bonds totaling $77,508 were issued for 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 20). |
| (4) | The Resource Recovery Revenue Bonds were issued for a total amount of $86,780. The bonds are collateralized by a pledge of certain revenues and assets of the project. This facility was sold in 2003 along with the debt obligation. |
Principal payments are payable in annual installments as follows:
| 2005 | $ | 19,215 | ||
| 2006 | 20,422 | |||
| 2007 | 12,972 | |||
| 2008 | 13,792 | |||
| 2009 | 14,588 | |||
| Thereafter | 38,292 | |||
| Total | $ | 119,281 | ||
| 15. | Guarantees and Warranties |
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 | $ | 5,300 | ||||
| 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.
161
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 15. | Guarantees and Warranties — (Continued) |
| 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 | ||
| Accruals | 72,800 | ||
| Settlements | (13,800 | ) | |
| Adjustments to provisions | (9,300 | ) | |
| Balance as of December 26, 2003 | $ | 131,600 | |
| 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.
December 26, 2003 | December 27, 2002 | ||||||||||||
Italian Project | Chilean Project | Italian Project | Chilean Project | ||||||||||
| Balance Sheet Data: | |||||||||||||
| Current assets | $ | 95,977 | 23,891 | $ | 80,966 | $ | 22,352 | ||||||
| Other assets (primarily buildings and equipment) | 409,267 | 185,315 | 344,993 | 218,990 | |||||||||
| Current liabilities | 32,735 | 17,188 | 20,665 | 14,748 | |||||||||
| Other liabilities (primarily long-term debt) | 385,047 | 121,362 | 344,148 | 152,949 | |||||||||
| Net assets | 87,462 | 70,656 | 61,146 | 73,645 | |||||||||
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||||||||||||||
| Italian Project | Chilean Project | Italian Project | Chilean Project | Italian Project | Chilean Project | Venezuela Project | ||||||||||||||||
| Income Statement Data for twelve months: | ||||||||||||||||||||||
| Total revenues | $ | 219,818 | $ | 39,114 | $ | 171,565 | $ | 38,425 | $ | 159,845 | $ | 40,546 | $ | 4,428 | ||||||||
| Gross earnings | 56,699 | 20,739 | 43,133 | 20,777 | 44,457 | 21,764 | 2,902 | |||||||||||||||
| Income before income taxes | 38,405 | 10,712 | 31,358 | 10,087 | 21,618 | 10,467 | 2,684 | |||||||||||||||
| Net earnings | 23,144 | 8,891 | 17,648 | 8,372 | 11,955 | 8,689 | 2,582 | |||||||||||||||
As of December 26, 2003, the Company’s share of the net earnings and investment in the equity affiliates totaled $17,142 and $98,651, respectively. Dividends of $7,997 were received during the year 2003. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $2,700 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 Chilean project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.
The undistributed retained earnings of the Company’s equity investees amounted to approximately $28,765 and $20,143 at December 26, 2003 and December 27, 2002, respectively.
162
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 17. | Income Taxes |
The components of loss before income taxes for the years 2003, 2002 and 2001 were taxed under the following jurisdictions:
2003 | 2002 | 2001 | ||||||||
| Domestic | $ | (155,538 | ) | $ | (506,639 | ) | $ | (244,809 | ) | |
| Foreign | 46,011 | (3,710 | ) | 32,012 | ||||||
| Total | $ | (109,527 | ) | $ | (510,349 | ) | $ | (212,797 | ) | |
The provision for income taxes on those earnings was as follows:
2003 | 2002 | 2001 | ||||||||
| Current tax expense: | ||||||||||
| Domestic | $ | 14,939 | $ | 5,931 | $ | 5,486 | ||||
| Foreign | 31,887 | 10,978 | 22,604 | |||||||
| Total current | 46,826 | 16,909 | 28,090 | |||||||
| Deferred tax (benefit)/expense: | ||||||||||
| Domestic | (84 | ) | — | 102,147 | ||||||
| Foreign | 684 | (2,252 | ) | (6,783 | ) | |||||
| Total deferred | 600 | (2,252 | ) | 95,364 | ||||||
| Total provision for income taxes | $ | 47,426 | $ | 14,657 | $ | 123,454 | ||||
Deferred tax assets (liabilities) consist of the following:
2003 | 2002 | 2001 | ||||||||
| Difference between book and tax depreciaion | $ | (13,654 | ) | $ | (35,002 | ) | $ | (34,369 | ) | |
| Pensions | 46,160 | 61,279 | (7,584 | ) | ||||||
| Capital lease transactions | 263 | (7,376 | ) | (8,612 | ) | |||||
| Revenue recognition | 12,192 | 7,210 | (5,999 | ) | ||||||
| Other | — | — | (192 | ) | ||||||
| Gross deferred tax assets (liabilities) | 44,961 | 26,111 | (56,756 | ) | ||||||
| Current taxability of estimated costs to complete long-term contracts | 19,039 | 14,278 | 4,297 | |||||||
| Income currently taxable deferred for financial reporting | 1,706 | 4,175 | 5,307 | |||||||
| Expenses not currently deductible for tax purposes | 200,084 | 129,917 | 122,983 | |||||||
| Investment tax credit carryforwards | 20,538 | 30,893 | 30,893 | |||||||
| Postretirement benefits other than pensions | 62,369 | 67,113 | 47,242 | |||||||
| Asbestos claims | 40,328 | 6,200 | 7,000 | |||||||
| Minimum tax credits | 17,917 | 10,883 | 11,073 | |||||||
| Foreign tax credits | 28,178 | 9,579 | 6,485 | |||||||
| Net operating loss carryforwards | 99,076 | 178,067 | 15,332 | |||||||
| Effect of write-downs and restructuring reserves | 11,234 | 40,873 | 63,680 | |||||||
| Other | 30,020 | 15,621 | 19,871 | |||||||
| Valuation allowance | (502,444 | ) | (444,427 | ) | (268,851 | ) | ||||
| 28,045 | 63,172 | 65,312 | ||||||||
| Net deferred tax assets | $ | 73,006 | $ | 89,283 | $ | 8,556 | ||||
163
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 2004 through 2008. Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2004 through 2008. 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. In 2003 and 2002, the valuation allowance increased by $58,017 and $175,576, respectively. Such increase is required under SFAS No. 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 do not begin expiring until 2020 and beyond, based on the current tax laws.
If the Company completes the exchange offer as discussed in Note 2, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.
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:
2003 | 2002 | 2001 | ||||||||
| Tax benefit at U.S. statutory rate | (35.0 | )% | (35.0 | )% | (35.0 | )% | ||||
| State income taxes, net of Federal income tax benefit | 6.8 | 0.4 | 1.9 | |||||||
| Increase in valuation allowance | 52.9 | 34.4 | 86.2 | |||||||
| Difference in estimated income taxes on foreign income and losses, net of previously provided amounts | 15.1 | 2.0 | 2.2 | |||||||
| Deferred charge | 1.7 | .4 | .9 | |||||||
| Other | 1.8 | .7 | 1.7 | |||||||
| 43.3 | % | 2.9 | % | 57.9 | % | |||||
| 18. | 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 total $26,700 in 2003, $32,000 in 2002, and $29,800 in 2001. Future minimum rental commitments on non-cancelable leases are as follows:
| Fiscal year: | ||||
| 2004 | $ | 25,100 | ||
| 2005 | 22,800 | |||
| 2006 | 19,400 | |||
| 2007 | 17,200 | |||
| 2008 | 15,700 | |||
| Thereafter | 159,500 | |||
| $ | 259,700 | |||
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 $3,622, $3,197 and $3,080, for the years ended December 26, 2003, December 27, 2002 and December 28, 2001, respectively. As of December 27, 2003 and December 27, 2002, the balance of the deferred gains was $74,151 and $69,540, 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.
164
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 19. | Capital Leases |
During 2002, the Company entered into sale-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capital leases. Assets under capital leases are summarized as follows:
2003 | 2002 | ||||||
| Buildings and improvements | $ | 38,522 | $ | 35,755 | |||
| Less accumulated amortization | 1,276 | 342 | |||||
| Net assets under capital leases | $ | 37,246 | $ | 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 26, 2003:
| Fiscal year: | ||||
| 2004 | $ | 6,830 | ||
| 2005 | 6,797 | |||
| 2006 | 7,246 | |||
| 2007 | 6,973 | |||
| 2008 | 7,449 | |||
| Thereafter | 131,435 | |||
| Less: Interest | (103,035 | ) | ||
| Net minimum lease payments under capital leases | 63,695 | |||
| Less: current portion of net minimum lease payments | 1,322 | |||
| Long-term net minimum lease payments | $ | 62,373 | ||
| 20. | 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. 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 26, 2003 is as follows:
Number of Claims | ||||||||||
2003 | 2002 | 2001 | ||||||||
| Balance, beginning of year | 139,800 | 110,700 | 92,100 | |||||||
| New claims | 48,260 | 45,200 | 54,700 | |||||||
| Claims resolved | (17,200 | ) | (16,100 | ) | (36,100 | ) | ||||
| Balance, end of year | 170,860* | 139,800 | 110,700 | |||||||
| *Includes approximately 24,500 claims on inactive court dockets. | ||||||||||
165
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 20. | Litigation and Uncertainties — (Continued) |
The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed or will be reimbursed from insurance coverage, was $66,000 in 2003, $57,200 in 2002, and $66,900 in 2001.
The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $1.8. 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 $555,400 relating to probable insurance recoveries of which approximately $60,000 is recorded in accounts and notes receivables, and $495,400 is recorded as long-term. 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 settlements with other insurers. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $372,200 and an estimated liability relating to future unasserted claims of approximately $214,000. Of the total, $60,000 is recorded in accrued expenses and $526,200 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 fifteen 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 26, 2003, total indemnity costs paid, prior to insurance recoveries, were approximately $354,000 and total defense costs paid were approximately $109,000.
The Company recorded charges related to increases in the valuation allowance for insurance claims receivable of $68,100, $26,200 and $0 for the years ended 2003, 2002 and 2001, respectively. These charges were recorded in other deductions in the consolidated statement of operations. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. The 2002 charge was recorded due to allocation of future costs to an insurer who became insolvent.
As of December 26, 2003, $257,700 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries various insurers and the subsidiaries as self-insurers. 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.
In July 2003, several subsidiaries of the Company and Liberty Mutual Insurance Company, one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. The subsidiaries received in July an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.
In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims.
In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.
166
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 20. | Litigation and Uncertainties — (Continued) |
The pending litigation and negotiations with other insurers is continuing.
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 believes 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 uncertainties 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 case has been amicably resolved by the parties and the appeal of the verdict has been dismissed. The terms of the settlement are confidential. The Company’s financial obligation was covered 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 yet to be calculated. This amended final judgment in the amount of $54,283 included such interest for the period beginning in 1983 when the lawsuit was filed through entry of judgment. Post-judgment interest accrued at a rate of 5.471 percent per annum from November 29, 1999. The management of Tray, Inc. believes that the Court’s decision contained numerous factual and legal errors subject to reversal on appeal. Tray, Inc. filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. On April 1, 2003, Tray, Inc. filed for bankruptcy. In the third quarter of 2003, the parties amicably resolved the cases. Management assessed the liability associated with the legal proceeding and determined that the previously recorded provision in the financial statements for this liability was adequate to address the terms of the settlement.
The Company has a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. The first phase of this project was profitable, but the close out of this phase resulted in increased costs. An $11,900 charge was recorded in 2003 and the remaining cash outlay of $4,000 will be expended in 2004. The Company is in the process of submitting requests for equitable adjustment related to this contract and at December 26, 2003 and December 27, 2002, the Company’s financial statements reflect anticipated collection of $0 and $9,000, respectively, from these requests for equitable adjustment.
The second phase is billed on a cost plus fee basis and is expected to conclude in June 2004. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is for the construction, start-up and testing of the facility for a fixed price of $114,000, subject to escalation, is scheduled to commence in 2004. This phase will begin with the purchase of long lead items followed in 2005 by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency are interested in restructuring the contract and have commenced discussions about the possible restructuring or withdrawal from the contract. If the project were to proceed, the Company intends to seek third party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot obtain third party financing or the required surety bond, the Company’s participation would be uncertain; this could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has good legal defenses should the government agency decide to pursue an action.
167
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 20. | Litigation and Uncertainties — (Continued) |
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, 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 Country 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.
Under U.S. Federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Clean Water Act, the Clean Air Act, and similar state and local laws, the current owner or operator of real property and the past owners or operators of real property (if disposal or release took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances, and are subject to additional liabilities if they do not comply with applicable laws regulating such hazardous substances. In either case, such liabilities can be substantial. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or mediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person (“off-site facility”). Liability at such off-site facilities is typically allocated among all of the viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site, and other factors.
The Company currently owns and operates industrial facilities and has also transferred its interests in industrial facilities that it formerly owned or operated. It is likely that as a result of its current or former operations, such facilities have been impacted by hazardous substances. The Company is not aware of any conditions at its currently owned facilities in the United States that it expects will cause the Company to incur material costs which have not been accrued.
The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities that may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be material. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.
The Company had been notified that it was a potentially responsible party (“PRP”) under CERCLA or similar state laws at three off-site facilities, excluding sites as to which the Company has resolved its liability. At each of these sites, the Company’s liability should be substantially less than the total site remediation costs because the percentage of waste attributable to the Company compared to that attributable to all other PRPs is low. The Company does not believe that its share of cleanup obligations at any of the off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.
168
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 20. | Litigation and Uncertainties — (Continued) |
The Company’s project claims have increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise from changes in the initial scope of work or from owner-caused delays. These claims are often subject to lengthy arbitration or litigation proceedings. The costs associated with these changes or owner-caused delays include additional direct costs, such as labor and material costs associated with the performance of the additional works, as well as indirect costs that may arise due to delays in the completion of the project, such as increased labor costs resulting from changes in labor markets. The Company has used significant additional working capital in projects with cost overruns pending the resolution of the relevant project claims. The Company cannot assure that project claims will not continue in the future.
The Company established a provision for the balance of outstanding commercial claims as of December 27, 2002 to bring the net book value of such claims to $0. At that time, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. The Company continues to pursue these claims, but there can be no assurance that it will recover the full amount of the claims, or anything at all.
The Company also faces a number of counterclaims brought against it by certain project owners in connection with several of the project claims described above. If the Company were found liable for any of these counterclaims, it would have to incur write-downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.
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.
| 21. | 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 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.
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:
December 26, 2003 | December 27, 2002 | ||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
| Nonderivatives: | |||||||||||||
| Cash and short-term investments | $ | 377,485 | $ | 377,485 | $ | 344,576 | $ | 344,576 | |||||
| Restricted Cash | 52,685 | 52,685 | 84,793 | 84,793 | |||||||||
| Long-term debt | (1,032,951 | ) | (591,080 | ) | (1,109,788 | ) | (569,985 | ) | |||||
| Derivatives: | |||||||||||||
| Foreign currency contracts | 3,310 | 3,310 | 8,470 | 8,470 | |||||||||
169
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 21. | Financial Instruments and Risk Management — (Continued) |
In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $609,000 and $1,182,394 as of December 26, 2003 and December 27, 2002, 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 26, 2003, the Company had $84,922 of foreign currency contracts outstanding. These foreign currency contracts mature in 2004. The contracts have been established by various international subsidiaries to sell a variety of currencies, and 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 26, 2003 and December 27, 2002, the Company had no significant concentrations of credit risk. The Company had issued a third-party financial guarantee totaling $2,750 at year-end 2003 and $2,750 at year-end 2002 with respect to a partnership interest in a commercial real estate project.
| 22. | Business Segments — Data |
The business of the Company and its subsidiaries falls within two business groups. THE ENGINEERING AND CONSTRUCTION GROUP (“E & C”) 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, however, the domestic environmental remediation business was sold in 2003. 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 2003, the E & C Group accounted for approximately 62% of the operating revenues. The geographic dispersion of these operating revenues was as follows: 12% North America, 11% Asia, 58% Europe, 6% Middle East, and 13% other. The Energy Group accounted for 38% of the operating revenues of the Company. The geographic dispersion of these operating revenues was as follows: 42% North America, 43% Europe, 6% Asia, 8% Middle East, and 1% South America.
Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined below, is the primary earnings measure used by the Company’s chief decision makers. Previously, gross margin, which is equal to operating revenues less cost of operating revenues, was considered the primary financial measure. Segment information for 2002 and 2001 has been restated to conform to the current presentations.
170
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 22. | Business Segments — Data — (Continued) |
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings/(loss) before taxes (before goodwill charge), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, adjusted for certain unusual and infrequent items specifically excluded in the terms of the Senior Credit Facility, is also used as a measure for certain covenants under the Senior Credit Facility. The Company believes that the line item on its consolidated statement of earnings entitled “net earnings/(loss)” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings/(loss) as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net earnings/(loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded.
The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:
| • | It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations; |
| • | It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations; |
| • | It does not include depreciation. Because the Company must utilize substantial property, plants and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations. |
A reconciliation of EBITDA, a non-GAAP financial measure, to net earnings/(loss), a GAAP measure, is shown on the next page.
Export revenues account for 4.5% of operating revenues. No single customer represented 10% or more of operating revenues for 2003, 2002, or 2001.
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.
171
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 22. | Business Segments — Data — (Continued) |
Summary financial information concerning the Company’s reportable segments is shown in the following table:
| Total | Engineering and Construction | Energy Group | Corporate and Financial Services | (1) | ||||||||||||||||
2003 | ||||||||||||||||||||
| Third party revenue | $ | 3,801,308 | $ | 2,342,660 | $ | 1,450,162 | $ | 8,486 | ||||||||||||
| Intercompany revenue | — | 10,733 | 4,315 | (15,048 | ) | |||||||||||||||
| Total revenue | $ | 3,801,308 | $ | 2,353,393 | $ | 1,454,477 | $ | (6,562 | ) | |||||||||||
| EBITDA | 21,460 | $ | 60,655 | $ | 140,394 | $ | (179,589 | ) | ||||||||||||
| Less: Interest expense (2)(3) | 95,413 | 3,201 | 17,453 | 74,759 | (3) | |||||||||||||||
| Less: Depreciation and amortization | 35,574 | 10,133 | (4) | (5) | 21,713 | (4) | (5) | 3,728 | ||||||||||||
| (Loss)/earnings before income taxes | (109,527 | ) | 47,321 | 101,228 | (258,076 | ) | (5) | |||||||||||||
| Tax provision/(benefits) | 47,426 | 15,906 | 43,403 | (11,883 | ) | |||||||||||||||
| Net (loss)/earnings | $ | (156,953 | ) | $ | 31,415 | $ | 57,825 | $ | (246,193 | ) | ||||||||||
| Identifiable assets | $ | 2,507,015 | $ | 1,030,737 | $ | 1,229,270 | $ | 247,008 | ||||||||||||
| Capital expenditures | $ | 12,870 | $ | 5,688 | $ | 6,582 | $ | 600 | ||||||||||||
2002 | ||||||||||||||||||||
| Third party revenue | $ | 3,574,537 | $ | 2,014,678 | $ | 1,544,706 | $ | 15,153 | ||||||||||||
| Intercompany revenue | — | 12,853 | 32,068 | (44,921 | ) | |||||||||||||||
| Total revenue | $ | 3,574,537 | $ | 2,027,531 | $ | 1,576,774 | $ | (29,768 | ) | |||||||||||
| EBITDA | $ | (219,096 | ) | $ | (41,438 | ) | $ | (31,148 | ) | $ | (146,510 | ) | ||||||||
| Less: Interest expense (2)(3) | 82,928 | (415 | ) | 21,621 | 61,722 | (3) | ||||||||||||||
| Less: Depreciation and amortization | 57,825 | 15,490 | (9) | 37,622 | (9) | 4,713 | ||||||||||||||
| Loss before income taxes and cumulative effect of a change in accounting principle for goodwill | (359,849 | ) | (56,513 | ) | (6) | (8) | (90,391 | ) | (6) | (7)(8) | (212,945 | ) | (6) | (7)(8) | ||||||
| Tax provision/(benefits) | 14,657 | (11,485 | ) | (62,859 | ) | 89,001 | ||||||||||||||
| Net loss prior to 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 | (150,500 | ) | (48,700 | ) | (101,800 | ) | — | |||||||||||||
| Net loss | $ | (525,006 | ) | $ | (93,728 | ) | $ | (129,332 | ) | $ | (301,946 | ) | ||||||||
| Identifiable assets | $ | 2,842,658 | $ | 1,100,401 | $ | 1,431,211 | $ | 311,046 | ||||||||||||
| Capital expenditures | $ | 53,395 | $ | 9,907 | $ | 9,317 | $ | 34,171 | ||||||||||||
2001 | ||||||||||||||||||||
| Third party revenue | $ | 3,392,474 | $ | 1,931,523 | $ | 1,439,153 | $ | 21,798 | ||||||||||||
| Intercompany revenue | — | 12,495 | 29,691 | (42,186 | ) | |||||||||||||||
| Total revenue | $ | 3,392,474 | $ | 1,944,018 | $ | 1,468,844 | $ | (20,388 | ) | |||||||||||
| EBITDA | $ | (72,581 | ) | $ | 32,661 | $ | (27,223 | ) | $ | (78,019 | ) | |||||||||
| Less: Interest expense (2)(3) | 84,466 | (179 | ) | 26,493 | 58,152 | (3) | ||||||||||||||
| Less: Depreciation and amortization | 55,750 | 17,721 | 34,470 | 3,559 | ||||||||||||||||
| (Loss)/earnings before income taxes | (212,797 | ) | 15,119 | (10) | (88,186 | ) | (10) | (11) | (139,730 | ) | (10) | (11) | ||||||||
| Tax provision/(benefits) | 123,395 | 10,982 | (27,430 | ) | 139,843 | (12) | ||||||||||||||
| Net (loss)/earnings | $ | (336,192 | ) | $ | 4,137 | $ | (60,756 | ) | $ | (279,573 | ) | |||||||||
| Identifiable assets | $ | 3,326,005 | $ | 1,289,207 | $ | 1,758,399 | $ | 278,399 | ||||||||||||
| Capital expenditures | $ | 33,998 | $ | 11,494 | $ | 15,463 | $ | 7,041 | ||||||||||||
172
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 22. | Business Segments — Data — (Continued) |
| (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. |
| (3) | Includes dividends on Preferred Security of $18,130 in 2003, $16,610 in 2002, and $15,750 in 2001. |
| (4) | Includes in 2003, revaluation of contract estimates and revisions of contract claims of $30,800; Engineering and Construction Group (E & C) $33,900 and Energy Group (Energy) $(3,100). |
| (5) | Includes in 2003, a gain on the sale of Environmental in E & C of $16,700 and an impairment on the anticipated sale of domestic corporate office building in the Corporate and Financial Services (C & F) of $15,100. Includes gain on sale of waste-to-energy plant of $4,300 in Energy, and provision for asbestos claims of $68,100 in C & F in 2003, $58,700 of performance intervention activities, debt restructuring efforts, accrual for legal settlement, severance costs, increased pension and post retirement costs; $8,900 in E & C, $2,800 in Energy, and $47,000 in C & F. |
| (6) | Includes in 2002, revaluation of contract estimates and provisions for uncollectible receivables of $216,700 $(210,800 after-tax): Engineering and Construction Group (E & C) $121,650, Energy Group (Energy) $86,450 and Corporate and Financial Services (C & F) $8,600; and a provision for mothballing a domestic manufacturing facility of $18,700 for Energy. |
| (7) | Includes in 2002, anticipated loss on sale of assets of $54,500 in Energy and provisions for asbestos claim of $26,200 in C & F. |
| (8) | 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 E & C, $12,700 in Energy, and $60,100 in C & F. |
| (9) | Excluded cumulative effect in 2002, goodwill change in accounting principle of $48,700 in E & C and $101,800 in Energy. |
| (10) | 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. |
| (11) | 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). |
| (12) | Includes in 2001, a valuation allowance for deferred tax assets of $194,600 on Corporate and Financial Services. |
173
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 22. | Business Segments — Data — (Continued) |
2003 | 2002 | 2001 | ||||||||
| Equity earnings in unconsolidated subsidiaries were as follows: | ||||||||||
| Engineering and Construction Group | $ | 9,738 | $ | 7,334 | $ | 4,432 | ||||
| Energy Group | 7,404 | 6,672 | 8,404 | |||||||
| Total | $ | 17,142 | $ | 14,006 | $ | 12,836 | ||||
| Geographic Concentration | ||||||||||
| Revenues: | ||||||||||
| United States | $ | 996,831 | $ | 1,544,827 | $ | 1,673,457 | ||||
| Europe | 2,741,413 | 1,923,211 | 1,669,409 | |||||||
| Canada | 69,626 | 136,267 | 126,851 | |||||||
| Corporate and Financial Services, including eliminations | (6,562 | ) | (29,768 | ) | (77,243 | ) | ||||
| Total | $ | 3,801,308 | $ | 3,574,537 | $ | 3,392,474 | ||||
| Long-lived assets: | ||||||||||
| United States | $ | 258,261 | $ | 345,934 | $ | 534,345 | ||||
| Europe | 215,101 | 195,359 | 174,058 | |||||||
| Canada | 1,255 | 1,537 | 1,958 | |||||||
| Corporate and Financial Services, including eliminations | 56,338 | 76,394 | 47,894 | |||||||
| Total | $ | 530,955 | $ | 619,224 | $ | 758,255 | ||||
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 2003 were as follows:
2003 | 2002 | 2001 | ||||||||
| Power | $ | 1,731,339 | $ | 1,647,135 | $ | 1,399,450 | ||||
| Oil and gas/refinery | 1,254,052 | 922,267 | 807,367 | |||||||
| Pharmaceutical | 300,507 | 404,825 | 485,786 | |||||||
| Chemical | 204,738 | 156,606 | 177,777 | |||||||
| Environmental | 124,724 | 353,981 | 337,248 | |||||||
| Power production | 167,594 | 130,843 | 150,990 | |||||||
| Eliminations and other | (59,139 | ) | (96,480 | ) | (43,304 | ) | ||||
| Total Operating Revenues | $ | 3,723,815 | $ | 3,519,177 | $ | 3,315,314 | ||||
| 23. | Related Party Transactions |
Mr. Kenneth A. Hiltz served as Chief Financial Officer of Foster Wheeler Ltd. from April 7, 2003 until January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to provide financial management and consulting services. Mr. Hiltz is also a principal with AlixPartners, LLC. Mr. Ryan J. Esko, an employee of AlixPartners, served as Treasurer of the Company from November 26, 2002 to January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to also provide financial management services to the Company. The Company paid AlixPartners, LLC approximately $743 for Mr. Hiltz’s services and $1,017 for Mr. Esko’s services during 2003 based upon the agreement terms. An additional $8,613 was paid to AlixPartners for financial management and consulting services.
174
FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 24. | Subsequent Events |
The Company entered into an agreement in the first quarter of 2004 to sell a domestic corporate office building for estimated net cash proceeds of $17,000, which approximates carrying value. The Company recorded an impairment loss of $15,100 on this building in the third quarter of 2003 in anticipation of a sale. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building is included in land, buildings, and equipment on the consolidated statement of financial position. The sale is expected to close in the second quarter of 2004. Under the terms of the Senior Credit Facility, 50% of the net proceeds of this transaction will be paid to the lenders.
| 25. | Valuation and Qualifying Accounts |
2003 | ||||||||||||||||
| Description | Balance at Beginning of Year | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance at the End of the Year | |||||||||||
| Allowance for Insurance Claims Receivable | $ | 37,877 | $ | 68,081 | $ | — | $ | 8,989 | $ | 96,969 | ||||||
| Allowance for Doubtful Accounts | $ | 73,048 | $ | 26,261 | $ | 1,457 | $ | 63,360 | $ | 37,406 | ||||||
2002 | ||||||||||||||||
| Description | Balance at Beginning of Year | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance at the End of the Year | |||||||||||
| Allowance for Insurance Claims Receivable | $ | 18,836 | $ | 26,200 | $ | — | $ | 7,159 | $ | 37,877 | ||||||
| Allowance for Doubtful Accounts(3) | $ | 2,988 | $ | 19,608 | $ | 56,451 | $ | 5,999 | $ | 73,048 | ||||||
2001 | ||||||||||||||||
| Description | Balance at Beginning of Year | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance at the End of the Year | |||||||||||
| Allowance for Insurance Claims Receivable | $ | 7,192 | $ | — | $ | 11,300 | (2) | $ | (344 | ) | $ | 18,836 | ||||
| Allowance for Doubtful Accounts(1) | $ | 3,379 | $ | 1,190 | $ | — | $ | 1,581 | $ | 2,988 | ||||||
| (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. |
| (3) | For 2002, provisions for non-payments of customer balances have been reclassified to the allowance for doubtful accounts to conform to the current period presentation. |
175
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 26, 2003
176
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), 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 Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 26, 2003 and December 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2003 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Company and 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 three years in the period ended December 26, 2003 and has a shareholders’ deficit of $872,400,000 at December 26, 2003. The Parent has substantial debt obligations and during 2003 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. 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 complete planned restructuring activities, 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 maintenance of credit facilities and bonding capacity adequate to conduct 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.
PRICEWATERHOUSE COOPERS LLP
Florham Park, New Jersey
March 10, 2004
177
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income/(Loss)
(in thousand of dollars)
FOR THE YEAR ENDED | ||||||||||
December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
(restated) (see Note 3) | (restated) (see Note 3) | |||||||||
| Revenues: | ||||||||||
| Operating revenues | $ | 2,082,018 | $ | 1,593,594 | $ | 1,439,218 | ||||
| Interest income (including $4,816 in 2003, $6,293 in 2002 and $6,362 in 2001 with affiliates) | 8,810 | 11,278 | 11,604 | |||||||
| Other income | 41,907 | 33,812 | 36,760 | |||||||
| Total Revenues | 2,132,735 | 1,638,684 | 1,487,582 | |||||||
| Costs and Expenses: | ||||||||||
| Cost of operating revenues | 1,994,210 | 1,561,074 | 1,378,153 | |||||||
| Selling, general and administrative expenses | 78,963 | 65,986 | 78,493 | |||||||
| Other deductions | 34,772 | 28,819 | 8,690 | |||||||
| Interest expense (including $4,135 in 2003, $5,985 in 2002 $6,239 in 2001 to affiliates) | 4,575 | 6,686 | 8,012 | |||||||
| Total Costs and Expenses | 2,112,520 | 1,662,565 | 1,473,348 | |||||||
| Earnings/(loss)before income taxes | 20,215 | (23,881 | ) | 14,234 | ||||||
| Provision for income taxes | 18,073 | 6,613 | 13,931 | |||||||
| Net earnings/(loss) | 2,142 | (30,494 | ) | 303 | ||||||
| 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 taxes of $399 in 2001) | — | — | 739 | |||||||
| Change in net loss on derivative instruments designated as | ||||||||||
| cash flow hedges (net of taxes of $279 in 2002 and ($678) in 2001) | — | 517 | (1,256 | ) | ||||||
| Change in accumulated translation adjustment during the year | (13,510 | ) | 24,224 | (9,185 | ) | |||||
| Minimum pension liability adjustment (net of tax provision/ | ||||||||||
| (benefit): of $18,886 in 2003 and ($73,400) in 2002) | 44,483 | (170,303 | ) | — | ||||||
| Comprehensive income/(loss) | $ | 33,115 | $ | (176,056 | ) | $ | (9,399 | ) | ||
See notes to consolidated financial statements.
178
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousand of dollars)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousand of dollars)
| December 26, 2003 | December 27, 2002 | ||||||
| (restated) (see Note 3) | |||||||
ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 178,050 | $ | 155,032 | |||
| Short-term investments | — | 41 | |||||
| Accounts and notes receivable: | |||||||
| Trade | 214,968 | 212,321 | |||||
| Other (including $18,658 in 2003 and $27,322 in 2002 with affiliates) | 45,259 | 45,904 | |||||
| Intercompany notes | 564 | 37,992 | |||||
| Contracts in process | 28,628 | 56,032 | |||||
| Inventories | 897 | 857 | |||||
| Prepaid, deferred and refundable income taxes | 30,033 | 37,946 | |||||
| Prepaid expenses | 7,466 | 7,839 | |||||
| Total current assets | 505,865 | 553,964 | |||||
| Land, buildings and equipment | 124,713 | 112,676 | |||||
| Less accumulated depreciation | 96,094 | 83,183 | |||||
| Net book value | 28,619 | 29,493 | |||||
| Restricted cash | 21,123 | 30,169 | |||||
| Notes and accounts receivable — long-term | 1,654 | 1,425 | |||||
| Intercompany notes receivable — long-term | 25,883 | 25,883 | |||||
| Investment and advances | 117,272 | 89,993 | |||||
| Other assets | 9,537 | 8,388 | |||||
| Deferred income taxes | 56,334 | 69,381 | |||||
| TOTAL ASSETS | $ | 766,287 | $ | 808,696 | |||
LIABILITIES AND SHAREHOLDER’S (DEFICIT) | |||||||
| Current Liabilities: | |||||||
| Current installments on long-term debt | $ | 440 | $ | 105 | |||
| Bank loans | — | 13,266 | |||||
| Accounts payable (including $49,439 in 2003 and $65,915 in 2002 with affiliates) | 182,792 | 175,848 | |||||
| Accrued expenses | 123,702 | 106,880 | |||||
| Intercompany notes payable | 9,891 | 19,179 | |||||
| Estimated costs to complete long-term contracts | 257,339 | 197,333 | |||||
| Advance payments by customers | 32,380 | 65,492 | |||||
| Income taxes | 26,174 | 35,004 | |||||
| Total current liabilities | 632,718 | 613,107 | |||||
| Long-term debt less current installments | 983 | 319 | |||||
| Intercompany notes payable — long-term | 129,283 | 134,372 | |||||
| Deferred income taxes | 5,438 | 6,638 | |||||
| Pension, postretirement and other employee benefits | 78,210 | 117,457 | |||||
| Other long-term liabilities and minority interest | 74,232 | 69,883 | |||||
| TOTAL LIABILITIES | 920,864 | 941,776 | |||||
| Shareholder’s (Deficit) | |||||||
| Common stock, no par value, 1,000 shares authorized, | |||||||
| 1 share issued and outstanding | 1 | 1 | |||||
| Capitalization of intercompany notes | (65,151 | ) | (10,539 | ) | |||
| Paid-in capital | 4,703 | 4,703 | |||||
| Retained earnings | 94,407 | 92,265 | |||||
| Accumulated other comprehensive loss | (188,537 | ) | (219,510 | ) | |||
| TOTAL SHAREHOLDER’S (DEFICIT) | (154,577 | ) | (133,080 | ) | |||
TOTAL LIABILITIES AND SHAREHOLDER’S | $ | 766,287 | $ | 808,696 | |||
See notes to consolidated financial statements.
179
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S (DEFICIT)/EQUITY
(in thousand of dollars)
December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
(restated) (see Note 3) | (restated) (see Note 3) | |||||||||
| Common Stock | ||||||||||
| Balance at beginning and end of year | $ | 1 | $ | 1 | $ | 1 | ||||
| Capitalization of Intercompany Notes | ||||||||||
| Balance at beginning of year | (10,539 | ) | 10,859 | (9,158 | ) | |||||
| Current year activity | (54,612 | ) | (21,398 | ) | 20,017 | |||||
| Balance at end of year | (65,151 | ) | (10,539 | ) | 10,859 | |||||
| Paid-in Capital | ||||||||||
| Balance at beginning and end of year | 4,703 | 4,703 | 4,703 | |||||||
| Retained Earnings | ||||||||||
| Balance at beginning of year | 92,265 | 123,345 | 178,042 | |||||||
| Net earnings/(loss) for the year | 2,142 | (30,494 | ) | 303 | ||||||
| Dividends paid | — | (586 | ) | (55,000 | ) | |||||
| Balance at end of year | 94,407 | 92,265 | 123,345 | |||||||
| Accumulated Other Comprehensive Loss | ||||||||||
| Balance at beginning of year | (219,510 | ) | (73,948 | ) | (64,246 | ) | ||||
| 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 $399 in 2001) | — | — | 739 | |||||||
| Change in net loss on derivative instruments designated as cash | ||||||||||
| flow hedges (net of taxes of $279 in 2002 and ($678) in 2001) | — | 517 | (1,256 | ) | ||||||
| Change in accumulated translation adjustment during the year | (13,510 | ) | 24,224 | (9,185 | ) | |||||
| Minimum pension liability Adjustment (net of tax provision/ | ||||||||||
| (benefit): $18,886 in 2003 and ($73,400) in 2002) | 44,483 | (170,303 | ) | — | ||||||
| Balance at end of year | (188,537 | ) | (219,510 | ) | (73,948 | ) | ||||
| Total Shareholder’ s (Deficit)/ Equity | $ | (154,577 | ) | $ | (133,080 | ) | $ | 64,960 | ||
See notes to consolidated financial statements.
180
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousand of dollars)
FOR THE YEAR ENDED | |||||||||||
December 26, 2003 | December 27, 2002 | December 28, 2001 | |||||||||
(restated) (see Note 3) | (restated) (see Note 3) | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net earnings/(loss) | $ | 2,142 | $ | (30,494 | ) | $ | 303 | ||||
| Adjustments to reconcile net earnings/(loss) | |||||||||||
| to cash flows from operating activities: | |||||||||||
| Depreciation and amortization | 9,294 | 9,404 | 10,136 | ||||||||
| Provision for losses on accounts receivable | 7,631 | 19,019 | 1,207 | ||||||||
| Deferred tax | 18,515 | 561 | 8,426 | ||||||||
| Net gain on asset sales | (28 | ) | (3,260 | ) | (10,841 | ) | |||||
| Equity earnings, net of dividends | (12,911 | ) | (9,443 | ) | (6,686 | ) | |||||
| Other noncash items | 5,166 | (10,773 | ) | 8,854 | |||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | 18,606 | 33,617 | 84,886 | ||||||||
| Contracts in process and inventories | 31,745 | 18,095 | 8,433 | ||||||||
| Accounts payable and accrued expenses | (3,935 | ) | 4,221 | (56,017 | ) | ||||||
| Estimated costs to complete long-term contracts | 45,233 | 42,326 | (18,057 | ) | |||||||
| Advance payments by customers | (36,905 | ) | 29,376 | 5,843 | |||||||
| Income taxes | (250 | ) | (2,794 | ) | 8,331 | ||||||
| Net cash provided by operating activities | 84,303 | 99,855 | 44,818 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Change in restricted cash | 11,214 | (30,169 | ) | — | |||||||
| Capital expenditures | (5,586 | ) | (6,716 | ) | (8,640 | ) | |||||
| Proceeds from sale of properties | 375 | 526 | 14,575 | ||||||||
| Decrease/(increase) in investments and advances | (1,391 | ) | (6,007 | ) | (10 | ) | |||||
| Decrease in short-term investments | 41 | 6,280 | 14,418 | ||||||||
| Net cash (used)/provided by investing activities | 4,653 | (36,086 | ) | 20,343 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Capitalization of intercompany notes | (54,611 | ) | (21,398 | ) | 20,017 | ||||||
| Dividends paid | — | (586 | ) | (55,000 | ) | ||||||
| Change in notes with affiliates | (7,115 | ) | 15,093 | (24,381 | ) | ||||||
| Payments of long-term debt | (5 | ) | (619 | ) | — | ||||||
| (Decrease)/increase bank loans | (13,739 | ) | (2,133 | ) | 2,473 | ||||||
| Net cash (used) by financing activities | (75,470 | ) | (9,643 | ) | (56,891 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 9,532 | 4,744 | (9,573 | ) | |||||||
| INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 23,018 | 58,870 | (1,303 | ) | |||||||
| Cash and cash equivalents at beginning of year | 155,032 | 96,162 | 97,465 | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 178,050 | $ | 155,032 | $ | 96,162 | |||||
| Cash paid during the year for: | |||||||||||
| Interest | $ | 2,119 | $ | 4,781 | $ | 7,843 | |||||
| Income taxes | $ | 12,851 | $ | 6,646 | $ | 12,498 | |||||
See notes to consolidated financial statements.
181
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousand 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, 3, 9,18 and 19.
| 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. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. may not, however, be able to continue as a going concern. 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 three-year period ended December 26, 2003, and has a shareholders’ deficit of $872,400. 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. As described in more detail below, Foster Wheeler Ltd. received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that Foster Wheeler Ltd. will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurances that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants.
Foster Wheeler Ltd.’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. Foster Wheeler Ltd.’s current cash flow forecasts indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2004.
As of December 26, 2003, Foster Wheeler Ltd. had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily from distributions from foreign subsidiaries. As of December 26, 2003, Foster
182
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
Wheeler Ltd. had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. Foster Wheeler Ltd. is sometimes required to cash collateralize bonding or certain bank facilities. The amount of Foster Wheeler Ltd.’s restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. Foster Wheeler Ltd.’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, Foster Wheeler Ltd. repatriated approximately $100,000 from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on Foster Wheeler Ltd.’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit Foster Wheeler Ltd.’s ability to continue as a going concern.
As part of its debt restructuring plan, Foster Wheeler Ltd. and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.
On February 5, 2004, Foster Wheeler Ltd. announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to Foster Wheeler Ltd. to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, Foster Wheeler Ltd. has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. Foster Wheeler Ltd. is offering a mix of equity as well as debt with longer maturities in exchange for these securities. Foster Wheeler Ltd. anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that Foster Wheeler Ltd. will complete the exchange offer on acceptable terms, or at all.
Failure by Foster Wheeler Ltd. to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.
In August 2002, Foster Wheeler Ltd. finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility, which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. Foster Wheeler Ltd. retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
183
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with these covenants throughout 2004.
Amendment No. 1 to the Senior Credit Facility, 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. As of December 26, 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
Amendment No. 2 to the Senior Credit Facility, 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 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, Foster Wheeler Ltd. agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if Foster Wheeler Ltd. has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. Foster Wheeler Ltd. expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in Foster Wheeler Ltd.’s liquidity forecast.
Holders of Foster Wheeler Ltd.’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 as of December 26, 2003) 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.
Foster Wheeler Ltd. finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to Foster Wheeler Ltd., for an initial non-cancelable period of 20 years.
In the third quarter of 2002, Foster Wheeler Ltd. entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of Foster Wheeler Ltd.’s domestic trade receivables. Under this agreement, Foster Wheeler Ltd. has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. The facility is subject to covenant compliance. The financial covenants commenced 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.
No borrowings were outstanding under this facility as of December 26, 2003 or December 27, 2002.
On January 26, 2004, subsidiaries in the UK entered into a two year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance
184
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of Foster Wheeler Ltd. debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 18, 2003, Foster Wheeler Ltd. received a formal notice from the New York Stock Exchange (“NYSE”) indicating that Foster Wheeler Ltd. was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. Following discussions with Foster Wheeler Ltd. in May 2003, the NYSE permitted Foster Wheeler Ltd.’s securities to continue to be listed subject to Foster Wheeler Ltd.’s return to compliance with the continued listing standard within 18 months of receipt of the notice and further subject to quarterly review by the NYSE. At that time, Foster Wheeler Ltd.’s ticker symbol was designated with the suffix “bc” indicating that it was below compliance with the NYSE listing standards. Following its most recent review, the NYSE determined to de-list Foster Wheeler Ltd. as of November 14, 2003 based on its inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. Foster Wheeler Ltd.’s common stock now trades on the Pink Sheets and its common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler Ltd. has relied on an exemption from this rule provided to NYSE-listed companies. Due to Foster Wheeler Ltd. being de-listed, this exemption is no longer available. To address this issue, Foster Wheeler Ltd. obtained the consent of the BMA to transfers between non-residents for so long as Foster Wheeler Ltd.’s shares continue to be quoted in the Pink Sheets or on the OTCBB. Foster Wheeler Ltd. believes that this consent will continue to be available.
| 3. | Sale of Investment in Foster Wheeler Energia S.A. |
In October 2003, the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, a wholly owned subsidiary of the Company, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the accompanying financial statements have been revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of financial position, results of operations and cash flows for all periods presented.
The following summarizes the financial position of Foster Wheeler Energia S.A. which has been excluded from the Company’s financial statements.
For the Years Ended December 31, | |||||||
2002 | 2001 | ||||||
| Assets | $ | 87,854 | $ | 91,820 | |||
| Liabilities | 42,957 | 61,818 | |||||
| Revenues | 45,873 | 66,454 | |||||
| Net (loss)/gain | (2,583 | ) | 5,409 | ||||
185
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | 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 Holdings, Inc. 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 2003, 2002 and 2001 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 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 26, 2003, December 27, 2002 and December 28, 2001, the Company has recorded commercial claims of $0, $0 and $50,200, 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 physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress towards completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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 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.
186
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | 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 $178,000 are maintained by foreign subsidiaries as of December 26, 2003. 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 $21,000 and $30,000 at December 26, 2003 and 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 2003, 2002 and 2001, 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 6. 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 $18,658 at December 26, 2003 and $27,322 at December 27, 2002, foreign refundable value-added tax, and accrued interest receivable.
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 cost method is appropriate due to lack of controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.
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.
187
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
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 $165,952 as of December 26, 2003. 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.
2003 | 2002 | 2001 | ||||||||
| Cumulative transition adjustment at beginning of year | $ | (49,257 | ) | $ | (73,277 | ) | $ | (64,426 | ) | |
| Current year foreign currency adjustment | (13,640 | ) | 24,020 | (8,851 | ) | |||||
| Cumulative transition adjustment at end of year | $ | (62,897 | ) | $ | (49,257 | ) | $ | (73,277 | ) | |
For the years 2003, 2002 and 2001 the Company recorded an after-tax net foreign currency transaction gain of $4,701, $1,918 and $3,294 respectively.
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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 26, 2003 an after-tax gain on derivative instruments of approximately $401 and for the year ended December 27, 2002, recorded an after-tax loss on derivative instruments of approximately $261.
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 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 2003, 2002, and 2001 consistent with the provisions of SFAS No. 123, the Company’s net earnings/(loss) would have been reduced to the pro forma amounts indicated below:
2003 | 2002 | 2001 | ||||||||
| Net earnings/(loss) — as reported | $ | 2,142 | $ | (30,494 | ) | $ | 303 | |||
| Deduct: Total stock-based employee compensation | ||||||||||
| expense determined under fair value based method | ||||||||||
| for awards net of taxes of $5 in 2003, $286 in 2002 and $144 in 2001 | 8 | 572 | 314 | |||||||
| Net earnings/(loss) — pro forma | $ | 2,134 | $ | (31,066 | ) | $ | (11 | ) | ||
188
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | 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:
2003 | 2002 | 2001 | ||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 1.36 | % | ||||
| Expected volatility | 88.23 | % | 83.62 | % | 79.20 | % | ||||
| Risk-free interest rate | 3.22 | % | 2.90 | % | 4.23 | % | ||||
| 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 regarding these option plans for the years 2003, 2002, and 2001 is as follows (presented in actual number of shares):
2003 | 2002 | 2001 | |||||||||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||||||
| Options outstanding, beginning of year | 1,379,228 | $ | 9.00 | 629,933 | $ | 17.64 | 490,433 | $ | 21.61 | ||||||||||
| Options exercised | — | — | (24,000 | ) | 9.56 | ||||||||||||||
| Options granted | 17,145 | 1.17 | 756,545 | 1.64 | 163,500 | 5.69 | |||||||||||||
| Options cancelled or expired | (13,750 | ) | 4.28 | (7,250 | ) | 10.86 | — | — | |||||||||||
| Options outstanding, end of year | 1,382,623 | $ | 8.96 | 1,379,228 | $ | 9.00 | 629,933 | $ | 17.86 | ||||||||||
| Option price range at end of year | $1.17 – $42.1875 | $1.64 – $42.1875 | $5.6875 – $42.1875 | ||||||||||||||||
| Option price range for exercised shares | $ | — | $ | — | $9.00 – $13.50 | ||||||||||||||
| Options available for grant at end of year | 506,846 | 445,069 | 430,180 | ||||||||||||||||
| Weighted-average fair value of | |||||||||||||||||||
| options granted during the year | $ | 0.79 | $ | 1.11 | $ | 2.80 | |||||||||||||
| Options exercisable at end of year | 815,282 | 622,683 | 466,433 | ||||||||||||||||
| Weighted-average exercise price of | |||||||||||||||||||
| exercisable options at end of year | $ | 13.79 | $ | 17.94 | $ | 22.13 | |||||||||||||
The following table summarizes information about fixed-price stock options outstanding as of December 26, 2003:
189
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
Options Outstanding | Options Exercisable | ||||||||||||||||
Range of Exercise Prices | Number Outstanding at 12/26/03 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable at 12/26/03 | Weighted- Average Exercise Price | ||||||||||||
| $ | 29.7500 | 61,100 | 2 years | $ | 29.75 | 61,100 | $ | 29.75 | |||||||||
| 42.1875 | 14,583 | 3 years | 42.19 | 14,583 | 42.19 | ||||||||||||
| 36.9375 | 62,000 | 4 years | 36.94 | 62,000 | 36.94 | ||||||||||||
| 27.6250 | 88,000 | 5 years | 27.63 | 88,000 | 27.63 | ||||||||||||
| 13.50 – 15.0625 | 181,750 | 6 years | 14.29 | 181,750 | 14.29 | ||||||||||||
| 9.0000 | 54,000 | 7 years | 9.00 | 54,000 | 9.00 | ||||||||||||
| 5.6875 | 157,500 | 8 years | 5.69 | 105,000 | 5.69 | ||||||||||||
| 1.6400 | 746,545 | 9 years | 1.64 | 248,849 | 1.64 | ||||||||||||
| 1.1700 | 17,145 | 10 years | 1.17 | — | — | ||||||||||||
| 1,382,623 | 815,282 | ||||||||||||||||
Recent Accounting Developments — 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:
| a. Product warranties | |
| 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. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
190
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and | |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. | |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
| 5. | Research and Development |
For the years 2003, 2002, and 2001, approximately $0, $500 and $1,800, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $3,500, $2,300 and $2,400, respectively, were spent on customer-sponsored research activities.
191
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 6. | Accounts and Notes Receivable — Trade |
The following table shows the components of trade accounts and notes receivable:
2003 | 2002 | |||||||
| From long-term contracts: | ||||||||
| Amounts billed due within one year | $ | 171,603 | $ | 150,487 | ||||
| Retention — Billed: | ||||||||
| Estimated to be due in: | ||||||||
| 2003 | — | 18,574 | ||||||
| 2004 | 2,868 | 5,702 | ||||||
| 2005 | 128 | — | ||||||
| 2006 | 656 | — | ||||||
| Total billed | 3,652 | 24,276 | ||||||
| Retention — Unbilled: | ||||||||
| Estimated to be due in: | ||||||||
| 2003 | — | 51,564 | ||||||
| 2004 | 51,731 | — | ||||||
| 2005 | 234 | — | ||||||
| 2006 | — | 4 | ||||||
| 2007 | 2,698 | — | ||||||
| Total unbilled | 54,663 | 51,568 | ||||||
| Total retentions | 58,315 | 75,844 | ||||||
| Total receivables from long-term contracts | 229,918 | 226,331 | ||||||
| Other trade accounts and notes receivable | 56 | 389 | ||||||
| Gross Trade Accounts and Notes Receivable | 229,974 | 226,720 | ||||||
| Less allowance for doubtful accounts | 15,006 | 14,399 | ||||||
| Net Trade Accounts and Notes Receivable | $ | 214,968 | $ | 212,321 | ||||
Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.
Changes in the allowance for doubtful accounts in 2003, 2002, and 2001 are presented below.
2003 | 2002 | 2001 | ||||||||
| Balance at beginning of year | $ | 14,399 | $ | 2,988 | $ | 3,347 | ||||
| Additions charged to expense | 7,631 | 19,019 | 1,207 | |||||||
| (Deductions)/amounts recovered | (7,024 | ) | (7,608 | ) | (1,566 | ) | ||||
| Balance at end of year | $ | 15,006 | $ | 14,399 | $ | 2,988 | ||||
192
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 7. | Contracts in Process and Inventories |
The following table shows the elements included in contract in process as related to long-term contracts:
2003 | 2002 | ||||||
| Contracts in Process | |||||||
| Costs plus accrued profits less earned revenues on contracts currently in process | $ | 32,501 | $ | 56,032 | |||
| Less progress payments | 3,873 | — | |||||
| Net | $ | 28,628 | $ | 56,032 | |||
Costs of inventories are shown below:
2003 | 2002 | ||||||
| Inventories | |||||||
| Materials and supplies | $ | — | $ | 634 | |||
| Finished goods | 897 | 223 | |||||
| $ | 897 | $ | 857 | ||||
| 8. | Land, Buildings and Equipment |
Land, buildings and equipment are stated at cost and are set forth below:
2003 | 2002 | ||||||
| Land and land improvements | $ | 32 | $ | 27 | |||
| Buildings | 22,791 | 20,384 | |||||
| Equipment | 101,890 | 92,216 | |||||
| Construction in progress | — | 49 | |||||
| $ | 124,713 | $ | 112,676 | ||||
Depreciation expense for the years 2003, 2002, and 2001 was $7,440, $9,257, and $10,082, respectively.
| 9. | 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.
2003 | 2002 | ||||||
| Balance Sheet Data: | |||||||
| Current assets | $ | 94,525 | $ | 79,569 | |||
| Other assets (primarily buildings and equipment) | 409,267 | 344,993 | |||||
| Current liabilities | 31,445 | 19,429 | |||||
| Other liabilities (primarily long-term debt) | 385,047 | 344,148 | |||||
| Net assets | $ | 87,300 | $ | 60,985 | |||
193
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 9. | Advances, Investments and Equity Interests — (Continued) |
2003 | 2002 | 2001 | ||||||||
| Total revenues | $ | 216,006 | $ | 168,421 | $ | 156,639 | ||||
| Gross earnings | 56,355 | 42,819 | 44,118 | |||||||
| Income before taxes | 38,062 | 31,013 | 21,290 | |||||||
| Net earnings | $ | 22,082 | $ | 17,303 | $ | 11,627 | ||||
As of December 26, 2003, the Company’s share of the net earnings and investment in the equity affiliates totaled $9,738 and $36,681, respectively. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $1,800 per year in total for the three projects.
The undistributed retained earnings of the Company’s equity investees amounted to approximately $28,500 and $17,000 at December 26, 2003 and December 27, 2002, respectively.
Additionally, at December 26, 2003 the Company holds investments in unconsolidated affiliates of $51,544 carried at cost since the Company does not hold a controlling financial interest. The Company has made advances of $29,046 to its third-party equity investees.
| 10. | Bank Loans |
The bank loan outstanding at the end of 2002 of $13,266 was paid off during 2003. The approximate weighted- average interest rate on borrowings during 2002 was 4.14%.
The Company had unused lines of credit for short-term bank borrowings of $1,860 at the end of 2003.
Interest costs on bank loans incurred in 2003, 2002, and 2001 were $440, $702 and $1,774, respectively.
| 11. | Income Taxes |
The components of earnings/(loss) before income taxes for the years 2003, 2002 and 2001 were taxed under the following jurisdictions:
2003 | 2002 | 2001 | ||||||||
| Domestic | $ | 17,954 | $ | 13,761 | $ | 7,212 | ||||
| Foreign | 2,261 | (37,642 | ) | 7,022 | ||||||
| Total | $ | 20,215 | $ | (23,881 | ) | $ | 14,234 | |||
The provision/(benefit) for income taxes on those earnings/(loss) was as follows:
| Current tax (benefit)/expense: | 2003 | 2002 | 2001 | |||||||
| Domestic | $ | 5,000 | $ | 1,646 | $ | 213 | ||||
| Foreign | 22,481 | 14,643 | 9,331 | |||||||
| Total current | 27,481 | 16,289 | 9,544 | |||||||
| Deferred tax (benefit)/expense: | ||||||||||
| Domestic | — | — | — | |||||||
| Foreign | (9,408 | ) | (9,676 | ) | 4,387 | |||||
| Total deferred | (9,408 | ) | (9,676 | ) | 4,387 | |||||
| Total provision for incomes taxes | $ | 18,073 | $ | 6,613 | $ | 13,931 | ||||
194
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 11. | Income Taxes — (Continued) |
Deferred tax assets (liabilities) consist of the following:
2003 | 2002 | 2001 | ||||||||
| Net operating loss carryforwards | $ | 31,794 | $ | 29,146 | $ | 27,177 | ||||
| Valuation allowance | (39,353 | ) | (36,324 | ) | (30,803 | ) | ||||
| Fixed assets and operating leases | 26,252 | 27,605 | 19,973 | |||||||
| Pension | 25,839 | 38,603 | (29,742 | ) | ||||||
| Other | 4,303 | 644 | 1,596 | |||||||
| Difference between book and tax recognition of income | (87 | ) | (580 | ) | (157 | ) | ||||
| Tax credit carryforwards | 1,354 | 5,097 | 535 | |||||||
| Contract and bonus reserve | 22,109 | 17,500 | 10,036 | |||||||
| Net deferred tax assets (liabilities) | $ | 72,211 | $ | 81,691 | $ | (1,385 | ) | |||
Tax credit carryforwards were generated in foreign subsidiaries. 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 $3,029 in 2003 and by $5,521 in 2002. Such increase is required under SFAS No.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 2013 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/(loss) before income taxes, as a result of the following:
2003 | 2002 | 2001 | ||||||||
| Tax provision/(benefit) at U.S. statutory rate | 35.0 | % | (35.0 | )% | 35.0 | % | ||||
| Permanent differences/non-deductible expenses | 32.7 | % | 126.3 | % | (2.7 | )% | ||||
| Alternative minimum tax | 18.6 | % | 5.1 | % | 1.5 | % | ||||
| Valuation allowance | 15.0 | % | 23.2 | % | 34.6 | % | ||||
| Foreign rate differential | 21.9 | % | (6.8 | )% | 27.7 | % | ||||
| Foreign tax credit utilized | (32.8 | )% | (89.9 | )% | 0.0 | % | ||||
| Other | (1.0 | )% | 4.8 | % | 1.8 | % | ||||
| 89.4 | % | 27.7 | % | 97.9 | % | |||||
| 12. | 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 26, 2003, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $200,109 pretax, resulting in a cumulative pretax charge to Other Comprehensive Income/(Loss). This represents a reduction in the minimum liability of $43,612 from the prior year, including the impact of foreign currency translation. At December 27, 2002, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $243,721 pretax, resulting in an after-tax charge to Other Comprehensive Income/(Loss) of $170,303. 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.
The following table contains the disclosures for pension benefits for the years 2003, 2002 and 2001.
195
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
Pension Benefits | ||||||||
2003 | 2002 | |||||||
| Projected Benefit Obligation (PBO) | ||||||||
| PBO at beginning of period | $ | 487,733 | $ | 352,316 | ||||
| Service cost | 13,071 | 12,374 | ||||||
| Interest cost | 27,799 | 20,502 | ||||||
| Plan participants contributions | 7,282 | 5,690 | ||||||
| Plan amendments | 1,961 | 3,091 | ||||||
| Actuarial loss | 157 | 73,212 | ||||||
| Benefits paid | (22,073 | ) | (16,810 | ) | ||||
| Special termination benefits/other | 993 | (1,291 | ) | |||||
| Foreign currency exchange rate changes | 52,193 | 38,649 | ||||||
| PBO at end of period | 569,116 | 487,733 | ||||||
| Plan Assets | ||||||||
| Fair value of plan assets at beginning of period | 310,276 | 324,106 | ||||||
| Actual return on plan assets | 51,712 | (45,489 | ) | |||||
| Employer contributions | 26,721 | 24,757 | ||||||
| Plan participant contributions | 7,282 | 5,690 | ||||||
| Benefits paid | (22,073 | ) | (16,810 | ) | ||||
| Other | 2,668 | (8,805 | ) | |||||
| Foreign currency exchange rate changes | 37,402 | 26,827 | ||||||
| Fair value of plan assets at end of period | 413,988 | 310,276 | ||||||
| Funded Status | ||||||||
| Funded Status | (155,128 | ) | (177,457 | ) | ||||
| Unrecognized net actuarial loss/(gain) | 265,933 | 286,824 | ||||||
| Unrecognized prior service cost | 9,893 | 11,305 | ||||||
| Unrecognized transition (asset) obligation | (162 | ) | — | |||||
| Adjustment for the minimum liability | (200,109 | ) | (243,721 | ) | ||||
| (Accrued) benefit cost | $ | (79,573 | ) | $ | (123,049 | ) | ||
196
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
| Pension Benefits | |||||||||||
2003 | 2002 | 2001 | |||||||||
| Net Periodic Benefit Cost | |||||||||||
| Service cost | $ | 13,071 | $ | 12,374 | $ | 11,248 | |||||
| Interest cost | 27,799 | 20,502 | 18,356 | ||||||||
| Expected return on plan assets | (24,479 | ) | (25,757 | ) | (31,311 | ) | |||||
| Amortization of transition asset | 71 | 63 | 64 | ||||||||
| Amortization of prior service cost | 1,460 | 1,352 | 1,029 | ||||||||
| Recognized actuarial loss/(gain) other | 20,311 | 8,340 | 2,243 | ||||||||
| Total SFAS No. 87 net periodic pension cost | $ | 38,233 | $ | 16,874 | $ | 1,629 | |||||
| Assumptions: | |||||||||||
2003 | 2002 | 2001 | |||||||||
| Periodic Benefit Cost | |||||||||||
| Discount rate | 5.60 | % | 5.75 | % | 5.75 | % | |||||
| Long-term rate of return | 7.50 | % | 8.00 | % | 9.00 | % | |||||
| Salary scale | 2.40 | % | 4.00 | % | 4.00 | % | |||||
| Benefit Obligations | 2003 | 2002 | ||||||
| Discount rate | 5.40 | % | 5.60 | % | ||||
| Salary rate | 3.00 | % | 3.30 | % | ||||
Plan measurement date — The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.
Accumulated benefit obligation —The accumulated benefit obligations (ABO) for the Company’s plans totaled approximately $500,000 and $444,000 at year end 2003 and 2002, respectively. As previously discussed, the Company recorded charges to other comprehensive income/(loss) in each of the years 2000 through 2003, due to ABO exceeding the fair value of plan assets.
Investment policy — Each of the Company’s plans is governed by a written investment policy.
The investment policy of the U.K. plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.
The investment policy of the Canadian plans uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.
Long-term rate of return assumptions — The expected long-term rate of return on plan assets is developed using weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted if required. The weighted-average expected long-term rate of return on plan assets has declined from 9.00% to 7.50% over the past three years.
197
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
| Plan Asset Allocations | 2003 | 2002 | |||||
| U.K. Plans | |||||||
| U.K. equities | 38 | % | 39 | % | |||
| Non-U.K. equities | 25 | % | 24 | % | |||
| U.K. fixed income securities | 32 | % | 34 | % | |||
| Non-U.K. fixed income securities | 0 | % | 0 | % | |||
| Other | 5 | % | 3 | % | |||
| Total | 100 | % | 100 | % | |||
| Canadian Plans | |||||||
| Canadian equities | 23 | % | 24 | % | |||
| Non-Canadian equities | 26 | % | 25 | % | |||
| Canadian fixed income securities | 44 | % | 45 | % | |||
| Non-Canadian fixed income securities | 0 | % | 0 | % | |||
| Other | 7 | % | 6 | % | |||
| Total | 100 | % | 100 | % | |||
Contributions — The Company expects to contribute approximately $26,664 to its pension plan in 2004.
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 2003, 2002 and 2001, the Company recorded an expense of approximately $3,700, $3,300 and $3,200, respectively. A liability of $25,176 in 2003 and $20,639 in 2002 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.
| 13. | 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 $3,622, $3,197 and $3,080 for the years ended 2003, 2002 and 2001, respectively. As of December 26, 2003 and December 27, 2002, the balance of the deferred gains was $74,151 and $69,540, 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.
| 14. | 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 $19,588 in 2003, $16,084 in 2002, and $16,481 in 2001. Future minimum rental commitments on non-cancelable leases are as follows:
| Fiscal year: | ||||
| 2004 | $ | 19,984 | ||
| 2005 | 18,648 | |||
| 2006 | 15,795 | |||
| 2007 | 13,766 | |||
| 2008 | 12,208 | |||
| Thereafter | 149,771 | |||
| $ | 230,172 | |||
198
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 15. | 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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 26, 2003 a pretax gain on derivative instruments of $617 and in the year ended December 27, 2002 a pretax loss of $402, which were recorded in the cost of operating revenues on the consolidated statement of operations and comprehensive income/(loss). 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 26, 2003, approximately $19,900 was owed to the Company by counterparties and approximately $7,800 was owed by the Company to counterparties. A $517 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.
The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.
| 16. | 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 | $ | 16,500 | ||
| Accruals | 12,300 | |||
| Settlements | (1,500 | ) | ||
| Adjustments to provisions | (4,000 | ) | ||
| Balance as of December 27, 2002 | $ | 23,300 | ||
| Accruals | 21,200 | |||
| Settlements | (1,900 | ) | ||
| Adjustments to provisions | (900 | ) | ||
| Balance as of December 26, 2003 | $ | 41,700 | ||
| 17. | 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 income/(loss).
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty.
| 18. | 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:
199
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 18. | Financial Instruments and Risk Management — (Continued) |
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.
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:
2003 | 2002 | ||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
| Nonderivatives: | |||||||||||||
| Cash and short-term investments | $ | 178,050 | $ | 178,050 | $ | 155,073 | $ | 155,073 | |||||
| Restricted cash | 21,123 | 21,123 | 30,169 | 30,169 | |||||||||
| Third-party long-term debt | 1,423 | 1,423 | 424 | 424 | |||||||||
| Intercompany notes receivable — current | 564 | — | 37,992 | — | |||||||||
| Intercompany notes receivable — long-term | 25,883 | — | 25,883 | — | |||||||||
| Intercompany notes payable — current | 7,488 | — | 18,944 | — | |||||||||
| Intercompany notes payable — long-term | 129,283 | — | 134,372 | — | |||||||||
| Derivatives: | |||||||||||||
| Foreign currency contracts | 215 | 215 | (402 | ) | (402 | ) | |||||||
In the ordinary course of business, the Company is contingently liable for performance under letters of credit, bank guarantees and surety bonds totaling $159,298 and $216,389 as of December 26, 2003 and December 27, 2002, 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 26, 2003, the Company had $27,724 of foreign currency contracts outstanding. These foreign currency contracts mature during 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 26, 2003 and December 27, 2002, the Company had no significant concentrations of credit risk.
| 19. | 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 income/(loss) for 2002, 2001 and 2000 related to these contracts and intercompany borrowings is the following:
200
FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousand of dollars)
| 19. | Related Party Transactions — (Continued) |
2003 | 2002 | 2001 | ||||||||
| Operating revenues | $ | 4,272 | $ | 8,882 | $ | 12,648 | ||||
| Cost of operating revenues | 10,757 | 29,926 | 53,604 | |||||||
| Interest income | 4,816 | 6,293 | 6,362 | |||||||
| Interest expense | 4,105 | 5,899 | 6,239 |
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 $18,886, $23,146 and $14,503 in 2003, 2002 and 2001, respectively.
Included in the consolidated balance sheet for 2003 and 2002 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:
2003 | 2002 | ||||||
| Accounts and notes receivable — other | $ | 18,658 | $ | 27,322 | |||
| Intercompany notes receivable | 26,447 | 63,875 | |||||
| Accounts payable | 49,439 | 65,915 | |||||
| Intercompany notes payable | 139,174 | 153,551 |
Intercompany notes payable includes $103,400 which bears interest at LIBOR plus .375% and $25,883 which bears interest at 2.0%.
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) 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 $65,151 and $10,539 at December 26, 2003 and December 27, 2002, respectively.
Additionally, at December 26, 2003 the Company held investments in unconsolidated affiliates of $51,544 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 26, 2003, December 27, 2002, and December 28, 2001.
| 20. | Security Pledged as Collateral |
Foster Wheeler LLC issued $200,000 Notes (“Senior Notes”) in the public market, which bear interest at a fixed rate of 6.75% and are due November 15, 2005. Holders of the Senior Notes have a security interest in the stock and debt of Foster Wheeler LLC’ s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 December 26, 2003) 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.
| 21. | Subsequent Events |
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional liquidity to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
201
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 26, 2003
202
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), of cash flows and of shareholder’s (deficit)/equity present fairly, in all material respects, the financial position of Foster Wheeler International Corporation and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 26, 2003 and December 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2003 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Company and 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 three years in the period ended December 26, 2003 and has a shareholders’ deficit of $872,400,000 at December 26, 2003. The Parent has substantial debt obligations and during 2003 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. 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 complete planned restructuring activities, 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 maintenance of credit facilities and bonding capacity adequate to conduct 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 10, 2004
203
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(in thousands of dollars)
| For the Year Ended | ||||||||||
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| (restated) (see Note 3) | (restated) (see Note 3) | |||||||||
Revenues: | ||||||||||
| Operating revenues | $ | 2,082,018 | $ | 1,593,594 | $ | 1,439,218 | ||||
| Interest income (including $4,816 in 2003, $6,293 in 2002 and $6,362 in 2001 with affiliates) | 8,810 | 11,278 | 11,604 | |||||||
| Other income | 41,907 | 33,812 | 36,760 | |||||||
| Total Revenues | 2,132,735 | 1,638,684 | 1,487,582 | |||||||
Costs and Expenses: | ||||||||||
| Cost of operating revenues | 1,994,210 | 1,561,074 | 1,378,153 | |||||||
| Selling, general and administrative expenses | 78,963 | 65,986 | 78,493 | |||||||
| Other deductions | 34,772 | 28,819 | 8,690 | |||||||
| Interest expense (including $4,105 in 2003, $5,899 in 2002 and $6,239 in 2001 with affiliates) | 4,545 | 6,600 | 8,012 | |||||||
| Total Costs and Expenses | 2,112,490 | 1,662,479 | 1,473,348 | |||||||
| Earnings/(loss) before income taxes | 20,245 | (23,795 | ) | 14,234 | ||||||
| Provision for income taxes | 18,073 | 6,613 | 13,931 | |||||||
| Net earnings/(loss) | 2,172 | (30,408 | ) | 303 | ||||||
| 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 $399 in 2001) | — | — | 739 | |||||||
| Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $279 in 2002 and $(678) in 2001) | — | 517 | (1,256 | ) | ||||||
| Change in accumulated translation adjustment during the year | (13,640 | ) | 24,020 | (8,851 | ) | |||||
| Minimum pension liability adjustment (net of tax provision/(benefit): $18,886 in 2003 and ($73,400) in 2002) | 44,483 | (170,303 | ) | — | ||||||
| Comprehensive income/(loss) | $ | 33,015 | $ | (176,174 | ) | $ | (9,065 | ) | ||
See notes to consolidated financial statements.
204
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
| December 26, 2003 | December 27, 2002 | ||||||
| (restated) (see Note 3) | |||||||
| ASSETS | |||||||
Current Assets: | |||||||
| Cash and cash equivalents | $ | 178,050 | $ | 155,032 | |||
| Short-term investments | — | 41 | |||||
| Accounts and notes receivable: | |||||||
| Trade | 214,968 | 212,321 | |||||
| Other (including $18,658 in 2003 and $27,322 in 2002 with affiliates) | 45,259 | 45,904 | |||||
| Intercompany notes | 564 | 37,992 | |||||
| Contracts in process | 28,628 | 56,032 | |||||
| Inventories | 897 | 857 | |||||
| Prepaid, deferred and refundable income taxes | 30,033 | 37,946 | |||||
| Prepaid expenses | 7,466 | 7,839 | |||||
| Total current assets | 505,865 | 553,964 | |||||
| Land, buildings and equipment | 124,713 | 112,676 | |||||
| Less accumulated depreciation | 96,094 | 83,183 | |||||
| Net book value | 28,619 | 29,493 | |||||
| Restricted cash | 21,123 | 30,169 | |||||
| Notes and accounts receivable — long-term | 1,654 | 1,425 | |||||
| Intercompany notes receivable — long-term | 25,883 | 25,883 | |||||
| Investment and advances | 117,272 | 93,002 | |||||
| Other assets | 9,537 | 8,387 | |||||
| Deferred income taxes | 56,334 | 69,381 | |||||
| TOTAL ASSETS | $ | 766,287 | $ | 811,704 | |||
| LIABILITIES AND SHAREHOLDER’S (DEFICIT) | |||||||
Current Liabilities: | |||||||
| Current installments on long-term debt | $ | 440 | $ | 105 | |||
| Bank loans | — | 13,266 | |||||
| Accounts payable (including $49,439 in 2003 and $63,915 in 2002 with affiliates) | 185,125 | 181,058 | |||||
| Accrued expenses | 123,702 | 106,880 | |||||
| Intercompany notes payable | 7,488 | 18,944 | |||||
| Estimated costs to complete long-term contracts | 257,339 | 197,333 | |||||
| Advance payments by customers | 32,380 | 65,492 | |||||
| Income taxes | 28,962 | 35,254 | |||||
| Total current liabilities | 635,436 | 618,332 | |||||
| Long-term debt less current installments | 983 | 319 | |||||
| Intercompany notes payable — long-term | 129,283 | 134,372 | |||||
| Deferred income taxes | 5,438 | 6,638 | |||||
| Pension, postretirement and other employee benefits | 78,210 | 117,457 | |||||
| Other long-term liabilities and minority interest | 74,231 | 69,883 | |||||
| Commitment and contingencies | — | — | |||||
| TOTAL LIABILITIES | 923,581 | 947,001 | |||||
Shareholder’s (Deficit) | |||||||
| Common stock, no par value, 1,000 shares authorized, 25 shares issued and outstanding | 20 | 20 | |||||
| Capitalization of intercompany notes | (65,151 | ) | (10,539 | ) | |||
| Paid-in capital | 2,351 | 2,351 | |||||
| Retained earnings | 94,023 | 92,251 | |||||
| Accumulated other comprehensive loss | (188,537 | ) | (219,380 | ) | |||
| TOTAL SHAREHOLDER’S (DEFICIT) | (157,294 | ) | (135,297 | ) | |||
TOTAL LIABILITIES AND SHAREHOLDER’S (DEFICIT) | $ | 766,287 | $ | 811,704 | |||
See notes to consolidated financial statements.
205
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of dollars)
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| (restated) (see Note 3) | (restated) (see Note 3) | |||||||||
Common Stock | ||||||||||
| Balance at beginning and end of year | $ | 20 | $ | 20 | $ | 20 | ||||
Capitalization of Intercompany Notes | ||||||||||
| Balance at beginning of year | (10,539 | ) | 10,859 | (9,158 | ) | |||||
| Current year activity | (54,612 | ) | (21,398 | ) | 20,017 | |||||
| Balance at end of year | (65,151 | ) | (10,539 | ) | 10,859 | |||||
Paid-in Capital | ||||||||||
| Balance at beginning and end of year | 2,351 | 2,351 | 2,351 | |||||||
Retained Earnings | ||||||||||
| Balance at beginning of year | 92,251 | 123,245 | 178,042 | |||||||
| Net earnings/(loss) for the year | 2,172 | (30,408 | ) | 303 | ||||||
| Dividends paid | (400 | ) | (586 | ) | (55,100 | ) | ||||
| Balance at end of year | 94,023 | 92,251 | 123,245 | |||||||
Accumulated Other Comprehensive Loss | ||||||||||
| Balance at beginning of year | (219,380 | ) | (73,614 | ) | (64,246 | ) | ||||
| 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 $399 in 2001) | — | — | 739 | |||||||
| Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $279 in 2002 and ($678) in 2001) | — | 517 | (1,256 | ) | ||||||
| Change in accumulated translation adjustment during the year | (13,640 | ) | 24,020 | (8,851 | ) | |||||
| Minimum pension liability adjustment (net of tax provision/(benefit): $18,886 in 2003 and ($73,400) in 2002) | 44,483 | (170,303 | ) | |||||||
| Balance at end of year | (188,537 | ) | (219,380 | ) | (73,614 | ) | ||||
Total Shareholder’s (Deficit)/Equity | $ | (157,294 | ) | $ | (135,297 | ) | $ | 62,861 | ||
See notes to consolidated financial statements.
206
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
| For the Year Ended | ||||||||||
| December 26, 2003 | December 27, 2002 | December 28, 2001 | ||||||||
| (restated) (see Note 3) | (restated) (see Note 3) | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net earnings/(loss) | $ | 2,172 | $ | (30,408 | ) | $ | 303 | |||
| Adjustments to reconcile net earnings/(loss) to cash flows from operating activities: | ||||||||||
| Depreciation and amortization | 9,294 | 9,404 | 10,136 | |||||||
| Provision for losses on accounts receivable | 7,631 | 19,019 | 1,207 | |||||||
| Deferred tax | 18,515 | 561 | 8,426 | |||||||
| Net gain on asset sales | (28 | ) | (3,260 | ) | (10,841 | ) | ||||
| Equity earnings, net of dividends | (12,911 | ) | (9,443 | ) | (6,686 | ) | ||||
| Other noncash items | 5,166 | (10,826 | ) | 8,854 | ||||||
| Changes in assets and liabilities: | ||||||||||
| Receivables | 18,606 | 33,617 | 84,886 | |||||||
| Contracts in process and inventories | 31,745 | 18,095 | 8,433 | |||||||
| Accounts payable and accrued expenses | (6,267 | ) | 4,221 | (56,017 | ) | |||||
| Estimated costs to complete long-term contracts | 45,233 | 42,326 | (18,057 | ) | ||||||
| Advance payments by customers | (36,905 | ) | 29,376 | 5,843 | ||||||
| Income taxes | 2,288 | (2,742 | ) | 8,331 | ||||||
| Net cash provided by operating activities | 84,539 | 99,940 | 44,818 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Change in restricted cash | 11,214 | (30,169 | ) | — | ||||||
| Capital expenditures | (5,586 | ) | (6,716 | ) | (8,640 | ) | ||||
| Proceeds from sale of properties | 375 | 526 | 14,575 | |||||||
| Decrease/(increase) in investments and advances | 940 | (6,007 | ) | (10 | ) | |||||
| Decrease in short-term investments | 41 | 6,280 | 14,418 | |||||||
| Net cash provided/(used) by investing activities | 6,984 | (36,086 | ) | 20,343 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Capitalization of intercompany notes | (54,611 | ) | (21,398 | ) | 20,017 | |||||
| Dividends paid | (400 | ) | (586 | ) | (55,100 | ) | ||||
| Change in notes with affiliates | (9,283 | ) | 15,008 | (24,281 | ) | |||||
| Payments of long-term debt | (5 | ) | (619 | ) | — | |||||
| (Decrease)/increase in bank loans | (13,739 | ) | (2,133 | ) | 2,473 | |||||
| Net cash (used) by financing activities | (78,038 | ) | (9,728 | ) | (56,891 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 9,533 | 4,744 | (9,573 | ) | ||||||
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 23,018 | 58,870 | (1,303 | ) | ||||||
| Cash and cash equivalents at beginning of year | 155,032 | 96,162 | 97,465 | |||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 178,050 | $ | 155,032 | $ | 96,162 | ||||
| Cash paid during the year for: | ||||||||||
| Interest | $ | 2,091 | $ | 4,871 | $ | 7,843 | ||||
| Income taxes | $ | 12,851 | $ | 6,646 | $ | 12,498 | ||||
See notes to consolidated financial statements.
207
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, 3, 9, 18 and 19.
| 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. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. may not, however, be able to continue as a going concern. 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 three-year period ended December 26, 2003, and has a shareholders’ deficit of $872,400. 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. As described in more detail below, Foster Wheeler Ltd. received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that Foster Wheeler Ltd. will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurances that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants.
Foster Wheeler Ltd.’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. Foster Wheeler Ltd.’s current cash flow forecasts indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2004.
As of December 26, 2003, Foster Wheeler Ltd. had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily from distributions from foreign subsidiaries. As of December 26, 2003, Foster Wheeler Ltd. had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. Foster Wheeler Ltd. is sometimes required to cash collateralize bonding or certain bank facilities. The amount of Foster Wheeler Ltd.’s restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
208
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. Foster Wheeler Ltd.’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, Foster Wheeler Ltd. repatriated approximately $100,000 from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on Foster Wheeler Ltd.’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit Foster Wheeler Ltd.’s ability to continue as a going concern.
As part of its debt restructuring plan, Foster Wheeler Ltd. and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.
On February 5, 2004, Foster Wheeler Ltd. announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to Foster Wheeler Ltd. to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, Foster Wheeler Ltd. has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. Foster Wheeler Ltd. is offering a mix of equity as well as debt with longer maturities in exchange for these securities. Foster Wheeler Ltd. anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that Foster Wheeler Ltd. will complete the exchange offer on acceptable terms, or at all.
Failure by Foster Wheeler Ltd. to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.
In August 2002, Foster Wheeler Ltd. finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility, which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. Foster Wheeler Ltd. retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
209
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with these covenants throughout 2004.
Amendment No. 1 to the Senior Credit Facility, 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. As of December 26, 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
Amendment No. 2 to the Senior Credit Facility, 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 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, Foster Wheeler Ltd. agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if Foster Wheeler Ltd. has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. Foster Wheeler Ltd. expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in Foster Wheeler Ltd.’s liquidity forecast.
Holders of Foster Wheeler Ltd.’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 as of December 26, 2003) 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.
Foster Wheeler Ltd. finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to Foster Wheeler Ltd., for an initial non-cancelable period of 20 years.
In the third quarter of 2002, Foster Wheeler Ltd. entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of Foster Wheeler Ltd.’s domestic trade receivables. Under this agreement, Foster Wheeler Ltd. has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. The facility is subject to covenant compliance. The financial covenants commenced 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.
No borrowings were outstanding under this facility as of December 26, 2003 or December 27, 2002.
On January 26, 2004, subsidiaries in the UK entered into a two year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
210
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of Foster Wheeler Ltd. debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 18, 2003, Foster Wheeler Ltd. received a formal notice from the New York Stock Exchange (“NYSE”) indicating that Foster Wheeler Ltd. was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. Following discussions with Foster Wheeler Ltd. in May 2003, the NYSE permitted Foster Wheeler Ltd.’s securities to continue to be listed subject to Foster Wheeler Ltd.’s return to compliance with the continued listing standard within 18 months of receipt of the notice and further subject to quarterly review by the NYSE. At that time, Foster Wheeler Ltd.’s ticker symbol was designated with the suffix “bc” indicating that it was below compliance with the NYSE listing standards. Following its most recent review, the NYSE determined to de-list Foster Wheeler Ltd. as of November 14, 2003 based on its inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. Foster Wheeler Ltd.’s common stock now trades on the Pink Sheets and its common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler Ltd. has relied on an exemption from this rule provided to NYSE-listed companies. Due to Foster Wheeler Ltd. being de-listed, this exemption is no longer available. To address this issue, Foster Wheeler Ltd. obtained the consent of the BMA to transfers between non-residents for so long as Foster Wheeler Ltd.’s shares continue to be quoted in the Pink Sheets or on the OTCBB. Foster Wheeler Ltd. believes that this consent will continue to be available.
| 3. | Sale of Investment in Foster Wheeler Energia S.A. |
In October 2003, the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, a wholly owned subsidiary of the Company, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the accompanying financial statements have been revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of financial position, results of operations and cash flows for all periods presented.
The following summarizes the financial position of Foster Wheeler Energia S.A. which has been excluded from the Company’s financial statements.
| For the Years Ended December 31, | |||||||
| 2002 | 2001 | ||||||
| Assets | $ | 87,854 | $ | 91,820 | |||
| Liabilities | 42,957 | 61,818 | |||||
| Revenues | 45,873 | 66,454 | |||||
| Net (loss)/gain | (2,583 | ) | 5,409 | ||||
211
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | 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 2003, 2002 and 2001 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 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 26, 2003, December 27, 2002 and December 28, 2001, the Company has recorded commercial claims of $0, $0 and $50,200, 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 physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress towards completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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 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.
212
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | 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 $178,000 are maintained by foreign subsidiaries as of December 26, 2003. 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 $21,000 and $30,000 at December 26, 2003 and 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 2003, 2002 and 2001, 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 6. 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 $18,658 at December 26, 2003 and $27,322 at December 27, 2002, foreign refundable value-added tax, and accrued interest receivable.
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 cost method is appropriate due to lack of controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.
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.
213
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
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 $165,952 as of December 26, 2003. 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.
| 2003 | 2002 | 2001 | ||||||||
| Cumulative translation adjustment at beginning of year | $ | (49,257 | ) | $ | (73,277 | ) | $ | (64,426 | ) | |
| Current year foreign currency adjustment | (13,640 | ) | 24,020 | (8,851 | ) | |||||
| Cumulative translation adjustment at end of year | $ | (62,897 | ) | $ | (49,257 | ) | $ | (73,277 | ) | |
For the years 2003, 2002 and 2001 the Company recorded an after-tax net foreign currency transaction gain of $4,701, $1,918 and $3,294 respectively.
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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 26, 2003 an after-tax gain on derivative instruments of approximately $401 and for the year ended December 27, 2002, recorded an after-tax loss on derivative instruments of approximately $261.
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 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 2003, 2002, and 2001 consistent with the provisions of SFAS No. 123, the Company’s net earnings/(loss) would have been reduced to the pro forma amounts indicated below:
| 2003 | 2002 | 2001 | ||||||||
| Net earnings/(loss) — as reported | $ | 2,172 | $ | (30,408 | ) | $ | 303 | |||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $5 in 2003, $286 in 2002 and $144 in 2001 | 8 | 572 | 314 | |||||||
| Net earnings/(loss) - pro forma | $ | 2,164 | $ | (30,980 | ) | $ | (11 | ) | ||
214
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | 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:
| 2003 | 2002 | 2001 | ||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 1.36 | % | ||||
| Expected volatility | 88.23 | % | 83.62 | % | 79.20 | % | ||||
| Risk-free interest rate | 3.22 | % | 2.90 | % | 4.23 | % | ||||
| 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 regarding these option plans for the years 2003, 2002, and 2001 is as follows (presented in actual number of shares):
| 2003 | 2002 | 2001 | |||||||||||||||||
| Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||||||
| Options outstanding, beginning of year | 1,379,228 | $ | 9.00 | 629,933 | $ | 17.64 | 490,433 | $ | 21.61 | ||||||||||
| Options exercised | — | — | (24,000 | ) | 9.56 | ||||||||||||||
| Options granted | 17,145 | 1.17 | 756,545 | 1.64 | 163,500 | 5.69 | |||||||||||||
| Options cancelled or expired | (13,750 | ) | 4.28 | (7,250 | ) | 10.86 | — | — | |||||||||||
| Options outstanding, end of year | 1,382,623 | $ | 8.96 | 1,379,228 | $ | 9.00 | 629,933 | $ | 17.86 | ||||||||||
| Option price range at end of year | $ | 1.17 – $42.1875 | $ | 1.64 – $42.1875 | $ | 5.6875 – $42.1875 | |||||||||||||
| Option price range for exercised shares | $ | — | $ | — | $9.00 – $13.50 | ||||||||||||||
| Options available for grant at end of year | 506,846 | 445,069 | 430,180 | ||||||||||||||||
| Weighted-average fair value of options granted during the year | $ | 0.79 | $ | 1.11 | $ | 2.80 | |||||||||||||
| Options exercisable at end of year | 815,282 | 622,683 | 466,433 | ||||||||||||||||
| Weighted-average exercise price of exercisable options at end of year | $ | 13.79 | $ | 17.94 | $ | 22.13 | |||||||||||||
215
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
The following table summarizes information about fixed-price stock options outstanding as of December 26, 2003:
| Options Outstanding | Options Exercisable | ||||||||||||
| Range of Exercise Prices | Number Outstanding at 12/26/03 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable at 12/26/03 | Weighted- Average Exercise Price | ||||||||
| $ 29.7500 | 61,100 | 2 years | $ | 29.75 | 61,100 | $ | 29.75 | ||||||
| 42.1875 | 14,583 | 3 years | 42.19 | 14,583 | 42.19 | ||||||||
| 36.9375 | 62,000 | 4 years | 36.94 | 62,000 | 36.94 | ||||||||
| 27.6250 | 88,000 | 5 years | 27.63 | 88,000 | 27.63 | ||||||||
| 13.50 – 15.0625 | 181,750 | 6 years | 14.29 | 181,750 | 14.29 | ||||||||
| 9.0000 | 54,000 | 7 years | 9.00 | 54,000 | 9.00 | ||||||||
| 5.6875 | 157,500 | 8 years | 5.69 | 105,000 | 5.69 | ||||||||
| 1.6400 | 746,545 | 9 years | 1.64 | 248,849 | 1.64 | ||||||||
| 1.1700 | 17,145 | 10 years | 1.17 | — | — | ||||||||
| 1,382,623 | 815,282 | ||||||||||||
Recent Accounting Developments — 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:
a. Product warranties
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. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
216
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
| 5. | Research and Development |
For the years 2003, 2002, and 2001, approximately $0, $500 and $1,800, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $3,500, $2,300 and $2,400, respectively, were spent on customer-sponsored research activities.
217
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 6. | Accounts and Notes Receivable — Trade |
The following table shows the components of trade accounts and notes receivable:
| December 26, 2003 | December 27, 2002 | ||||||
| Amounts billed due within one year | $ | 171,603 | $ | 150,487 | |||
| Retention — Billed: | |||||||
| Estimated to be due in: | |||||||
| 2003 | — | 18,574 | |||||
| 2004 | 2,868 | 5,702 | |||||
| 2005 | 128 | — | |||||
| 2006 | 656 | — | |||||
| Total billed | 3,652 | 24,276 | |||||
| Retention — Unbilled: | |||||||
| Estimated to be due in: | |||||||
| 2003 | — | 51,564 | |||||
| 2004 | 51,731 | — | |||||
| 2005 | 234 | — | |||||
| 2006 | — | 4 | |||||
| 2007 | 2,698 | — | |||||
| Total unbilled | 54,663 | 51,568 | |||||
| Total retentions | 58,315 | 75,844 | |||||
| Total receivables from long-term contracts | 229,918 | 226,331 | |||||
| Other trade accounts and notes receivable | 56 | 389 | |||||
| Gross Trade Accounts and Notes Receivable | 229,974 | 226,720 | |||||
| Less allowance for doubtful accounts | 15,006 | 14,399 | |||||
| Net Trade Accounts and Notes Receivable | $ | 214,968 | $ | 212,321 | |||
Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.
Changes in the allowance for doubtful accounts in 2003, 2002, and 2001 are presented below.
| 2003 | 2002 | 2001 | ||||||||
| Balance at beginning of year | $ | 14,399 | $ | 2,988 | $ | 3,347 | ||||
| Additions charged to expense | 7,631 | 19,019 | 1,207 | |||||||
| (Deductions)/amounts recovered | (7,024 | ) | (7,608 | ) | (1,566 | ) | ||||
Balance at end of year | $ | 15,006 | $ | 14,399 | $ | 2,988 | ||||
218
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 7. | Contracts in Process and Inventories |
The following table shows the elements included in contract in process as related to long-term contracts:
| 2003 | 2002 | ||||||
Contracts in Process | |||||||
| Costs plus accrued profits less earned revenues on contracts currently in process | $ | 32,501 | $ | 56,032 | |||
| Less progress payments | 3,873 | — | |||||
| Net | $ | 28,628 | $ | 56,032 | |||
Costs of inventories are shown below:
| 2003 | 2002 | ||||||
Inventories | |||||||
| Materials and supplies | $ | — | $ | 634 | |||
| Finished goods | 897 | 223 | |||||
| $ | 897 | $ | 857 | ||||
| 8. | Land, Buildings and Equipment |
Land, buildings and equipment are stated at cost and are set forth below:
| 2003 | 2002 | ||||||
| Land and land improvements | $ | 32 | $ | 27 | |||
| Buildings | 22,791 | 20,384 | |||||
| Equipment | 101,890 | 92,216 | |||||
| Construction in progress | — | 49 | |||||
| $ | 124,713 | $ | 112,676 | ||||
Depreciation expense for the years 2003, 2002, and 2001 was $7,440, $9,257, and $10,082, respectively.
| 9. | 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.
| 2003 | 2002 | ||||||
| Balance Sheet Data: | |||||||
| Current assets | $ | 94,525 | $ | 79,569 | |||
| Other assets (primarily buildings and equipment) | 409,267 | 344,993 | |||||
| Current liabilities | 31,445 | 19,429 | |||||
| Other liabilities (primarily long-term debt) | 385,047 | 344,148 | |||||
| Net assets | $ | 87,300 | $ | 60,985 | |||
219
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 9. | Advances, Investments and Equity Interests — (Continued) |
| For the year ended | 2003 | 2002 | 2001 | |||||||
| Total revenues | $ | 216,006 | $ | 168,421 | $ | 156,639 | ||||
| Gross earnings | 56,355 | 42,819 | 44,118 | |||||||
| Income before taxes | 38,062 | 31,013 | 21,290 | |||||||
| Net earnings | $ | 22,082 | $ | 17,303 | $ | 11,627 | ||||
As of December 26, 2003, the Company’s share of the net earnings and investment in the equity affiliates totaled $9,738 and $36,681, respectively. The Company has guaranteed certain performance obligations of such projects. The Company’s average contingent obligations under such guarantees are approximately $1,800 per year in total for the three projects.
The undistributed retained earnings of the Company’s equity investees amounted to approximately $28,500 and $17,000 at December 26, 2003 and December 27, 2002, respectively.
Additionally, at December 26, 2003 the Company holds investments in unconsolidated affiliates of $51,544 carried at cost since the Company does not hold a controlling financial interest. The Company has made advances of $29,046 to its third-party equity investees.
| 10. | Bank Loans |
The bank loan outstanding at the end of 2002 of $13,266 was paid off during 2003. The approximate weighted- average interest rate on borrowings during 2002 was 4.14%.
The Company had unused lines of credit for short-term bank borrowings of $1,860 at the end of 2003.
Interest costs on bank loans incurred in 2003, 2002, and 2001 were $440, $702 and $1,774, respectively.
| 11. | Income Taxes |
The components of earnings/(loss) before income taxes for the years 2003, 2002 and 2001 were taxed under the following jurisdictions:
| 2003 | 2002 | 2001 | ||||||||
| Domestic | $ | 17,984 | $ | 13,847 | $ | 7,212 | ||||
| Foreign | 2,261 | (37,642 | ) | 7,022 | ||||||
| Total | $ | 20,245 | $ | (23,795 | ) | $ | 14,234 | |||
The provision/(benefit) for income taxes on those earnings/(loss) was as follows:
| 2003 | 2002 | 2001 | ||||||||
| Current tax (benefit)/expense: | ||||||||||
| Domestic | $ | 5,000 | $ | 1,646 | $ | 213 | ||||
| Foreign | 22,481 | 14,643 | 9,331 | |||||||
| Total current | 27,481 | 16,289 | 9,544 | |||||||
| Deferred tax (benefit)/expense: | ||||||||||
| Domestic | — | — | — | |||||||
| Foreign | (9,408 | ) | (9,676 | ) | 4,387 | |||||
| Total deferred | (9,408 | ) | (9,676 | ) | 4,387 | |||||
| Total provision for incomes taxes | $ | 18,073 | $ | 6,613 | $ | 13,931 | ||||
220
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 11. | Income Taxes — (Continued) |
Deferred tax assets (liabilities) consist of the following:
| 2003 | 2002 | 2001 | ||||||||
| Net operating loss carryforwards | $ | 31,794 | $ | 29,146 | $ | 27,177 | ||||
| Valuation allowance | (39,353 | ) | (36,324 | ) | (30,803 | ) | ||||
| Fixed assets and operating leases | 26,252 | 27,605 | 19,973 | |||||||
| Pension | 25,839 | 38,603 | (29,742 | ) | ||||||
| Other | 4,303 | 644 | 1,596 | |||||||
| Difference between book and tax recognition of income | (87 | ) | (580 | ) | (157 | ) | ||||
| Tax credit carryforwards | 1,354 | 5,097 | 535 | |||||||
| Contract and bonus reserve | 22,109 | 17,500 | 10,036 | |||||||
| Net deferred tax assets (liabilities) | $ | 72,211 | $ | 81,691 | $ | (1,385 | ) | |||
Tax credit carryforwards were generated in foreign subsidiaries. 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 $3,029 in 2003 and by $5,521 in 2002. Such increase is required under SFAS No.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 2013 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/(loss) before income taxes, as a result of the following:
| 2003 | 2002 | 2001 | ||||||||
| Tax provision/(benefit) at U.S. statutory rate | 35.0 | % | (35.0 | )% | 35.0 | % | ||||
| Permanent differences/non-deductible expenses | 32.6 | % | 126.4 | % | (2.7 | )% | ||||
| Alternative minimum tax | 18.6 | % | 5.1 | % | 1.5 | % | ||||
| Valuation allowance | 15.0 | % | 23.2 | % | 34.6 | % | ||||
| Foreign rate differential | 21.9 | % | (6.8 | )% | 27.7 | % | ||||
| Foreign tax credit utilized | (32.8 | )% | (89.9 | )% | 0.0 | % | ||||
| Other | (1.0 | )% | 4.8 | % | 1.8 | % | ||||
| 89.3 | % | 27.8 | % | 97.9 | % | |||||
| 12. | 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 26, 2003, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $200,109 pretax, resulting in a cumulative pretax charge to Other Comprehensive Income/(Loss). This represents a reduction in the minimum liability of $43,612 from the prior year, including the impact of foreign currency translation. At December 27, 2002, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $243,721 pretax, resulting in an after-tax charge to Other Comprehensive Income/(Loss) of $170,303. 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.
The following table contains the disclosures for pension benefits for the years 2003, 2002 and 2001.
221
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
| Pension Benefits | |||||||
| 2003 | 2002 | ||||||
Projected Benefit Obligation (PBO) | |||||||
| PBO at beginning of period | $ | 487,733 | $ | 352,316 | |||
| Service cost | 13,071 | 12,374 | |||||
| Interest cost | 27,799 | 20,502 | |||||
| Plan participants contributions | 7,282 | 5,690 | |||||
| Plan amendments | 1,961 | 3,091 | |||||
| Actuarial loss | 157 | 73,212 | |||||
| Benefits paid | (22,073 | ) | (16,810 | ) | |||
| Special termination benefits/other | 993 | (1,291 | ) | ||||
| Foreign currency exchange rate changes | 52,193 | 38,649 | |||||
| PBO at end of period | 569,116 | 487,733 | |||||
Plan Assets | |||||||
| Fair value of plan assets at beginning of period | 310,276 | 324,106 | |||||
| Actual return on plan assets | 51,712 | (45,489 | ) | ||||
| Employer contributions | 26,721 | 24,757 | |||||
| Plan participant contributions | 7,282 | 5,690 | |||||
| Benefits paid | (22,073 | ) | (16,810 | ) | |||
| Other | 2,668 | (8,805 | ) | ||||
| Foreign currency exchange rate changes | 37,402 | 26,827 | |||||
| Fair value of plan assets at end of period | 413,988 | 310,276 | |||||
Funded Status | |||||||
| Funded Status | (155,128 | ) | (177,457 | ) | |||
| Unrecognized net actuarial loss/(gain) | 265,933 | 286,824 | |||||
| Unrecognized prior service cost | 9,893 | 11,305 | |||||
| Unrecognized transition (asset) obligation | (162 | ) | — | ||||
| Adjustment for the minimum liability | (200,109 | ) | (243,721 | ) | |||
| (Accrued) benefit cost | $ | (79,573 | ) | $ | (123,049 | ) | |
222
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
| Pension Benefits | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
Net Periodic Benefit Cost | ||||||||||
| Service cost | $ | 13,071 | $ | 12,374 | $ | 11,248 | ||||
| Interest cost | 27,799 | 20,502 | 18,356 | |||||||
| Expected return on plan assets | (24,479 | ) | (25,757 | ) | (31,311 | ) | ||||
| Amortization of transition asset | 71 | 63 | 64 | |||||||
| Amortization of prior service cost | 1,460 | 1,352 | 1,029 | |||||||
| Recognized actuarial loss/(gain) other | 20,311 | 8,340 | 2,243 | |||||||
| Total SFAS No. 87 net periodic pension cost | $ | 38,233 | $ | 16,874 | $ | 1,629 | ||||
| Assumptions: | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
Periodic Benefit Cost | ||||||||||
| Discount rate | 5.60 | % | 5.75 | % | 5.75 | % | ||||
| Long-term rate of return | 7.50 | % | 8.00 | % | 9.00 | % | ||||
| Salary scale | 2.40 | % | 4.00 | % | 4.00 | % | ||||
Benefit Obligations | 2003 | 2002 | ||||||||
| Discount rate | 5.40 | % | 5.60 | % | ||||||
| Salary rate | 3.00 | % | 3.30 | % |
Plan measurement date — The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.
Accumulated benefit obligation — The accumulated benefit obligations (ABO) for the Company’s plans totaled approximately $500,000 and $444,000 at year end 2003 and 2002, respectively. As previously discussed, the Company recorded charges to other comprehensive income/(loss) in each of the years 2000 through 2003, due to ABO exceeding the fair value of plan assets.
Investment policy — Each of the Company’s plans is governed by a written investment policy.
The investment policy of the U.K. plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.
The investment policy of the Canadian plans uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.
Long-term rate of return assumptions — The expected long-term rate of return on plan assets is developed using weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted if required. The weighted-average expected long-term rate of return on plan assets has declined from 9.00% to 7.50% over the past three years.
223
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 12. | Pensions, Postretirement and Other Employee Benefits — (Continued) |
| Plan Asset Allocations | 2003 | 2002 | |||||
| U.K. Plans | |||||||
| U.K. equities | 38 | % | 39 | % | |||
| Non-U.K. equities | 25 | % | 24 | % | |||
| U.K. fixed income securities | 32 | % | 34 | % | |||
| Non-U.K. fixed income securities | 0 | % | 0 | % | |||
| Other | 5 | % | 3 | % | |||
| Total | 100 | % | 100 | % | |||
| Canadian Plans | |||||||
| Canadian equities | 23 | % | 24 | % | |||
| Non-Canadian equities | 26 | % | 25 | % | |||
| Canadian fixed income securities | 44 | % | 45 | % | |||
| Non-Canadian fixed income securities | 0 | % | 0 | % | |||
| Other | 7 | % | 6 | % | |||
| Total | 100 | % | 100 | % | |||
Contributions — The Company expects to contribute approximately $26,664 to its pension plan in 2004.
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 2003, 2002 and 2001, the Company recorded an expense of approximately $3,700, $3,300 and $3,200, respectively. A liability of $25,176 in 2003 and $20,639 in 2002 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.
| 13. | 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 $3,622, $3,197 and $3,080 for the years ended 2003, 2002 and 2001, respectively. As of December 26, 2003 and December 27, 2002, the balance of the deferred gains was $74,151 and $69,540, 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.
| 14. | 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 $19,588 in 2003, $16,084 in 2002, and $16,481 in 2001. Future minimum rental commitments on non-cancelable leases are as follows:
| Fiscal year: | ||||
| 2004 | 19,984 | |||
| 2005 | 18,648 | |||
| 2006 | 15,795 | |||
| 2007 | 13,766 | |||
| 2008 | 12,208 | |||
| Thereafter | 149,771 | |||
| $ | 230,172 | |||
224
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 15. | 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 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 26, 2003 a pretax gain on derivative instruments of $617 and in the year ended December 27, 2002 a pretax loss of $402, which were recorded in the cost of operating revenues on the consolidated statement of operations and comprehensive income/(loss). 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 26, 2003, approximately $19,900 was owed to the Company by counterparties and approximately $7,800 was owed by the Company to counterparties. A $517 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.
The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.
| 16. | 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 | $ | 16,500 | ||
| Accruals | 12,300 | |||
| Settlements | (1,500 | ) | ||
| Adjustments to provisions | (4,000 | ) | ||
Balance as of December 27, 2002 | $ | 23,300 | ||
| Accruals | 21,200 | |||
| Settlements | (1,900 | ) | ||
| Adjustments to provisions | (900 | ) | ||
Balance as of December 26, 2003 | $ | 41,700 | ||
| 17. | 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 income/(loss).
The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty.
| 18. | 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.
225
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 18. | Financial Instruments and Risk Management — (Continued) |
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.
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:
| 2003 | 2002 | ||||||||||||
| Carrying | Carrying | ||||||||||||
| Amount | Fair Value | Amount | Fair Value | ||||||||||
| Nonderivatives: | |||||||||||||
| Cash and short-term investments | $ | 178,050 | $ | 178,050 | $ | 155,073 | $ | 155,073 | |||||
| Restricted cash | 21,123 | 21,123 | 30,169 | 30,169 | |||||||||
| Third-party long-term debt | 1,423 | 1,423 | 424 | 424 | |||||||||
| Intercompany notes receivable — current | 564 | — | 37,992 | — | |||||||||
| Intercompany notes receivable — long-term | 25,883 | — | 25,883 | — | |||||||||
| Intercompany notes payable — current | 7,488 | — | 18,944 | — | |||||||||
| Intercompany notes payable — long-term | 129,283 | — | 134,372 | — | |||||||||
| Derivatives: | |||||||||||||
| Foreign currency contracts | 215 | 215 | (402 | ) | (402 | ) | |||||||
In the ordinary course of business, the Company is contingently liable for performance under letters of credit, bank guarantees and surety bonds totaling $159,298 and $216,389 as of December 26, 2003 and December 27, 2002, 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 26, 2003, the Company had $27,724 of foreign currency contracts outstanding. These foreign currency contracts mature during 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 26, 2003 and December 27, 2002, the Company had no significant concentrations of credit risk.
226
FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 19. | 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 income/(loss) for 2002, 2001 and 2000 related to these contracts and intercompany borrowings is the following:
| 2003 | 2002 | 2001 | ||||||||
| Operating revenues | $ | 4,272 | $ | 8,882 | $ | 12,648 | ||||
| Cost of operating revenues | 10,757 | 29,926 | 53,604 | |||||||
| Interest income | 4,816 | 6,293 | 6,362 | |||||||
| Interest expense | 4,105 | 5,899 | 6,239 | |||||||
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 $18,886, $23,146 and $14,503 in 2003, 2002 and 2001, respectively.
Included in the consolidated balance sheet for 2003 and 2002 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:
| 2003 | 2002 | ||||||
| Accounts and notes receivable — other | $ | 18,658 | $ | 27,322 | |||
| Intercompany notes receivable | 26,447 | 63,875 | |||||
| Accounts payable | 49,439 | 63,915 | |||||
| Intercompany notes payable | 136,771 | 153,316 | |||||
Intercompany notes payable includes $103,400 which bears interest at LIBOR plus .375% and $25,883 which bears interest at 2.0%.
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) 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 $65,151 and $10,539 at December 26, 2003 and December 27, 2002, respectively.
Additionally, at December 26, 2003 the Company held investments in unconsolidated affiliates of $51,544 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 26, 2003, December 27, 2002, and December 28, 2001.
| 20. | Security Pledged as Collateral |
Foster Wheeler LLC issued $200,000 Notes (“Senior Notes”) in the public market, which bear interest at a fixed rate of 6.75% and are due November 15, 2005. Holders of the Senior Notes have a security interest in the stock and debt of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 December 26, 2003) 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.
| 21. | Subsequent Events |
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional liquidity to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
227
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003
228
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), of cash flows and of shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler Europe Limited and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 26, 2003 and December 27, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2003 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 Company and 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 three years in the period ended December 26, 2003 and has a shareholders’ deficit of $872,400,000 at December 26, 2003. The Parent has substantial debt obligations and during 2003 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. 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 complete planned restructuring activities, 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 maintenance of credit facilities and bonding capacity adequate to conduct 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 10, 2004
229
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(in thousands of dollars)
For the Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
(restated) (see Note 3) | (restated) (see Note 3) | |||||||||
| Revenues: | ||||||||||
| Operating revenues | $ | 1,967,266 | $ | 1,379,167 | $ | 1,159,193 | ||||
| Interest income (including $3,516 in 2003, $7,079 in 2002 and $6,370 in 2001 with affiliates) | 7,251 | 11,674 | 10,744 | |||||||
| Other income | 30,410 | 23,661 | 24,920 | |||||||
| Total Revenues | 2,004,927 | 1,414,502 | 1,194,857 | |||||||
| Costs and Expenses: | ||||||||||
| Cost of operating revenues | 1,878,319 | 1,358,105 | 1,101,557 | |||||||
| Selling, general and administrative expenses | 72,080 | 59,494 | 57,240 | |||||||
| Other deductions | 22,194 | 20,567 | 2,495 | |||||||
| Minority interest | 405 | — | (19 | ) | ||||||
| Interest expense (including $23,336 in 2003, $22,558 in 2002 and $24,951 in 2001 with affiliates) | 23,758 | 23,248 | 26,405 | |||||||
| Total Costs and Expenses | 1,996,756 | 1,461,414 | 1,187,678 | |||||||
| Earnings/(loss) before income taxes | 8,171 | (46,912 | ) | 7,179 | ||||||
| Provision/(benefit) for income taxes | 13,796 | (3,839 | ) | 14,109 | ||||||
| Net (loss) | (5,625 | ) | (43,073 | ) | (6,930 | ) | ||||
| 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 $360) | — | — | 667 | |||||||
| Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $298 in 2002 and $(658) in 2001) | — | 553 | (1,220 | ) | ||||||
| Change in accumulated translation adjustment during the year | (14,824 | ) | 36,462 | (9,372 | ) | |||||
| Minimum pension liability adjustment (net of tax provision/ (benefits): $18,763 in 2003 and $(71,305) in 2002) | 44,058 | (166,380 | ) | |||||||
| Comprehensive income/(loss) | $ | 23,609 | $ | (172,438 | ) | $ | (16,855 | ) | ||
See notes to consolidated financial statements.
230
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
December 31, | |||||||
2003 | 2002 | ||||||
(restated) (see Note 3) | |||||||
ASSETS | |||||||
Current Assets: | |||||||
| Cash and cash equivalents | $ | 169,321 | $ | 129,008 | |||
| Short-term investments | — | 41 | |||||
| Accounts and notes receivable: | |||||||
| Trade | 183,041 | 180,516 | |||||
| Other (including $17,681 in 2003 and $22,186 in 2002 with affiliates) | 36,542 | 34,904 | |||||
| Intercompany notes | 5,486 | 42,141 | |||||
| Contracts in process | 25,500 | 52,437 | |||||
| Inventories | 897 | 857 | |||||
| Prepaid, deferred and refundable income taxes | 30,034 | 36,528 | |||||
| Prepaid expenses | 6,354 | 6,741 | |||||
| Total current assets | 457,175 | 483,173 | |||||
| Land, buildings and equipment | 114,225 | 103,748 | |||||
| Less accumulated depreciation | 88,793 | 77,207 | |||||
| Net book value | 25,432 | 26,541 | |||||
| Restricted cash | 20,747 | 30,169 | |||||
| Notes and accounts receivable — long-term | 1,654 | 1,425 | |||||
| Investment and advances | 116,408 | 92,082 | |||||
| Other assets | 9,495 | 8,347 | |||||
| Deferred income taxes | 53,995 | 66,799 | |||||
TOTAL ASSETS | $ | 684,906 | $ | 708,536 | |||
LIABILITIES AND SHAREHOLDER’S DEFICIT | |||||||
Current Liabilities: | |||||||
| Current installments on long-term debt | $ | 440 | $ | 105 | |||
| Bank loans | — | 13,266 | |||||
| Accounts payable (including $50,920 in 2003 and $65,270 in 2002 with affiliates) | 172,551 | 168,807 | |||||
| Accrued expenses | 104,397 | 104,562 | |||||
| Intercompany notes payable | 3,903 | 13,606 | |||||
| Estimated costs to complete long-term contracts | 238,196 | 171,265 | |||||
| Advance payments by customers | 28,556 | 51,544 | |||||
| Income taxes | 17,339 | 26,817 | |||||
| Total current liabilities | 565,382 | 549,972 | |||||
| Long-term debt less current installments | 983 | 319 | |||||
| Intercompany notes payable — long-term | 306,871 | 309,795 | |||||
| Deferred income taxes | 5,277 | 5,281 | |||||
| Pension, postretirement and other employee benefits | 75,569 | 115,309 | |||||
| Other long-term liabilities and minority interest | 74,231 | 69,884 | |||||
| Commitments and contingencies | — | — | |||||
TOTAL LIABILITIES | 1,028,313 | 1,050,560 | |||||
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 | (66,251 | ) | (41,259 | ) | |||
| Accumulated deficit | (117,287 | ) | (111,662 | ) | |||
| Accumulated other comprehensive loss | (167,149 | ) | (196,383 | ) | |||
TOTAL SHAREHOLDER’S DEFICIT | (343,407 | ) | (342,024 | ) | |||
TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT | $ | 684,906 | $ | 708,536 | |||
See notes to consolidated financial statements.
231
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S DEFICIT
(in thousands of dollars)
December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| (restated) (see Note 3) | (restated) (see Note 3) | |||||||||
| 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 | (41,259 | ) | (50,829 | ) | (10,081 | ) | ||||
| Current year activity | (24,992 | ) | 9,570 | (40,748 | ) | |||||
| Balance at end of year | (66,251 | ) | (41,259 | ) | (50,829 | ) | ||||
| Accumulated Deficit | ||||||||||
| Balance at beginning of year | (111,662 | ) | (68,589 | ) | (61,659 | ) | ||||
| Net loss for the year | (5,625 | ) | (43,073 | ) | (6,930 | ) | ||||
| Balance at end of year | (117,287 | ) | (111,662 | ) | (68,589 | ) | ||||
| Accumulated Other Comprehensive Loss | ||||||||||
| Balance at beginning of year | (196,383 | ) | (67,018 | ) | (57,093 | ) | ||||
| 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 $360 in 2001) | — | 667 | ||||||||
| Change in net gain on derivative instruments designated as cash flow hedges (net of taxes of $298 in 2002 and $(658) in 2001) | 553 | (1,220 | ) | |||||||
| Change in accumulated translation adjustment during the year | (14,824 | ) | 36,462 | (9,372 | ) | |||||
| Minimum pension liability adjustment (net of tax provision/ (benefit): $18,763 in 2003 and $(71,305) in 2002) | 44,058 | (166,380 | ) | |||||||
| Balance at end of year | (167,149 | ) | (196,383 | ) | (67,018 | ) | ||||
| Total Shareholder’s Deficit | $ | (343,407 | ) | $ | (342,024 | ) | $ | (179,156 | ) | |
See notes to consolidated financial statements.
232
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
| For the Year Ended December 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||
| (restated) (see Note 3) | (restated) (see Note 3) | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net loss | $ | (5,625 | ) | $ | (43,073 | ) | $ | (6,930 | ) | |
| Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||||
| Depreciation and amortization | 8,276 | 8,273 | 8,929 | |||||||
| Provision for losses on accounts receivable | 9,149 | 9,063 | 153 | |||||||
| Deferred tax | 19,177 | (827 | ) | 3,426 | ||||||
| Net gain on asset sales | (28 | ) | (3,260 | ) | (10,803 | ) | ||||
| Equity earnings, net of dividends | (9,738 | ) | (9,424 | ) | (6,475 | ) | ||||
| Other noncash items | 494 | 9,435 | (7,060 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||
| Receivables | 11,086 | 37,793 | 59,493 | |||||||
| Contracts in process and inventories | 30,293 | 7,204 | 8,795 | |||||||
| Accounts payable and accrued expenses | (20,363 | ) | 23,750 | (14,543 | ) | |||||
| Estimated costs to complete long-term contracts | 54,190 | 49,025 | (11,491 | ) | ||||||
| Advance payments by customers | (24,906 | ) | 31,585 | (16,290 | ) | |||||
| Income taxes | (2,555 | ) | (7,778 | ) | 415 | |||||
| Other assets and liabilities | 2,409 | (12,348 | ) | (4,648 | ) | |||||
| Net cash provided by operating activities | 71,859 | 99,418 | 2,971 | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Change in restricted cash | 11,481 | (30,169 | ) | — | ||||||
| Capital expenditures | (4,639 | ) | (6,585 | ) | (7,305 | ) | ||||
| Proceeds from sale of assets | 263 | 501 | 14,555 | |||||||
| Decrease in investments and advances | 885 | — | — | |||||||
| Decrease short-term investments | 40 | 6,279 | 14,418 | |||||||
| Net cash provided/ (used) by investing activities | 8,030 | (29,974 | ) | 21,668 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Capitalization of intercompany notes receivable | (24,992 | ) | 9,570 | (40,748 | ) | |||||
| Change in notes with affiliates | (7,376 | ) | (15,513 | ) | (4,265 | ) | ||||
| Payments of long-term debt | (5 | ) | (619 | ) | — | |||||
| (Decrease)/increase in bank loans | (13,740 | ) | (2,122 | ) | 5,231 | |||||
| Net cash used by financing activities | (46,113 | ) | (8,684 | ) | (39,782 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 6,537 | 6,410 | (8,141 | ) | ||||||
| INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 40,313 | 67,170 | (23,284 | ) | ||||||
| Cash and cash equivalents at beginning of year | 129,008 | 61,838 | 85,122 | |||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 169,321 | $ | 129,008 | $ | 61,838 | ||||
| Cash paid during the year for: | ||||||||||
| Interest | $ | 1,993 | $ | 4,252 | $ | 6,035 | ||||
| Income taxes | $ | 12,118 | $ | 2,632 | $ | 7,296 | ||||
See notes to consolidated financial statements.
233
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, 3, 9, 18 and 19.
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. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. may not, however, be able to continue as a going concern. 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 three-year period ended December 26, 2003, and has a shareholders’ deficit of $872,400. 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. As described in more detail below, Foster Wheeler Ltd. received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that Foster Wheeler Ltd. will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants contained in the Senior Credit Facility throughout 2004. However, there can be no assurances that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants.
Foster Wheeler Ltd.’s U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.
Management closely monitors liquidity and updates its U.S. cash flow forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. Foster Wheeler Ltd.’s current cash flow forecasts indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2004.
234
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
As of December 26, 2003, Foster Wheeler Ltd. had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily from distributions from foreign subsidiaries. As of December 26, 2003, Foster Wheeler Ltd. had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $430,200 compared to $429,400 as of December 27, 2002. Of the $430,200 total at December 26, 2003, approximately $366,700 was held by foreign subsidiaries. Foster Wheeler Ltd. is sometimes required to cash collateralize bonding or certain bank facilities. The amount of Foster Wheeler Ltd.’s restricted cash at December 26, 2003 was $52,700, of which $48,000 relates to the non-U.S. operations.
Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. Foster Wheeler Ltd.’s current 2004 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, Foster Wheeler Ltd. repatriated approximately $100,000 from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash transfers will occur as there are significant legal and contractual restrictions on Foster Wheeler Ltd.’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit Foster Wheeler Ltd.’s ability to continue as a going concern.
As part of its debt restructuring plan, Foster Wheeler Ltd. and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on December 22, 2003, and as further amended on January 13, 2004, relating to an offer for all of the existing $175,000 Preferred Trust Securities, $210,000 Convertible Notes, $113,300 Robbins bonds, and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.
On February 5, 2004, Foster Wheeler Ltd. announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing to Foster Wheeler Ltd. to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, Foster Wheeler Ltd. has discontinued its previously announced plans to divest one of its European operating units.
The total amount of debt and preferred trust securities subject to the exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. Foster Wheeler Ltd. is offering a mix of equity as well as debt with longer maturities in exchange for these securities. Foster Wheeler Ltd. anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, there can be no assurance that Foster Wheeler Ltd. will complete the exchange offer on acceptable terms, or at all.
Failure by Foster Wheeler Ltd. to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on Foster Wheeler Ltd.’s and the Company’s financial condition. These matters raise substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.
In August 2002, Foster Wheeler Ltd. finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility, which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. Foster Wheeler Ltd. retained the first $77,000 of such amounts and also retains a 50% share of the
235
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
balance. With the sale of the Foster Wheeler Environmental Corporation net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $11,800 were made on the term loan during 2003.
The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that Foster Wheeler Ltd. will be in compliance with these covenants throughout 2004.
Amendment No. 1 to the Senior Credit Facility, 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. As of December 26, 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
Amendment No. 2 to the Senior Credit Facility, 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 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, Foster Wheeler Ltd. agreed to pay on March 31, 2004 a fee equal to 5% of the lenders’ credit exposure on March 31, 2004 if Foster Wheeler Ltd. has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. Foster Wheeler Ltd. expects the gross amount of this fee, if required, will be approximately $14,000, which has been accrued and included in Foster Wheeler Ltd.’s liquidity forecast.
Holders of Foster Wheeler Ltd.’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $164,900 as of December 26, 2003) 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.
Foster Wheeler Ltd. finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to Foster Wheeler Ltd., for an initial non-cancelable period of 20 years.
In the third quarter of 2002, Foster Wheeler Ltd. entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of Foster Wheeler Ltd.’s domestic trade receivables. Under this agreement, Foster Wheeler Ltd. has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. The facility is subject to covenant compliance. The financial covenants commenced 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.
No borrowings were outstanding under this facility as of December 26, 2003 or December 27, 2002.
On January 26, 2004, subsidiaries in the UK entered into a two year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans
236
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 2. | Liquidity and Going Concern — (Continued) |
available to provide working capital which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 10, 2004, the facility remains undrawn.
The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that Foster Wheeler Ltd. will not violate the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of Foster Wheeler Ltd. debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $919,300 as of December 26, 2003. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 18, 2003, Foster Wheeler Ltd. received a formal notice from the New York Stock Exchange (“NYSE”) indicating that Foster Wheeler Ltd. was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. Following discussions with Foster Wheeler Ltd. in May 2003, the NYSE permitted Foster Wheeler Ltd.’s securities to continue to be listed subject to Foster Wheeler Ltd.’s return to compliance with the continued listing standard within 18 months of receipt of the notice and further subject to quarterly review by the NYSE. At that time, Foster Wheeler Ltd.’s ticker symbol was designated with the suffix “bc” indicating that it was below compliance with the NYSE listing standards. Following its most recent review, the NYSE determined to de-list Foster Wheeler Ltd. as of November 14, 2003 based on its inability to meet the NYSE’s minimum shareholders’ equity requirement of positive $50,000. Foster Wheeler Ltd.’s common stock now trades on the Pink Sheets and its common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler Ltd. has relied on an exemption from this rule provided to NYSE-listed companies. Due to Foster Wheeler Ltd. being de-listed, this exemption is no longer available. To address this issue, Foster Wheeler Ltd. obtained the consent of the BMA to transfers between non-residents for so long as Foster Wheeler Ltd.’s shares continue to be quoted in the Pink Sheets or on the OTCBB. Foster Wheeler Ltd. believes that this consent will continue to be available.
| 3. | Sale of Investment in Foster Wheeler Energia S.A. |
In October 2003, the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the accompanying financial statements have been revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of financial position, results of operations and cash flows for all periods presented.
The following summarizes the financial position of Foster Wheeler Energia S.A. which has been excluded from the Company’s financial statements.
237
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 3. | Sale of Investment in Foster Wheeler Energia S.A. — (Continued) |
| For the Years Ended December 31, | |||||||
2002 | 2001 | ||||||
| Assets | $ | 87,854 | $ | 91,820 | |||
| Liabilities | 42,957 | 61,818 | |||||
| Revenues | 45,873 | 66,454 | |||||
| Net (loss)/earnings | (2,583 | ) | 5,409 | ||||
| 4. | 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 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, 2003, 2002 and 2001, the Company recorded commercial claims of $0, $0 and $50,200, 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 physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress towards completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.
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;
238
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
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. 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 $21,000 and $30,000 at December 31, 2003 and 2002, respectively, 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, 2003, 2002 and 2001, 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 6. 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 $17,681 at December 31, 2003, and $22,186 at December 31, 2002, foreign refundable value-added tax and accrued interest receivable.
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.
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 cost method is appropriate due to a lack of a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.
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.
239
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
2003 | 2002 | 2001 | ||||||||
| Cumulative translation adjustment at beginning of year | $ | (30,003 | ) | $ | (66,465 | ) | $ | (57,093 | ) | |
| Current year foreign currency adjustment | (14,824 | ) | 36,462 | (9,372 | ) | |||||
| Cumulative translation adjustment at end of year | $ | (44,827 | ) | $ | (30,003 | ) | $ | (66,465 | ) | |
For the year ended December 31, 2003, the Company recorded an after-tax net foreign currency transaction gain of $129, and in the years ended December 31, 2002 and 2001, recorded after-tax net foreign currency transaction losses of $1,289 and $581, respectively.
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, 2003 and 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2003 an after-tax gain on derivative instruments of approximately of $400 and for the year ended December 31, 2002, recorded an after-tax loss on derivative instruments of approximately $297.
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 2003, 2002 and 2001 consistent with the provisions of SFAS No. 123, the Company’s net earnings would have been reduced to the pro forma amounts indicated below:
2003 | 2002 | 2001 | ||||||||
| Net (loss) — as reported | $ | (5,625 | ) | $ | (43,073 | ) | $ | (6,930 | ) | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $5 in 2003, $286 in 2002 and $133 in 2001 | 8 | 572 | 295 | |||||||
| Net (loss) — pro forma | $ | (5,633 | ) | $ | (43,645 | ) | $ | (7,225 | ) | |
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:
2003 | 2002 | 2001 | ||||||||
| Dividend yield | 0.00 | % | 0.00 | % | 1.36 | % | ||||
| Expected volatility | 88.23 | % | 83.62 | % | 79.20 | % | ||||
| Risk-free interest rate | 3.22 | % | 2.90 | % | 4.23 | % | ||||
| 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
240
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
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, 2003, 2002 and 2001 relating to options granted to Company personnel and options available for grant is as follows (presented in actual number of shares):
2003 | 2002 | 2001 | |||||||||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||||||
| Options outstanding, beginning of year | 1,341,778 | $ | 8.80 | 591,233 | $ | 17.98 | 462,483 | $ | 21.61 | ||||||||||
| Options exercised | — | — | (24,000 | ) | 9.56 | ||||||||||||||
| Options granted | 17,145 | 1.17 | 756,545 | 1.64 | 152,750 | 5.69 | |||||||||||||
| Options cancelled or expired | (12,500 | ) | 3.57 | (6,000 | ) | 9.98 | — | — | |||||||||||
| Options outstanding, end of year | 1,346,423 | $ | 8.76 | 1,341,778 | $ | 8.80 | 591,233 | $ | 17.98 | ||||||||||
| Option price range at end of year | $1.17 to $42.1875 | $1.647 to $42.1875 | $5.6875 to $42.1875 | ||||||||||||||||
| Option price range for exercised shares | — | — | $9.00 to $13.50 | ||||||||||||||||
| Options available for grant at end of year | 506,846 | 445,069 | 430,180 | ||||||||||||||||
| Weighted-average fair value of options granted during the year | $ | 0.79 | $ | 1.11 | $ | 2.80 | |||||||||||||
| Options exercisable at end of year | 782,081 | 585,233 | 438,483 | ||||||||||||||||
| Weighted-average price of exercisable options at end of year | $ | 13.64 | $ | 18.06 | $ | 22.27 | |||||||||||||
The following table summarizes information about fixed-price stock options outstanding as of December 31, 2003:
| Options Outstanding | Options Exercisable | |||||||||||||||
Range of Exercise Prices | Number Outstanding at 12/31/03 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable at 12/31/03 | Weighted- Average Exercise Price | |||||||||||
| $ 29.7500 | 59,900 | 2 years | $ | 29.75 | 59,900 | $ | 29.75 | |||||||||
| 42.1875 | 14,583 | 3 years | 42.19 | 14,583 | 42.19 | |||||||||||
| 36.9375 | 58,000 | 4 years | 36.94 | 58,000 | 36.94 | |||||||||||
| 27.6250 | 83,000 | 5 years | 27.63 | 83,000 | 27.63 | |||||||||||
| 13.50 to 15.0625 | 169,750 | 6 years | 14.29 | 169,750 | 14.29 | |||||||||||
| 9.0000 | 49,000 | 7 years | 9.00 | 49,000 | 9.00 | |||||||||||
| 5.6875 | 148,500 | 8 years | 5.69 | 99,000 | 5.69 | |||||||||||
| 1.6400 | 746,545 | 9 years | 1.64 | 248,848 | 1.64 | |||||||||||
| 1.1700 | 17,145 | 10 years | 1.17 | — | ||||||||||||
| 1,346,423 | 782,081 | |||||||||||||||
Recent Accounting Developments— 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,
241
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
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:
a. Product warranties
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. The Company implemented the recognition and measurement provisions of the interpretation in the first quarter of 2003.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:
| • | The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and | |
| • | The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss. |
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.
Based on the Company’s preliminary assessment of the impact of this interpretation, management does not believe any of the Company’s currently unconsolidated variable interest entities are required to be included in its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives
242
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 4. | Summary of Significant Accounting Policies — (Continued) |
Implementation Group process that effectively required amendments to SFAS No. 133; (2) in connection with the other FASB projects dealing with financial instruments; and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, many of which had been previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not impact the financial instruments issued by the Company prior to May 31, 2003 and there have been no issuances of financial instruments by the Company since that date.
In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.
| 5. | Research and Development |
For the years 2003, 2002, and 2001, approximately $0, $0 and $300, respectively, were spent on Company-sponsored research activities. During the same periods, approximately $3,500, $2,300 and $2,400, respectively, were spent on customer-sponsored research activities.
| 6. | Accounts and Notes Receivable — Trade |
The following table shows the components of trade accounts and notes receivable:
243
FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)
| 6. | Accounts and Notes Receivable — Trade — |