Although the solid fuel-fired boiler market remains highly competitive, we believe that there are several continuing global market forces that will positively influence our Global Power Group. We believe that continued worldwide economic growth is driving power demand growth in most world regions. Global natural gas and oil supply concerns have driven gas and oil prices upwards to unprecedented levels. We expect natural gas fuel price volatility to remain high over the next 3-5 years due to declining domestic supplies in the world’s largest industrialized countries. In addition, we expect growth in sales of our environmental retrofit products due to further tightening of environmental regulations, including the development and growing acceptance of global greenhouse gas regulation. We believe that the combined effect of these factors will have a significant positive influence on the demand for our products and services, such as new utility and industrial solid fuel boilers, boiler services, boiler environmental products, and boiler-related construction services.
In North America, we believe the declining generating capacity reserves across the region coupled with persistent high oil and natural gas pricing is spurring market growth for large coal utility boilers. Given the uncertainty of future greenhouse gas regulation, we are seeing a growing market preference for supercritical utility boilers. Plants that use these technologies operate more efficiently by producing the least amount of greenhouse gas per unit of electricity produced and also capture other pollutants to a higher level. We believe clients are selecting these technologies as a hedge against future greenhouse gas, mercury and other pollutant regulation that could occur in the near term. Due to this market direction, our Global Power Group is now actively marketing large-scale supercritical boiler technology as part of our utility boiler product portfolio to capitalize on this business opportunity. From the industrial sector, we are seeing growth in the solid fuel industrial boiler market, driven by high oil and gas pricing. These boilers allow industrial clients to utilize low cost biomass and other solid opportunity fuels, as an economic solution to supplying their energy needs. Many of these fuels also carry governmental tax credits and other financial incentives to encourage their use as renewable fuels making them more attractive to both the industrial and utility power sectors. We believe that our circulating fluidized-bed, or CFB, boiler technology is well positioned to serve this market segment due to its outstanding fuel flexibility and excellent environmental performance. The U.S. Environmental Protection Agency’s, or EPA’s, recent finalization of the Clean Air Interstate Rule and the implementation of earlier New Source Review lawsuit settlements brought against a number of utilities by the EPA continue to drive a strong retrofit pollution control market, including add-on pollution control systems, such as low NOx combustion systems, selective catalytic reduction systems and flue gas desulphurization systems. This market trend should benefit sales of our environmental products. Finally, we believe that due to reducing capacity margins, coal utility power plants are running harder to produce more electricity, which in turn is spurring maintenance investment by owners. We also think that owners are making larger capital investments in these plants to extend their lives. We believe these factors are helping to maintain a strong boiler service market, which should benefit our boiler service business.
In Europe, we believe that many of the same market forces discussed above are resulting in similar beneficial market trends for our European power business. We believe that declining power capacity reserves across the region coupled with persistent high oil and natural gas pricing is spurring market growth for large utility coal boilers. Due to Europe’s historical preference for high efficiency coal power plants and the emissions trading scheme regulation, supercritical boiler technology continues to be the preference in the utility boiler market sector. For this market segment, we believe that our supercritical CFB technology significantly increases our opportunity to take full advantage of the substantial domestic coal reserves held by many industrialized nations. In the fourth quarter of 2005, we were awarded a lump-sum turnkey contract for the design, supply and erection of the world’s largest CFB boiler and the world’s first supercritical CFB unit in Poland. From the industrial sector, driven by increasing power prices, and high oil and gas pricing, we are seeing growth in the solid fuel industrial power market, which is benefiting sales of our industrial boilers. The European Union, or EU, has established regulation and incentive programs to encourage the use of biomass and other waste fuels, which we believe is spurring growth both in the industrial and utility sectors for our CFB boilers market. We believe that the EU’s new landfill and waste recycling directives has opened a new market for our CFB boilers firing refuse derived fuels. The EU’s Large Combustion Plant Directive, or LCPD, is expected to drive growth in the retrofit pollution control market, which should benefit our environmental products business. Due to the LCPD’s relatively mild first step reduction goals, we do not expect to see significant growth until after 2008 in this sector. Finally, coal utility power plants in Europe are running harder to produce more electricity spurring maintenance and life extension investment by owners. Similar to the U.S., reduced capacity margins are driving this market, which is having a positive effect on the volume of our boiler service sales.
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In Asia, we believe that high economic growth continues to drive strong power demand growth and demand for new power capacity. The region’s historically high coal use, now coupled with high world oil and gas pricing, will likely continue to drive growth for coal-fueled utility and industrial boilers in the region. The region contains some of the world’s largest utility and industrial boiler markets, such as China and India, offering selective opportunities for our Global Power Group businesses. Due to the region’s growing environmental awareness, we see opportunities for our CFBs as well as our supercritical pulverized coal, or PC, boiler technologies, as well as biomass and opportunity fuel applications. We also see substantial opportunity for our CFB boilers in the potentially large Indian power market resulting from the country’s abundant low quality coals. Finally, reduced capacity margins are also resulting in coal utility power plants being run harder to produce more electricity spurring maintenance and life extension investment by owners, offering further opportunity for our boiler services.
Due to these market factors, the Global Power Group is actively marketing our PC and CFB boilers utilizing both conventional as well as supercritical steam designs, and our boiler maintenance services on a worldwide scale.
Liquidity and Capital Resources
June 2006 Year-to-Date Activities
In January 2006, we completed transactions which increased the number of common shares to be delivered upon the exercise of our Class A and Class B common share purchase warrants during the offer period and raised $75,300 in net proceeds. The exercise price per warrant was not increased in the offers. Holders of approximately 95% of the Class A warrants and 57% of the Class B warrants participated in the offers resulting in the aggregate issuance of approximately 8,403,500 common shares. As described below, we used the warrant proceeds to redeem the remaining amounts of our 2011 senior notes and trust preferred securities.
In April 2006, we consummated the exchange of 1,277,900 of our common shares for $50,000 of outstanding aggregate principal amount of our 2011 senior notes. Under the terms of the exchange, the participating holders received 25.558 common shares for each thousand dollars of aggregate principal amount of 2011 senior notes, including accrued and unpaid interest, exchanged. In addition, we called for redemption of the remaining amount of 2011 senior notes and trust preferred securities. In May 2006, we redeemed the remaining $61,500 of outstanding aggregate principal amount of our 2011 senior notes and the remaining $6,000 of outstanding aggregate principal amount of our trust preferred securities. In June 2006, we executed an open market purchase of $1,000 of outstanding aggregate principal amount of our convertible notes. These debt reduction initiatives reduced the carrying amount of our debt by $122,100, reduced the amount of accrued interest by $4,900, improved consolidated shareholders’ deficit by $46,500 and reduced our cash on hand by $79,800. The improvement in consolidated shareholders’ deficit reflects the issuance of new common share equity of $58,800 offset by a charge to income of $12,300. The charge to income reflects a loss of $8,200 on the 2011 senior notes exchange resulting primarily from the difference between the fair market value of the common shares issued and the carrying value of the 2011 senior notes exchanged, a loss of $3,900 on the 2011 senior notes redemption resulting primarily from a make-whole premium payment, and a loss of $200 on the trust preferred securities and convertible notes redemptions resulting primarily from the write-off of deferred charges.
As of June 30, 2006, we had cash and cash equivalents on hand, short-term investments and restricted cash totaling $358,100, compared to $372,700 as of December 30, 2005. The decrease results primarily from cash used in operations of $30,900, offset by cash provided by financing activities of $8,700 and favorable exchange rate changes on cash and cash equivalents of $11,900. Of the $358,100 total at June 30, 2006, $268,000 was held by our foreign subsidiaries. See Note 1 to the condensed consolidated financial statements in this Form 10-Q for additional details on cash and restricted cash balances.
We used cash from operations of $30,900 in the first six months of 2006, compared to using $22,600 of cash from operations during the comparable period in 2005. Our operating cash flow during the first six months of 2006 was impacted primarily by the funding of $35,500 for asbestos payments and the increased workload of our Global E&C Group. Our working capital varies from period to period depending on the mix, stage of completion and commercial terms and conditions of our contracts. Working capital in our Global E&C Group tends to rise as the workload of reimbursable contracts increases while working capital tends to decrease in our Global Power Group when the workload increases. The use of cash in the first six months of 2005 was attributed primarily to the requirement to reimburse a bank in the first quarter of 2005 that had previously funded $23,300 to one of our European clients upon the expiration of a project-specific performance bond facility, which we had previously provided to the client.
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On April 7, 2006, we completed the purchase of the remaining 51% interest in MF Power S.r.L., a special purpose joint venture that was 49% owned by us prior to the acquisition. We now own 100% of the equity interest of MF Power S.r.L., which was renamed FW Power S.r.L. immediately following our acquisition. FW Power S.r.L. is dedicated to the development, construction and operation of electric power generating wind farm projects in Italy. In accordance with the terms of the purchase agreement, we are required to pay a purchase price of €16,400 (approximately $21,000 at the current exchange rate), of which €12,600 (approximately $15,200 at the exchange rate in effect at the time of payment) was paid at closing and €3,800 (approximately $4,900 at the current exchange rate) is due upon start of construction of one of the three wind farms being developed by FW Power S.r.L. The purchase price is also subject to adjustments based on receipt by FW Power S.r.L. of additional grants according to Italian law 488 and we are expecting to make an additional payment of €3,100 (approximately $4,000 at the current exchange rate). FW Power S.r.L. had €26,200 (approximately $31,700) of non-recourse project debt at closing and €16,700 (approximately $20,300) of cash as of the closing date.
Capital expenditures in the first six months of 2006 were $10,100, compared to $3,700 for the comparable period of 2005. The capital expenditures related primarily to leasehold improvements, information technology equipment and office equipment at our Global E&C Group offices in the United Kingdom, Continental Europe and Asia-Pacific and the expansion of the Global Power Group’s manufacturing facility in China. We anticipate spending an additional $1,700 on the expansion of this manufacturing facility over the remainder of 2006, which we anticipate financing with a local debt facility. We also anticipate spending €11,400 (approximately $14,600 at the current exchange rate) in our FW Power S.r.L. business over the balance of 2006 as we continue construction of the electric power generating wind farm projects in Italy. We anticipate financing €8,500 (approximately $10,900 at the current exchange rate) of these construction costs with special purpose limited recourse project debt, although such financing has not yet been secured.
Cash provided by financing activities in the first six months of 2006 was $8,700, compared to using $23,000 of cash for financing activities in the comparable period in 2005. The cash provided by financing activities in the first six months of 2006 reflects primarily the aforementioned warrant offer proceeds and stock option proceeds, partially offset by the redemption of the 2011 senior notes and trust preferred securities. The cash used in financing activities in the first six months of 2005 results primarily from the payment of financing costs of $13,400 in conjunction with the execution of the senior credit agreement and planned debt repayments of $7,300.
Outlook
We update our liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations from non-U.S. subsidiaries, proceeds from asset sales, working capital needs, unused credit line availability and claims recoveries, if any. Our liquidity forecasts extend over a twelve-month period and continue to indicate that sufficient liquidity will be available to fund our working capital needs through such period.
It is customary in the industries in which we operate to provide standby letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. We are required in certain circumstances to provide security to banks and the surety to obtain new standby letters of credit, bank guarantees and performance bonds. Certain of our European subsidiaries are required to and have cash collateralized $7,600 and $15,600 of their bonding requirements as of June 30, 2006 and December 30, 2005, respectively. Providing cash collateral increases working capital needs and limits our ability to repatriate funds from operating subsidiaries.
Our domestic operating entities do not generate sufficient cash flow to cover the costs related to our obligations to fund U.S. pension plans, asbestos-related liabilities and corporate overhead expenses. Consequently, we require cash repatriations from our non-U.S. subsidiaries in the normal course of our operations to meet our domestic cash needs and have successfully repatriated cash for many years. Our current 2006 forecast assumes total cash repatriation from our non-U.S. subsidiaries of approximately $101,800 from royalties, management fees, intercompany loans, debt service on intercompany loans and/or dividends. We repatriated $67,000 and $ 45,300 from our non-U.S. subsidiaries in the first six months of 2006 and 2005, respectively.
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Our non-U.S. 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 our non-U.S. subsidiaries are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. These factors limit our ability to repatriate funds held by certain of our non-U.S. subsidiaries. However, we believe we could repatriate additional cash from certain other of our foreign subsidiaries should we desire and also have access to the domestic revolving credit facility.
We have funded $35,500 of asbestos liabilities from our cash flow in the first six months of 2006. As a result of the asbestos insurance settlement from June 2006, we are expecting net positive cash inflows of $900 in the second half of 2006 from our asbestos management program. For the year, we forecast a net cash outflow of $34,600 relating to asbestos. This estimate is considered in our liquidity forecast and assumes no additional settlements with insurance companies or elections by us to fund additional payments.
Proposed asbestos trust fund legislation is being considered in the U.S. Senate. This proposed legislation, should it become law in its original form, would alter our payment obligations. Additionally, we would not receive any payments under our settlement agreements for contributions by us to the trust fund if the proposed legislation becomes law. Under the form of the legislation brought to the Senate floor in February 2006, we would be required to fund approximately $19,250 per year to a national trust fund for 30 years in lieu of any other liability for asbestos claims. This form of legislation would have a material adverse impact on our financial condition, results of operations and long-term cash flow. However, under the form of the legislation reintroduced in the Senate in May 2006, our contributions would be capped so that we would contribute no more than the lesser of 5% of our annual adjusted cash flow, subject to certain aggregate caps and minimums, or $19,250. We have supported this modification to the legislation.
We have $18,700 in pending and to be submitted requests for equitable adjustment, or REAs, of which $12,600 was recorded in contracts in process on our condensed consolidated balance sheet as of June 30, 2006. The REAs, which relate to a project currently being executed for a U.S. government agency, include work performed and to be performed through 2008 over which time we expect to recover the total amount of the REAs. We are continuing to negotiate with the U.S government agency regarding these REAs as well as potentially restructuring the related contract.
We own a 50.5% interest in Martinez Cogen L.P., which owns and operates a natural gas fired cogeneration facility located at, and supplying most of its electrical and steam output to, an oil refinery in Martinez, California. The financial condition, results of operations and cash flows of Martinez Cogen L.P. are impacted by, among other things, the cost of natural gas and the electric tariffs upon which most of its revenues are based. As a consequence of this fee structure, in some circumstances, natural gas costs could exceed the corresponding revenues from the electricity and steam generated and sold. The electric tariffs are set by independent regulatory agencies and are updated periodically. If the electric tariffs decrease or if they do not increase sufficiently to recover the increased cost of natural gas within a timely period, Martinez Cogen L.P. may incur losses and our financial condition, results of operations and cash flow may be adversely affected. The management of Martinez Cogen L.P. is exploring ways to improve the foregoing situation, which include preliminary discussions with the refinery customer about the potential for restructuring the agreements between Martinez Cogen L.P. and the refinery. Further, the natural gas prices and electric tariffs in effect at June 30, 2006 are forecast to be sufficient to generate positive earnings and cash flow for Martinez Cogen L.P. in 2006.
We maintain several defined benefit pension plans in the United States, United Kingdom, and Canada. Funding requirements for these plans are dependent, in part, on the performance of global capital markets and the discount rates used to calculate the present value of the liability. The poor performance of the global capital markets in the past and low interest rates significantly increased the funding requirements for these plans. The non-U.S. plans are funded from the local operating cash flows while funding for the U.S. plans is included within our U.S. working capital requirements. Our U.S. pension plans are frozen and our U.K. plan is closed to new entrants. The funding requirement for the U.S. plans will approximate $26,800 in 2006 and is projected to decline to essentially zero by 2010. Funding requirements for the foreign plans will approximate $27,800 in 2006 and will be required beyond 2010; however, contribution requirements subsequent to 2010 are not yet available. See Note 5 to the condensed consolidated financial statements in this Form 10-Q for additional information on our pension plans.
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We are currently pursuing a new senior secured domestic credit facility. The proposed new facility, which would replace our current senior credit agreement arranged in 2005, is intended to increase bonding capacity to support our operations and to reduce bonding costs. We would be required to make a prepayment penalty (currently $5,000) if we terminate our current senior credit agreement prior to March 2008. We would also be required to write-off previously paid unamortized fees and expenses associated with our current senior credit agreement (currently $10,200).
Please refer to Note 4 to the condensed consolidated financial statements in this Form 10-Q for further information regarding our debt obligations.
The Board of Directors discontinued the payment of common share dividends in July 2001. We were prohibited from paying dividends under our prior senior credit facility and are prohibited under our current senior credit agreement. Therefore, we paid no dividends during the first six months of 2006 or during fiscal year 2005.
Capital Structure
We have the following common shares and common share equivalents as of August 2, 2006:
| | Units | | Common Share
Equivalents | |
| |
| |
| |
Common shares outstanding | | 68,379,982 | | 68,379,982 | |
Convertible preferred shares outstanding | | 3,752 | | 244,345 | |
Stock options outstanding | | 2,284,228 | | 2,284,228 | |
Class A common share purchase warrants outstanding | | 208,618 | | 351,334 | |
Class B common share purchase warrants outstanding | | 14,857,464 | | 1,074,195 | |
Restricted stock units outstanding | | 352,156 | | 352,156 | |
| | | |
| |
Common shares and common share equivalents outstanding | | | | 72,686,240 | |
Common shares available for issuance | | | | 75,315,400 | |
| | | |
| |
Authorized common shares | | | | 148,001,640 | |
| | | |
| |
Off-Balance Sheet Arrangements
We have off-balance sheet financing arrangements in the form of operating leases, purchase commitments, standby letters of credit, bank guarantees and surety bonds. While these represent financial commitments, they are not required to be reported on our balance sheet under GAAP.
Backlog and New Orders Booked
The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which we have determined are legally binding and likely to proceed. Although backlog represents only business that is considered likely to be performed, cancellations or scope adjustments may occur. 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 our future earnings related to the performance of such work due to factors outside our control, such as changes in project schedules or project cancellations. We cannot predict with certainty the portion of backlog to be performed in a given year. Backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sale of subsidiaries, if any.
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Backlog measured in Foster Wheeler scope reflects the dollar value of backlog excluding third-party costs incurred by us on a reimbursable basis as agent or principal (i.e., flow-through costs). Foster Wheeler scope measures the component of backlog with mark-up and corresponds to our services plus fees for reimbursable contracts, and total selling price for lump-sum contracts.
| | June 30, 2006 | | July 1, 2005 | |
| |
| |
| |
| | Global
E&C
Group | | Global
Power
Group | | Total | | Global
E&C
Group | | Global
Power
Group | | Total | |
| |
| |
| |
| |
| |
| |
| |
NEW ORDERS BY PROJECT LOCATION:
Second quarter: | | | | | | | | | | | | | | | | |
North America | | $ | 80,200 | | $ | 254,200 | | $ | 334,400 | | $ | 22,600 | | $ | 156,900 | | $ | 179,500 | |
South America | | | (1,000 | ) | | 3,000 | | | 2,000 | | | 15,500 | | | (200 | ) | | 15,300 | |
Europe | | | 169,200 | | | 115,600 | | | 284,800 | | | 104,700 | | | 43,800 | | | 148,500 | |
Asia | | | 110,600 | | | 16,700 | | | 127,300 | | | 39,600 | | | 10,800 | | | 50,400 | |
Middle East | | | 63,400 | | | 1,100 | | | 64,500 | | | 103,500 | | | 1,100 | | | 104,600 | |
Australasia and other | | | 184,500 | | | 1,000 | | | 185,500 | | | 943,900 | | | 500 | | | 944,400 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 606,900 | | $ | 391,600 | | $ | 998,500 | | $ | 1,229,800 | | $ | 212,900 | | $ | 1,442,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Year-to-date: | | | | | | | | | | | | | | | | | | | |
North America | | $ | 137,200 | | $ | 529,100 | | $ | 666,300 | | $ | 31,400 | | $ | 237,400 | | $ | 268,800 | |
South America | | | 10,400 | | | 47,000 | | | 57,400 | | | 22,100 | | | 5,400 | | | 27,500 | |
Europe | | | 266,100 | | | 182,700 | | | 448,800 | | | 248,000 | | | 124,100 | | | 372,100 | |
Asia | | | 187,700 | | | 44,700 | | | 232,400 | | | 64,800 | | | 19,000 | | | 83,800 | |
Middle East | | | 911,800 | | | 1,300 | | | 913,100 | | | 189,500 | | | 4,700 | | | 194,200 | |
Australasia and other | | | 208,900 | | | 1,000 | | | 209,900 | | | 955,600 | | | 700 | | | 956,300 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 1,722,100 | | $ | 805,800 | | $ | 2,527,900 | | $ | 1,511,400 | | $ | 391,300 | | $ | 1,902,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
NEW ORDERS BY INDUSTRY:
Second quarter: | | | | | | | | | | | | | | | | | | | |
Power generation | | $ | 900 | | $ | 365,000 | | $ | 365,900 | | $ | 12,500 | | $ | 183,900 | | $ | 196,400 | |
Oil refining | | | 300,200 | | | — | | | 300,200 | | | 110,900 | | | — | | | 110,900 | |
Pharmaceutical | | | 18,100 | | | — | | | 18,100 | | | 6,400 | | | — | | | 6,400 | |
Oil and Gas | | | 210,500 | | | — | | | 210,500 | | | 995,700 | | | — | | | 995,700 | |
Chemical/petrochemical | | | 39,000 | | | — | | | 39,000 | | | 84,900 | | | — | | | 84,900 | |
Power plant operation | | | — | | | 26,600 | | | 26,600 | | | — | | | 29,000 | | | 29,000 | |
Environmental | | | 10,200 | | | — | | | 10,200 | | | 19,900 | | | — | | | 19,900 | |
Eliminations and others | | | 28,000 | | | — | | | 28,000 | | | (500 | ) | | — | | | (500 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 606,900 | | $ | 391,600 | | $ | 998,500 | | $ | 1,229,800 | | $ | 212,900 | | $ | 1,442,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Year-to-date: | | | | | | | | | | | | | | | | | | | |
Power generation | | $ | 2,600 | | $ | 754,000 | | $ | 756,600 | | $ | 87,500 | | $ | 337,300 | | $ | 424,800 | |
Oil refining | | | 472,800 | | | — | | | 472,800 | | | 193,200 | | | — | | | 193,200 | |
Pharmaceutical | | | 49,000 | | | — | | | 49,000 | | | 25,900 | | | — | | | 25,900 | |
Oil and Gas | | | 259,500 | | | — | | | 259,500 | | | 1,066,100 | | | — | | | 1,066,100 | |
Chemical/petrochemical | | | 889,100 | | | — | | | 889,100 | | | 132,000 | | | — | | | 132,000 | |
Power plant operation | | | — | | | 51,800 | | | 51,800 | | | — | | | 54,000 | | | 54,000 | |
Environmental | | | 14,700 | | | — | | | 14,700 | | | 41,000 | | | — | | | 41,000 | |
Eliminations and others | | | 34,400 | | | — | | | 34,400 | | | (34,300 | ) | | — | | | (34,300 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 1,722,100 | | $ | 805,800 | | $ | 2,527,900 | | $ | 1,511,400 | | $ | 391,300 | | $ | 1,902,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
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| | June 30, 2006 | | July 1, 2005 | |
| |
| |
| |
| | Global
E&C
Group | | Global
Power
Group | | Total | | Global
E&C
Group | | Global
Power
Group | | Total | |
| |
| |
| |
| |
| |
| |
| |
BACKLOG (FUTURE REVENUES) BY CONTRACT TYPE: | | | | | | | | | | |
Lump-sum turnkey | | $ | 300,100 | | $ | 280,700 | | $ | 580,800 | | $ | 293,700 | | $ | 22,200 | | $ | 315,900 | |
Other fixed-price | | | 347,500 | | | 980,100 | | | 1,327,600 | | | 172,900 | | | 561,500 | | | 734,400 | |
Reimbursable | | | 3,073,600 | | | 36,400 | | | 3,110,000 | | | 1,666,500 | | | 56,800 | | | 1,723,300 | |
Eliminations | | | (10,800 | ) | | (5,100 | ) | | (15,900 | ) | | (60,900 | ) | | (4,000 | ) | | (64,900 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 3,710,400 | | $ | 1,292,100 | | $ | 5,002,500 | | $ | 2,072,200 | | $ | 636,500 | | $ | 2,708,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
BACKLOG (FUTURE REVENUES) BY PROJECT LOCATION: | | | | | | | | | | |
North America | | $ | 184,800 | | $ | 691,300 | | $ | 876,100 | | $ | 78,100 | | $ | 326,900 | | $ | 405,000 | |
South America | | | 92,500 | | | 49,300 | | | 141,800 | | | 32,000 | | | 12,000 | | | 44,000 | |
Europe | | | 440,600 | | | 434,300 | | | 874,900 | | | 477,000 | | | 152,100 | | | 629,100 | |
Asia | | | 278,900 | | | 115,700 | | | 394,600 | | | 183,100 | | | 130,100 | | | 313,200 | |
Middle East | | | 1,687,700 | | | 1,200 | | | 1,688,900 | | | 277,900 | | | 4,400 | | | 282,300 | |
Australasia and other | | | 1,025,900 | | | 300 | | | 1,026,200 | | | 1,024,100 | | | 11,000 | | | 1,035,100 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 3,710,400 | | $ | 1,292,100 | | $ | 5,002,500 | | $ | 2,072,200 | | $ | 636,500 | | $ | 2,708,700 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
BACKLOG (FUTURE REVENUES) BY INDUSTRY: | | | | | | | | | | | | | |
Power generation | | $ | 108,100 | | $ | 1,164,100 | | $ | 1,272,200 | | $ | 192,200 | | $ | 524,700 | | $ | 716,900 | |
Oil refining | | | 1,093,200 | | | — | | | 1,093,200 | | | 313,200 | | | — | | | 313,200 | |
Pharmaceutical | | | 130,700 | | | — | | | 130,700 | | | 137,100 | | | — | | | 137,100 | |
Oil and Gas | | | 1,183,200 | | | — | | | 1,183,200 | | | 1,085,400 | | | — | | | 1,085,400 | |
Chemical/petrochemical | | | 1,070,600 | | | — | | | 1,070,600 | | | 195,600 | | | — | | | 195,600 | |
Power plant operation | | | — | | | 128,000 | | | 128,000 | | | — | | | 111,800 | | | 111,800 | |
Environmental | | | 69,100 | | | — | | | 69,100 | | | 130,000 | | | — | | | 130,000 | |
Eliminations and others | | | 55,500 | | | — | | | 55,500 | | | 18,700 | | | — | | | 18,700 | |
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Total | | $ | 3,710,400 | | $ | 1,292,100 | | $ | 5,002,500 | | $ | 2,072,200 | | $ | 636,500 | | $ | 2,708,700 | |
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Foster Wheeler scope in backlog | | $ | 1,564,700 | | $ | 1,277,900 | | $ | 2,842,600 | | $ | 937,400 | | $ | 620,100 | | $ | 1,557,500 | |
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E&C man-hours in backlog (in thousands) | | | 11,185 | | | | | | 11,185 | | | 6,579 | | | | | | 6,579 | |
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The overall increase in consolidated backlog as of June 30, 2006, compared to July 1, 2005, is attributable primarily to our Global E&C Group, where we have won a number of significant contracts. Our second quarter 2006 Global E&C Group awards included contracts to provide four coker heaters, to perform process and detailed engineering, and to supply delayed coking technology for a coker project in India; an engineering, procurement and construction management, or EPCm, contract to provide a delayed coker to a facility in the United States; an engineering, procurement and construction, or EPC, contract for a cogeneration facility at a European refinery; and a contract for the EPC phase of a heavy crude expansion project for a refinery in the United States. Additionally, our Global E&C Group awards in the first quarter of 2006 included an EPC contract for the utilities and offsite work at a world-scale integrated refining and petrochemical complex in Rabigh, Saudi Arabia; an EPCm contract for a ethylene oxide/mono-ethylene glycol unit in Kuwait; and an EPC contract for safety automating services of the unheading and valve interlock systems on the delayed coking unit at a refinery in the United States.
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Our Global Power Group awards for the second quarter included a design and supply, or D&S, contract for two CFB boilers for a new solid-fuel power plant in Texas; a D&S contract for a pulverized-coal boiler to a power plant in the United States; a contract to supply a CFB boiler island for a chemical plant in Bulgaria; and a contract to supply new low-NOx burners and to upgrade mill classifiers at a power plant in Spain. Our first quarter 2006 Global Power Group awards included a D&S contract to provide two CFB boilers to be used at a proposed solid-fuel generating unit at a power station in Louisiana; a D&S contract for two CFB boilers for an alumina refinery in Brazil; and a design, supply and erection contract for a peat and bio-mass-fired CFB boiler island unit for a combined heat and power plant in Finland.
Inflation
The effect of inflation on our revenues and earnings is minimal. Although a majority of our 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.
Application of Critical Accounting Policies and Estimates
Our condensed 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 we consider significant to the understanding and operations of our business as well as key estimates that are used in implementing the policies. Several of the critical accounting policies and estimates are discussed in the notes to the condensed consolidated financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations as referenced below. A full discussion of our critical accounting policies and estimates is included in our 2005 Form 10-K. The only significant change to our application of critical accounting policies and estimates is our adoption of SFAS No. 123R, “Share Based Payment,” at the start of 2006, as discussed below.
Revenue Recognition
Refer to Note 1 to the condensed consolidated financial statements in this Form 10-Q, “Summary of Significant Accounting Policies – Revenue Recognition on Long-Term Contracts.”
Asbestos
Refer to Note 12 to the condensed consolidated financial statements in this Form 10-Q, “Litigation and Uncertainties.”
Pension and Postretirement Benefits
We have several defined benefit pension plans in the United States, the United Kingdom and Canada. We also have defined postretirement benefit plans for health care and life insurance benefits in the United States and Canada. The U.S. plans are frozen and the U.K. plan is closed to new entrants. Details of our pension and postretirement benefit plans are included in Note 5 to the condensed consolidated financial statements in this Form 10-Q.
The calculations of pension and postretirement benefit liabilities, annual service cost and cash contributions required rely heavily on estimates about future events often extending decades into the future. We are responsible for establishing the assumptions used for the estimates, which include:
| • | The discount rate used to present value the future obligations; |
| • | The expected long-term rate of return on plan assets; |
| • | The expected percentage of annual salary increases; |
| • | The selection of the actuarial mortality tables; and |
| • | The annual inflation percentage. |
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We utilize our business judgment in establishing the estimates used in the calculations of pension and postretirement benefit liabilities, annual service cost and cash contributions. These estimates are updated on an annual basis at the beginning of each year or more frequently upon the occurrence of significant events. The estimates can vary significantly from the actual results and we cannot provide any assurance that the estimates used to calculate our pension and postretirement benefit liabilities will approximate actual results. The volatility between the assumptions and actual results can be significant.
Share-Based Compensation Plans
Our share-based compensation plans include both restricted stock awards and stock option awards. Prior to December 31, 2005, we accounted for share-based employee compensation plans under the measurement and recognition provisions of APB No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, we used the intrinsic value method of accounting for our stock option awards and did not recognize compensation expense for stock options that were granted at an exercise price equal to or greater than the market price of our common stock on the date of grant. As a result, the recognition of share-based compensation expense was generally limited to the expense attributed to restricted stock awards. In accordance with SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we provided pro forma net income or loss and net earnings or loss per common share disclosures for each period prior to December 31, 2005, as if we had applied the fair value-based method in measuring compensation expense for our share-based compensation plans, including stock options.
Effective December 31, 2005, we adopted the fair value provisions of SFAS No. 123R, “Share-Based Payment,” using the modified prospective transition method. Under this method, we will recognize share-based compensation expense for (i) all share-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123, and (ii) all future share-based payment awards based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Because we elected to use the modified prospective transition method, results for prior periods have not been restated.
Compensation cost for our share-based plans of $4,700 and $8,700 was charged against income for the three and six months ended June 30, 2006, respectively. The related income tax benefit recognized in the condensed consolidated statement of operations and comprehensive income was $100 and $200 for the three and six months ended June 30, 2006, respectively. The compensation cost charged against income for the comparable periods of 2005 totaled $2,100 and $4,300, respectively. The related income tax benefit recognized in the condensed consolidated statement of operations and comprehensive income was $100 and $200 for the three and six months ended July 1, 2005, respectively. We received $10,500 in cash from option exercises under our share-based compensation plans for the six months ended June 30, 2006.
As of June 30, 2006, there was $2,700 and $3,300 of total unrecognized compensation cost related to stock options and restricted awards, respectively. Those costs are expected to be recognized over a weighted-average period of 6 months and 5 months, respectively.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, which incorporates assumptions regarding a number of complex and subjective variables. We then recognize the fair value of each option as compensation cost ratably using the straight-line attribution method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions:
| • | Expected volatility – we estimate the volatility of our common stock at the date of grant using a combination of unadjusted historical volatility, historical volatility adjusted for periods of unusual stock price activity, volatility of comparable companies and other factors. |
| • | Expected term – we estimate the expected term of options granted based on a combination of vesting schedules, life of the option, historical experience and estimates of future exercise behavior patterns. |
| • | Risk-free interest rate – we estimate the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected life of the options in effect at the time of grant. |
| • | Dividends – we use an expected dividend yield of zero since we are restricted from paying dividends under our senior credit agreement. |
| • | Forfeitures – we estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use a combination of historical data, demographic characteristics and other factors to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to December 31, 2005, we accounted for forfeitures as they occurred. The cumulative effect adjustment related to forfeitures upon adoption of SFAS No. 123R was immaterial. |
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If factors change and we employ different assumptions in the application of SFAS No. 123R in future periods, the compensation expense that we record under SFAS No. 123R for future awards may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved in selecting the option pricing model assumptions used to estimate share-based compensation expense under SFAS No. 123R. Option pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, existing valuation models may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration or forfeiture of those share-based payments in the future. Stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.
There are significant differences among valuation models. This may result in a lack of comparability with other companies that use different models, methods and assumptions. There is also a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and may materially affect the fair value estimate of share-based payments.
Goodwill and Intangible Assets
Refer to Note 1 to the condensed consolidated financial statements in this Form 10-Q, “Summary of Significant Accounting Policies – Intangible Assets.”
Income Taxes
Refer to Note 1 to the condensed consolidated financial statements in this Form 10-Q, “Summary of Significant Accounting Policies – Income Taxes.”
Liquidity Forecasting
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Form 10-Q.
Accounting Developments
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS No. 133 and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in tax positions and requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact on our financial statements of adopting FIN 48.
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Safe Harbor Statement
This management’s discussion and analysis of financial condition and results of operations, other sections of this quarterly report on Form 10-Q and other reports and oral statements made by Foster Wheeler representatives from time to time may contain forward-looking statements that are based on our assumptions, expectations and projections about Foster Wheeler and the various industries within which we operate. These include statements regarding our expectation about revenues (including as expressed by our backlog), our 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. We caution that a variety of factors, including but not limited to the factors described under Part II, Item 1A. “Risk Factors” 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 and gas, pharmaceutical and chemical/petrochemical industries; |
| • | changes in the financial condition of our customers; |
| • | changes in regulatory environment; |
| • | changes in project design or schedules; |
| • | changes in our estimates of costs to complete projects; |
| • | changes in trade, monetary and fiscal policies worldwide; |
| • | 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 our liability for damages and insurance coverage for asbestos exposure; |
| • | protection and validity of our patents and other intellectual property rights; |
| • | increasing competition by foreign and domestic companies; |
| • | compliance with our debt covenants; |
| • | recoverability of claims against our customers and others by us and claims by third parties against us; and |
| • | changes in estimates used in our 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 our control. You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(amounts in thousands of dollars)
Our strategy for managing transaction risks associated with currency fluctuations is for each operating unit to enter into derivative transactions, such as foreign currency forward exchange contracts, to hedge its exposure on contracts into the operating unit’s functional currency. We utilize all such financial instruments solely for hedging. Our company policy prohibits the speculative use of such instruments. The counterparties to such financial instruments expose us to credit loss in the event of nonperformance. To minimize this risk, we enter into these financial instruments with financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies).
Interest Rate Risk — We are exposed to changes in interest rates should we need to borrow under our senior credit agreement (there were no such borrowings as of June 30, 2006) and under our variable rate project debt to the extent that we have not entered into interest rate swap agreements to yield a fixed interest rate. If market rates average 1% more in the next twelve months, our interest expense for such period of time would increase, and our income before income taxes would decrease by approximately $100. This amount has been determined by considering the impact of the hypothetical interest rates on our variable rate borrowings as of June 30, 2006.
Foreign Currency Risk — We operate on a worldwide basis with substantial operations in Europe that subject us to translation risk on the Euro and British pound sterling. All significant activities of our non-U.S. affiliates are recorded in their functional currency, which is typically the country of domicile of the affiliate. While this mitigates the potential impact of earnings fluctuations as a result of changes in foreign currency exchange rates, our affiliates do enter into transactions through the normal course of operations in currencies other than their functional currency. We seek to minimize the resulting exposure to foreign currency fluctuations by matching the revenues and expenses in the same currency for our long-term contracts. We further mitigate these foreign currency exposures through the use of foreign currency forward exchange contracts to hedge the exposed item, such as anticipated purchases or revenues, back to their functional currency.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the interim period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) pursuant to Exchange Act Rule 13a-15. Based on this evaluation, and as of June 30, 2006, our chief executive officer and our chief financial officer concluded, at the reasonable assurance level, that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 30, 2005.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting in the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 12 to the condensed consolidated financial statements in this Form 10-Q for a discussion of legal proceedings, which is incorporated by reference in this Part II.
ITEM 1A. RISK FACTORS
Risk Factors Relating to Our Business
Our business is subject to a number of risks and uncertainties, including those described below. If any of these events occur, our business could be harmed and the trading price of our securities could decline. The following discussion of risks relating to our business should be read carefully in connection with evaluating our business, prospects and the forward-looking statements contained in this report on Form 10-Q. For additional information regarding forward-looking statements, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement.”
We require cash repatriations from our non-U.S. subsidiaries to meet our domestic cash needs related to our U.S. pension plans, asbestos-related liabilities and corporate overhead expenses. Our ability to repatriate funds from our non-U.S. subsidiaries is limited by a number of factors.
As of June 30, 2006, we had cash, cash equivalents, short-term investments and restricted cash of $358,100, of which $268,000 was held by our non-U.S. subsidiaries. Our current 2006 forecast assumes total cash repatriation from our non-U.S. subsidiaries of $101,800 from royalties, management fees, intercompany loans, debt service on intercompany loans and/or dividends. There can be no assurance that the forecasted foreign cash repatriation will occur as our non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Amounts that cannot be repatriated exceed, and are not directly comparable to, the foreign component of restricted cash presented in our financial statements. In addition, certain of our non-U.S. subsidiaries are parties to bank guarantee and other agreements that contain covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, we may not be able to repatriate and utilize funds held by our non-U.S. subsidiaries in the amount forecasted above.
If we have a material weakness in our internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.
Although we had no material weaknesses as of December 30, 2005, we have reported a material weakness in our internal control over financial reporting in the past. We cannot assure that we will avoid a material weakness in the future. If we have another material weakness in our internal control over financial reporting in the future, it could adversely impact our ability to report our financial results in a timely and accurate manner.
Our international operations involve risks that may limit or disrupt operations, limit repatriation of cash, increase foreign taxation or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flow.
We have substantial international operations that are conducted through foreign and domestic subsidiaries, as well as through agreements with foreign joint venture partners. Our international operations accounted for approximately 76% of our operating revenues and substantially all of our operating cash flow for the first six months of 2006. We have international operations in Europe, Asia, Africa and South America. Additionally, we purchase materials and equipment on a worldwide basis. Our foreign operations are subject to risks that could materially adversely affect our business, financial condition, results of operations and cash flow, including:
| • | uncertain political, legal and economic environments; |
| • | potential incompatibility with foreign joint venture partners; |
| • | foreign currency controls and fluctuations; |
| • | energy prices and availability; |
| • | the imposition of additional governmental controls and regulations; |
| • | war and civil disturbances; and |
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Because of these risks, our international operations may be limited, or disrupted; we may lose contract rights; our foreign taxation may be increased; or we 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 potential events and liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Our debt levels, significant interest payment obligations and fees paid under our letter of credit facility could limit the funds we have available for working capital, capital expenditures, dividend payments, acquisitions and other business purposes, which could adversely impact our business.
As of June 30, 2006, we had corporate debt of $30,100, limited recourse project specific debt of $124,900, capital lease obligations of $65,400 and undrawn letters of credit, bank guarantees and surety bonds issued and outstanding of $604,400.
Over the last five years, we have been required to allocate a significant portion of our cash flow to pay interest on debt and fees to maintain our letter of credit facility. After paying interest on debt, we have fewer funds available for working capital, capital expenditures, acquisitions and other business purposes. This could limit our ability to respond to changing market conditions, limit our ability to expand through acquisitions, increase our vulnerability to adverse economic and industry conditions and place us at a competitive disadvantage compared to our competitors that have less indebtedness. Our estimated cash requirements for interest and principal debt service for the balance of 2006 are approximately $26,800.
Certain of our various debt agreements impose financial covenants, which may prevent us from capitalizing on business opportunities and taking certain corporate actions, which could materially adversely affect our business, financial condition, results of operations and cash flow.
Our senior credit agreement imposes financial covenants on us. These covenants limit our 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 under this debt. We may not be able to repay such obligations if accelerated. Our failure to repay such obligations under our senior credit agreement and our other debt obligations would have a material adverse effect on our business, financial condition, results of operations and cash flow and result in defaults under the terms of our other indebtedness.
We face limitations on our ability to obtain new letters of credit and bank guarantees on the same terms as we have historically. If we were unable to obtain letters of credit and bank guarantees on reasonable terms, our business, financial condition, results of operations and cash flow would be materially adversely affected.
It is customary in the industries in which we operate to provide letters of credit and bank guarantees in favor of clients to secure obligations under contracts.
We may not be able to continue obtaining new letters of credit and bank guarantees in sufficient quantities to match our business requirements. If our financial condition deteriorates, we may also be required to provide cash collateral or other security to maintain existing letters of credit and bank guarantees. If this occurs, our ability to perform under existing contracts may be adversely affected and our business, financial condition, results of operations and cash flow could be materially adversely affected.
Our 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.
Some of our contracts are lump-sum contracts and other shared-risk contracts that are inherently risky because we agree to the selling price of the project at the time we enter into the contracts. The selling price is based on estimates of the ultimate cost of the contract and we assume substantially all of the risks associated with completing the project, as well as the post-completion warranty obligations.
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We assume the project’s technical risk and associated warranty obligations, meaning that we must tailor products and systems to satisfy the technical requirements of a project even though, at the time the project is awarded, we may not have previously produced such a product or system. We also assume the risks related to revenue, cost and gross profit realized on such contracts that can vary, sometimes substantially, from the original projections due to changes in a variety of other factors, including but not limited to:
| • | unanticipated technical problems with the equipment being supplied or developed by us, which may require that we spend our own money to remedy the problem; |
| • | changes in the costs of components, materials or labor; |
| • | difficulties in obtaining required governmental permits or approvals; |
| • | changes in local laws and regulations; |
| • | changes in local labor conditions; |
| • | project modifications creating unanticipated costs; |
| • | delays caused by local weather conditions; and |
| • | our suppliers’ or subcontractors’ failure to perform. |
These risks are exacerbated as most projects are long-term that result in increased risk that the circumstances upon which we based our original bid will change in a manner that increases our costs. In addition, we sometimes bear the risk of delays caused by unexpected conditions or events. Long-term, fixed-price projects often make us 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, including in some cases up to or slightly exceeding the full contract value in certain events of non-performance, and could negatively impact our business, financial condition, results of operations and cash flow.
We may increase the size and number of lump-sum turnkey contracts, sometimes in countries where we have limited previous experience.
We may bid for and enter into such contracts through partnerships or joint ventures with third parties that have greater bonding capacity than we do. This would increase our ability to bid for the contracts. Entering into these partnerships or joint ventures will expose us to credit and performance risks of those third-party partners, which could have a negative impact on our business and our results of operations if these parties fail to perform under the arrangements.
We also perform government contracts containing fixed labor rates that are subject to audit by governmental agencies. These audits can occur several years after completion of the project and could result in claims for reimbursement from us. These reimbursement amounts could be materially different than estimated, which could have a negative impact on our results of operations and cash flow.
We may have high working capital requirements in the near term and we may have difficulty obtaining financing, which could have a negative impact on our business, financial condition, results of operations and cash flow.
Our business requires a significant amount of working capital and our U.S. operations do not generate sufficient cash flow to cover our obligations to fund U.S. benefit plans, asbestos-related liabilities and corporate overhead expenses. In some 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, we are contractually obligated to our customers to fund working capital on our projects. In addition, we are subject to risks associated with debt financing.
Our working capital requirements may increase if we are required to give our customers more favorable payment terms under contracts in order to compete successfully for certain projects. These terms may include reduced advance payments from customers and payment schedules from customers that are less favorable to us. In the past, our working capital requirements have increased in recent years because we have 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 from our customers. All of these factors may result, or have resulted, in increases in the amount of contracts in process and receivables and short-term borrowings. Continued increases in working capital requirements could have a material adverse effect on our business, financial condition and cash flow.
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Projects included in our backlog may be delayed or cancelled, which could materially adversely affect our financial condition, results of operations and cash flow.
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 and legally binding letters of intent that we have determined are likely to be performed. Backlog projects represent only business that is considered firm, although cancellations or scope adjustments may occur. Most contracts require our clients to pay for work performed to the point of contract cancellation. Due to changes in project scope and schedule, we 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 to us. Material delays, cancellations or payment defaults could materially adversely affect our financial condition, results of operations and cash flow.
Backlog as of June 30, 2006 increased 35% as compared to year-end 2005. However, backlog may decline in the future.
The number and cost of our current and future asbestos claims in the United States could be substantially higher than we have estimated and the timing of payment of claims could be sooner than we have estimated, which could materially adversely affect our financial condition, results of operations and cash flow.
Some of our 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 alleged bodily injury or death arising from exposure to asbestos in connection with work performed, or heat exchange devices assembled, installed and/or sold, by our subsidiaries. We expect these subsidiaries to be named as defendants in similar suits and claims brought in the future. For purposes of our financial statements, we have estimated the indemnity and defense costs to be incurred in resolving pending and forecasted domestic claims through year-end 2020. 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 our estimates. Some of the factors that may result in the costs of these claims being higher than our 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; |
| • | decreases in the proportion of claims dismissed with zero indemnity payments; |
| • | indemnity payments being required to be made sooner than expected; |
| • | 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 that 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 our balance sheet is based on estimated indemnity and defense costs expected to be incurred through year-end 2020. We believe that it is likely that there will be new claims filed after 2020, but in light of uncertainties inherent in long-term forecasts, we do not believe that we can reasonably estimate the indemnity and defense costs that might be incurred after 2020. Our forecast contemplates that the number of new claims requiring indemnity will decline from year to year. Failure of future claims to decline as we expect may result in our aggregate liability for asbestos claims being higher than estimated.
Since year-end 2004, we have worked with Analysis Research Planning Corporation (“ARPC”), nationally recognized consultants in projecting asbestos liabilities, to estimate the amount of asbestos-related indemnity and defense costs for the following 15-year period. ARPC reviews our asbestos indemnity payments, defense costs and claims activity during the previous year and compares them to our 15-year forecast prepared at the previous year-end. Our March 31, 2006 and June 30, 2006 estimated liability reflected a reduction of our liability estimated at year-end 2005 for payments and settlements made during those three and six month periods, respectively.
In 2005, the number of mesothelioma claims filed against us was significantly higher than forecast. In addition, the average indemnity amounts we paid for both mesothelioma and non-mesothelioma claims were significantly higher than forecast. These factors increase indemnity costs but were partially offset by significantly higher than forecasted rates of dismissals of claims with zero indemnity payments.
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Based on their review of 2005 activity, ARPC recommended that the assumptions used to estimate our future asbestos liability over the next 15 years be updated as of year-end 2005. Accordingly, we worked with ARPC to develop a revised estimate of our indemnity and defense costs through year-end 2020. At year-end 2005, we increased our liability for domestic asbestos indemnity and defense costs through year-end 2020 to $516,000, which brought our liability to a level consistent with ARPC’s reasonable best estimate. In connection with updating our estimated asbestos liability and related asset, we recorded a loss of $113,700 in the fourth quarter of 2005. Our liability for asbestos indemnity and defense costs was $478,400 as of June 30, 2006.
Our forecast of the number of future claims is based, in part, on a regression model, which employs the statistical analysis of our historical claims data to generate a trend line for future claims and, in part, on an analysis of future disease incidence. Although we believe 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 our subsidiaries performed work or sold equipment, could also be used and might project higher numbers of future claims than our forecast.
As occurred in 2005, the actual number of future claims, the mix of disease types and the amounts of indemnity and defense costs may exceed our current estimates. We annually update our 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 liabilities as a result of revised forecasts, adverse jury verdicts or other negative developments involving asbestos litigation or insurance recoveries may cause the value or trading prices of our securities to decrease significantly. These negative developments could also negatively impact our liquidity, cause us to default under covenants in our indebtedness, cause our credit ratings to be downgraded, restrict our access to capital markets or otherwise have a material adverse effect on our financial condition, results of operations and cash flow.
The amount and timing of insurance recoveries of our asbestos-related costs in the United States is uncertain. The failure to obtain insurance recoveries could cause a material adverse effect on our financial condition, results of operations and cash flow.
We believe that a significant portion of our subsidiaries’ liability and defense costs for asbestos claims will be covered by insurance. Since year-end 2005, we have worked with Peterson Risk Consulting, nationally recognized experts in the estimation of insurance recoveries, to review our estimate of the value of the unsettled insurance asset and assist in the estimation of our primary and unsettled asbestos insurance asset. Based on insurance policy data, historical claim data, future liability estimate, and allocation methodology assumptions we provided them, Peterson Risk Consulting provided an analysis of the unsettled insurance asset as of year-end 2005. We utilized that analysis to determine our estimate of the value of the unsettled insurance asset.
In June 2006, in connection with the coverage litigation referred to below, our subsidiaries reached an agreement to settle their asbestos and silica-related insurance coverage with an additional insurer. This settlement generally provides for payments over an up to 25-year period in exchange for the release by our subsidiaries of past, present and future asbestos and silica-related claims under this insurer’s policies, an agreement by our subsidiaries to dismiss this insurer from the coverage litigation, and an agreement by our subsidiaries to indemnify this insurer from claims asserted under the released claims. Principally as a result of this insurance settlement, we increased our reported asbestos-related insurance assets by $79,600 and recorded a gain of $79,600 in the second quarter of 2006.
Our condensed consolidated balance sheet as of June 30, 2006, includes as an asset an aggregate of $399,000, which represents our best estimate of actual and probable insurance recoveries relating to our domestic liability for pending and estimated future asbestos claims through year-end 2020, $43,400 of this asset is recorded in accounts and notes receivable and $355,600 is recorded as asbestos-related insurance recovery receivable. The amount recorded within accounts and notes receivable reflects amounts due in the next 12 months under executed settlement agreements with insurers and does not include any estimate for future settlements. The amount recorded as asbestos-related insurance recovery receivable includes an estimate of recoveries from unsettled insurers in the insurance litigation discussed below, based upon assumptions relating to cost allocation, the application of New York law to certain insurance coverage issues, and other factors as well as an estimate of the amount of recoveries under existing settlements with other insurers. On February 13, 2001, litigation was commenced against certain of our subsidiaries by certain of our insurers seeking to recover from other insurers amounts previously paid by them and to adjudicate their rights and responsibilities under our subsidiaries’ insurance policies. As of June 30, 2006, we estimated the value of our asbestos insurance asset contested by our subsidiaries’ insurers in ongoing litigation as $46,100. In addition, if national trust fund legislation becomes law in the form being considered in the U.S. Senate we will not receive any payments under our settlement agreements for future claims or contributions by us to the trust fund made under the legislation. While this litigation is pending, we have had to cover a substantial portion of our settlement payments and defense costs out of our cash flow.
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Our subsidiaries have entered into several settlement agreements calling for certain insurers to make lump-sum payments, as well as payments over time, for use by our subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for portions of out-of-pocket costs previously incurred. We intend to continue to attempt to negotiate additional settlements where achievable on a reasonable basis in order to minimize the amount of future costs that we would be required to fund out of our cash flow. Unless we settle the remaining unsettled insurance recoveries available, at amounts significantly in excess of our current estimates, it is likely that the amount of our insurance settlements will not cover all future asbestos-related costs and we will continue to fund a portion of such future costs, which will reduce our cash flow and our working capital, and may adversely affect our long-term liquidity.
An adverse outcome in the pending insurance litigation described above could limit our remaining insurance recoveries. However, a favorable outcome in all or part of the litigation could increase remaining insurance recoveries above our current estimate.
Even if the coverage litigation is resolved in a manner favorable to us our insurance recoveries (both from the litigation and from settlements) may be limited by insolvencies among our insurers. We have not assumed recovery in the estimate of our asbestos insurance recovery asset from any of our currently insolvent insurers. Other insurers may become insolvent in the future and our insurers also may fail to reimburse amounts owed to us on a timely basis. Failure to realize expected insurance recoveries, or delays in receiving material amounts from our insurers could have a material adverse effect on our financial condition and our cash flow.
We have funded $35,500 of asbestos liabilities from our cash flow in the first six months of 2006. As a result of the asbestos insurance settlement from June 2006, we are expecting net positive cash inflows of $900 in the second half of 2006 from our asbestos management program. For the year, we forecast a net cash outflow of $34,600 relating to asbestos. This estimate is considered in our liquidity forecast and assumes no additional settlements with insurance companies or elections by us to fund additional payments.
Proposed national asbestos trust fund legislation could require us to pay amounts in excess of current estimates of our net asbestos liability, which could adversely affect our financial condition, results of operations and long-term cash flow.
Although no specific federal legislation has been enacted by the United States Congress, a possibility exists that a bill entitled Fairness in Asbestos Injury Resolution Act of 2005, which has been introduced in both houses of Congress in Washington D.C., may become law. This bill was reported out of the Senate Judiciary Committee and was brought to the Senate floor in February 2006, but was defeated on a procedural issue without a vote on the merits. Because we have been named as a defendant in a significant number of asbestos-related bodily injury claims we would be a “defendant participant” in a proposed national trust fund should such enabling legislation become law. If this proposed legislation is enacted into law in its original form, substantially all current and future asbestos claims will be removed from the tort system and claimants’ exclusive remedy will be payment from a national trust fund. This proposed legislation, should it become law in its original form, would alter our payment obligations. Additionally, we would not receive any payments under our settlement agreements for contributions by us to the trust fund if the proposed legislation becomes law. Under the form of the legislation brought to the Senate floor in February 2006, we would be required to fund approximately $19,250 per year to a national trust fund for 30 years in lieu of any other liability for asbestos claims. This form of legislation would have a material adverse impact on our financial condition, results of operations and long-term cash flow. However, under the form of the legislation reintroduced in the Senate in May 2006, our contributions would be capped so that we would contribute no more than the lesser of 5% of our annual adjusted cash flow, subject to certain aggregate caps and minimums, or $19,250. We have supported this modification to the legislation.
The number of asbestos-related claims received by our subsidiaries in the United Kingdom has recently increased. To date, these claims have been covered by insurance policies and proceeds from the policies have been paid directly to the plaintiffs. The timing and amount of asbestos claims that may be made in the future, the financial solvency of the insurers, and the amount that may be paid to resolve the claims, are uncertain. The insurance carriers’ failure to make payments due under the policies could have a material adverse effect on our financial condition, results of operations and cash flow.
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Some of our subsidiaries in the United Kingdom have received claims alleging personal injury arising from exposure to asbestos in connection with work performed, or heat exchange devices assembled, installed and/or sold, by our subsidiaries. The total number of claims received to date in the United Kingdom is 800 of which 329 remained open at June 30, 2006. We expect these subsidiaries to be named as defendants in additional suits and claims brought in the future. To date, insurance policies have provided coverage for substantially all of the costs incurred in connection with resolving asbestos claims in the United Kingdom. Our ability to continue to recover under these insurance policies is dependent upon, among other things, the timing and amount of asbestos claims that may be made in the future, the financial solvency of our insurers, and the amount that may be paid to resolve the claims. These factors could significantly limit insurance recoveries, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Failure by us to successfully defend against claims made against us by project owners or by our project subcontractors, or failure by us to recover adequately on claims made against project owners, could have a material adverse effect upon our financial condition, results of operations and cash flow.
In the ordinary course of business, claims involving project owners and subcontractors are brought against us and by us in connection with our project contracts. Claims brought against us include back charges for alleged defective or incomplete work, breaches of warranty and/or late completion of the project work, and claims for canceled projects. The claims and back charges can involve actual damages, as well as contractually agreed upon liquidated sums. If we were found to be liable on any of the project claims against us, we would have to incur a write-down or charge against earnings, to the extent a reserve had not been established for the matter in our accounts. Claims brought by us against project owners include claims for additional costs incurred in excess of current contract provisions arising out of project delays and changes in the initial scope of work. Claims between us and our subcontractors and vendors include claims like any of those described above. These project claims, if not resolved through negotiation, are often subject to lengthy and expensive litigation or arbitration proceedings. In the past, we used significant additional working capital in projects with cost overruns pending the resolution of our claims against project owners and we cannot assure that we will not be required to use significant working capital in the future. Amounts ultimately realized on project claims by us could differ materially from the balances included in our financial statements, resulting in a charge against earnings to the extent profit has already been accrued on a project contract. Charges and write-downs associated with claims brought against us and by us could have a material adverse impact on our financial condition, results of operations and cash flow.
Because our operations are concentrated in four particular industries, we may be adversely impacted by economic or other developments in these industries.
We derive a significant amount of revenues from services provided to corporations that are concentrated in four industries: power, oil and gas, chemical/petrochemical and pharmaceuticals. Unfavorable economic or other developments in one or more of these industries could adversely affect our clients and could have a material adverse effect on our financial condition, results of operations and cash flow.
Our failure to successfully manage geographically diverse operations could impair our ability to react quickly to changing business and market conditions and comply with industry standards and procedures.
We operate in more than 50 countries around the world, with approximately 9,000, or 86%, of our employees located outside of the United States. In order to manage our day-to-day operations, we must overcome cultural and language barriers and assimilate different business practices. In addition, we are 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 our ability to react quickly to changing business and market conditions and comply with industry standards and procedures.
We may lose business to competitors who have greater financial resources.
We are engaged in highly competitive businesses in which customer contracts are often awarded through bidding processes based on price and the acceptance of certain risks. We compete 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 we do. Because financial strength is a factor in deciding whether to grant a contract, our competitors’ greater financial strength may give them a competitive advantage and could prevent us from obtaining contracts for which we have bid.
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A failure by us to attract and retain qualified personnel, joint venture partners, advisors and subcontractors could have an adverse effect on our business, financial condition, results of operations and cash flow.
Our 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 our future success. The market for these professionals, joint venture partners, advisors and subcontractors is competitive, and we 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 our ability to attract and retain skilled laborers. Failure to attract or retain these workers could have a material adverse effect on our business, financial condition, results of operations and cash flow.
We are subject to various environmental laws and regulations in the countries in which we operate. If we fail to comply with these laws and regulations, we may have to incur significant costs and penalties that could adversely affect our financial condition, results of operations and cash flow.
Our 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 we operate. Both our Global E&C Group and Global Power 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. We 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 we are subject to additional liabilities if we do not comply with applicable laws regulating such hazardous substances, and, in either case, such liabilities can be substantial.
We may be subject to significant costs, fines and penalties and/or compliance orders if we do 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 us 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 us or others, or for acts by us or others which were in compliance with all applicable laws at the time the acts were performed. In some cases, we have assumed contractual indemnification obligations for environmental liabilities associated with some formerly owned properties. Additionally, we 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.
You should read Note 12 to the condensed consolidated financial statements in this Form 10-Q for a summary of our material environmental proceedings and litigation.
We rely on our information systems in our operations. Failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.
The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not always be adequate to properly prevent security breaches. Moreover, advances in computing capabilities or other developments may result in a compromise or breach of the technology used by us to protect our systems.
In the past we have experienced a security breach. Compromises of our security systems could expose us to a risk of loss or litigation and possible liability, which could substantially harm our business and results of operations. Further, anyone who is able to circumvent our security measures could misappropriate proprietary or confidential information, which could adversely affect our ability to effectively compete for new business or could cause interruptions in our operations. Because of the nature and magnitude of our projects, we may be the target of cyber terrorists or be the subject of industrial espionage. Although we maintain property and liability insurance, the insurance may not cover potential losses and/or claims of this type or may not be adequate to cover all related costs or liability that may be incurred.
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In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer.
Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.
We may lose market share to our competitors and be unable to operate our business profitably if our patents and other intellectual property rights do not adequately protect our proprietary products.
Our success depends significantly on our ability to protect our intellectual property rights to the technologies and know-how used in our proprietary products. We rely on patent protection, as well as a combination of trade secret, unfair competition and similar laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to design around the patents. We also rely on unpatented proprietary technology. We cannot provide assurance that we can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology. We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part with confidentiality agreements and intellectual property assignment agreements with our employees, independent distributors and consultants. However, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop such trade secrets or other proprietary information.
Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more directly with us, which could adversely affect our competitive position and business.
We also hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of our products. The loss of such licenses would prevent us from manufacturing and selling these products, which could harm our business.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third-party to acquire us without the consent of our 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 20 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. |
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| • | 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 no less than 120 calendar days prior to the anniversary of the date on which Foster Wheeler Ltd. first mailed its proxy materials for the preceding 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 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.
“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 us, 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.
We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.
Foster Wheeler Ltd. is a Bermuda exempted company. As a result, the rights of shareholders will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A substantial portion of our assets are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against us or our directors based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, under the securities laws of those jurisdictions or entertain actions in Bermuda under the securities laws of other jurisdictions.
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Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2006, we held an annual general meeting of common shareholders. The voting results of the annual general meeting of common shareholders were as follows:
| | For | | Against(A) or
Withheld(W) | | Abstentions | | Broker
Non-Votes | |
| |
| |
| |
| |
| |
1. Election of directors. (*) | | | | | | | | | |
a. Diane C. Creel | | 48,044,436 | | 188,625 (W) | | | | | |
b. Robert C. Flexon | | 48,129,677 | | 103,384 (W) | | | | | |
c. James D. Woods | | 47,992,857 | | 240,204 (W) | | | | | |
| | | | | | | | | |
2. Auditor appointment. | | 48,035,843 | | 184,964 (A) | | 12,254 | | | |
| | | | | | | | | |
3. Increase in the authorized share capital from approximately 74,000,000 to 148,000,000. | | 46,535,274 | | 1,663,372 (A) | | 34,415 | | | |
| | | | | | | | | |
4. Approval of Omnibus Incentive Plan. | | 21,921,126 | | 5,485,964 (A) | | 67,190 | | 20,758,781 | |
| | | | | | | | | |
5. Approval of amendment to bye-law 44(1). | | 27,178,994 | | 219,793 (A) | | 75,495 | | 20,758,779 | |
* | In addition, the following directors continued to serve after the meeting: Eugene D. Atkinson, Stephanie Hanbury-Brown, Joseph J. Melone and Raymond J. Milchovich. |
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ITEM 6. EXHIBITS
Exhibit No. | | Exhibits |
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3.1 | | Memorandum of Association of Foster Wheeler Ltd. (Filed as Annex II to Foster Wheeler Ltd.’s Form S-4/A (File No. 333-52468) filed on March 9, 2001, and incorporated herein by reference.) |
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3.2 | | Memoranda of Reduction of Share Capital and Memorandum of Increase in Share Capital each dated December 1, 2004. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K, filed on December 2, 2004, and incorporated herein by reference.) |
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3.3 | | Certificate of Designation relating to Foster Wheeler Ltd.’s Series B Convertible Preferred Shares, adopted on September 24, 2004. (Filed as Exhibit 3.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 24, 2004, and incorporated herein by reference.) |
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3.4 | | Bye-Laws of Foster Wheeler Ltd., amended May 9, 2006. (Filed as Exhibit 3.2 to Foster Wheeler Ltd.’s Form 8-K, filed on May 12, 2006, and incorporated herein by reference.) |
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10.1 | | Third Amendment to Loan Agreement and Guaranty, dated as of April 19, 2006, in respect of and to the Loan Agreement and Guaranty, dated as of March 24, 2005, among Foster Wheeler LLC, Foster Wheeler USA Corp., Foster Wheeler North America Corporation, Foster Wheeler Energy Corporation and Foster Wheeler Inc., the Guarantors party thereto, the Lenders party thereto, Morgan Stanley & Co. Incorporated, as Collateral Agent, Wells Fargo Foothill Inc., as Administrative Agent, Sole Lead Arranger and Sole Lead Bookrunner. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K, filed on April 25, 2006, and incorporated herein by reference.) |
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10.2 | | Foster Wheeler Ltd. Omnibus Incentive Plan. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 8-K, filed on May 12, 2006, and incorporated herein by reference.) |
| | |
10.3 | | Form of Director’s Restricted Stock Unit Award Agreement effective June 16, 2006 by and between Foster Wheeler Ltd. and each of Ralph Alexander, Eugene Atkinson, Diane C. Creel, Robert C. Flexon, Stephanie Hanbury-Brown, Joseph J. Melone and James D. Woods. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 8-K, filed on June 16, 2006, and incorporated herein by reference.) |
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10.4 | | Form of Director’s Stock Option Agreement effective June 16, 2006 by and between Foster Wheeler Ltd. and each of Ralph Alexander, Eugene Atkinson, Diane C. Creel, Robert C. Flexon, Stephanie Hanbury-Brown, Joseph J. Melone and James D. Woods. (Filed as Exhibit 10.2 to Foster Wheeler Ltd.’s Form 8-K, filed on June 16, 2006, and incorporated herein by reference.) |
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12.1 | | Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges |
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31.1 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Raymond J. Milchovich |
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31.2 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of John T. La Duc |
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32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Raymond J. Milchovich |
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32.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of John T. La Duc |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | FOSTER WHEELER LTD.
(Registrant) |
Date: August 9, 2006
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/s/ RAYMOND J. MILCHOVICH
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| | | RAYMOND J. MILCHOVICH
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER |
Date: August 9, 2006
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/s/ JOHN T. LA DUC
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| | | JOHN T. LA DUC
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF