Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
---------- ----------
Commission file number 1-286-2
FOSTER WHEELER LTD.
(Exact Name of Registrant as Specified in its Charter)
BERMUDA 22-3802649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PERRYVILLE CORPORATE PARK, CLINTON, NEW JERSEY 08809-4000
(Address of Principal Executive Offices) (Zip Code)
(908) 730-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(Name of Each Exchange on which
(Title of Each Class) Registered)
FOSTER WHEELER LTD. NEW YORK STOCK EXCHANGE
COMMON STOCK, $1.00 PAR VALUE
FW PREFERRED CAPITAL TRUST I NEW YORK STOCK EXCHANGE
9.00% PREFERRED SECURITIES, SERIES I (GUARANTEED BY FOSTER WHEELER LLC)
Securities registered pursuant to Section 12(g) of the Act:
NONE
------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
- --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 25, 2002, 40,771,560 shares of the Registrant's Common Shares,
were issued and outstanding, and the aggregate market value of such shares held
by nonaffiliates of the Registrant on such date was approximately $125,576,405
(based on the last price on that date of $3.08 per share).
List hereunder the following documents if incorporated by reference, and
the Part of the Form 10-K into which the document is incorporated:
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 22, 2002 are incorporated by reference
in Part III of this report.
FOSTER WHEELER LTD.
2001 Form 10-K Annual Report
Table of Contents
PART I
ITEM PAGE
1. Business 2
2. Properties 12
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 17
Executive Officers of Registrant
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
7A. Quantitative and Qualitative Disclosures about Market Risk 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 77
PART III
10. Directors and Executive Officers of the Registrant 77
11. Executive Compensation 77
12. Security Ownership of Certain Beneficial Owners and Management 77
13. Certain Relationships and Related Transactions 77
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report. See Item 7. "Managements Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for further information.
1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS:
Foster Wheeler Ltd. was incorporated under the laws of Bermuda in 2001.
Effective May 25, 2001, Foster Wheeler Corporation, which was originally
incorporated under the laws of the State of New York in 1900, underwent a
reorganization pursuant to which shareholders received one share of Foster
Wheeler Ltd. for each share of Foster Wheeler Corporation they owned. Foster
Wheeler Ltd. is essentially a holding company which owns the stock of various
subsidiary companies. Except as the context otherwise requires, the terms
"Foster Wheeler" or the "Company", as used herein, include Foster Wheeler Ltd.
and its subsidiaries.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
See Note 22 to Financial Statements in this Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS:
(THOUSANDS OF DOLLARS)
The business of the Company falls within two business groups. The ENGINEERING
AND CONSTRUCTION GROUP (the "E&C Group") designs, engineers and constructs
petroleum, chemical, petrochemical and alternative-fuels facilities and related
infrastructure, including power generation and distribution facilities,
production terminals, pollution control equipment, water treatment facilities
and process plants for the production of fine chemicals, pharmaceuticals,
dyestuffs, fragrances, flavors, food additives and vitamins. The E&C Group also
provides a broad range of environmental remediation services, together with
related technical, design and regulatory services. The ENERGY EQUIPMENT GROUP
(the "EE Group") designs, manufactures and erects steam generating and auxiliary
equipment for power stations and industrial markets worldwide. Steam generating
equipment includes a full range of fluidized bed and conventional boilers firing
coal, oil, gas, biomass and other municipal solid waste, waste wood and low-Btu
gases. Auxiliary equipment includes feedwater heaters, steam condensers,
heat-recovery equipment and low-NOx burners. Site services related to these
products encompass plant erection, maintenance engineering, plant upgrading and
life extension and plant repowering. The EE Group also provides research
analysis and experimental work in fluid dynamics, heat transfer, combustion and
fuel technology, materials engineering and solids mechanics. In addition, the EE
Group builds, owns and operates cogeneration, independent power production and
resource recovery facilities, as well as facilities for the process and
petrochemical industries. It generates revenues from construction and operating
activities pursuant to long-term sale of project outputs (i.e., electricity and
steam contracts), operating and maintenance agreements and from returns on its
equity positions. This Group refinances its investment in selected projects from
time to time when such refinancing will result in risk mitigation, a lower
effective financing cost or a potential increased return on investment.
Foster Wheeler markets its services and products through a staff of sales and
marketing personnel and through a network of sales representatives. The
Company's businesses are not seasonal nor are they dependent on a limited group
of customers. No single customer accounted for 10 percent or more of Foster
Wheeler's consolidated revenues in fiscal 2001, 2000 or 1999.
The materials used in Foster Wheeler's manufacturing and construction operations
are obtained from both domestic and foreign sources. Materials, which consist
mainly of steel products and manufactured items, are heavily dependent on
foreign sources, particularly for overseas projects. Generally, lead-time for
delivery of materials does not constitute a problem.
On March 5, 2002, President Bush signed the Steel Products Proclamation which
imposes tariffs on certain imported steel and steel products, effective March
20, 2002. Management does not believe there will be a significant impact to the
Company, but a final determination cannot be made until the new tariffs are
implemented.
Foster Wheeler owns and licenses patents, trademarks and know-how, which are
used in each of its industry groups. Such patents and trademarks are of varying
durations. Neither business group is materially dependent upon any particular or
related patents or trademarks. Foster Wheeler has licensed companies throughout
the world to manufacture marine and
2
stationary steam generators and related equipment and certain of its other
products. Principal licensees are located in Finland, Japan, the Netherlands,
Italy, Spain, Portugal, Norway and the United Kingdom.
For the most part, Foster Wheeler's products are custom designed and
manufactured and are not produced for inventory. Customers often make a down
payment at the time a contract is executed and continue to make progress
payments until the contract is completed and the work has been accepted as
meeting contract guarantees. Generally, contracts are awarded on the basis of
price, delivery schedule, performance and service.
Foster Wheeler had unfilled orders as of December 28, 2001 of $6,004,400 as
compared to unfilled orders as of December 29, 2000 of $6,142,300. The elapsed
time from the award of a contract to completion of performance may be up to four
years. The dollar amount of unfilled orders is not necessarily indicative of the
future earnings of the Company related to the performance of such work. Although
unfilled orders represent only business which is considered firm, there can be
no assurance that cancellations or scope adjustments will not occur. Due to
additional factors outside of the Company's control, such as changes in project
schedules, the Company cannot predict with certainty the portion of unfilled
orders that will not be performed.
The unfilled orders by business group as of December 28, 2001 and December 29,
2000 are as follows:
2001 2000
---- ----
Engineering and Construction Group ...................... $ 4,539,300 $ 4,534,600
Energy Equipment Group .................................. 1,493,100 1,727,400
Corporate and Financial Services (including eliminations) (28,000) (119,700)
----------- -----------
$ 6,004,400 $ 6,142,300
=========== ===========
Unfilled orders of projects at December 28, 2001 and December 29, 2000 consisted
of:
2001 2000
---- ----
Signed contracts ........................................ $ 5,867,200 $ 5,619,300
Letters of intent and contracts awarded but not finalized 137,200 523,000
----------- -----------
$ 6,004,400 $ 6,142,300
=========== ===========
Many companies compete in the engineering and construction segment of Foster
Wheeler's business. Management of the Company estimates, based on industry
publications, that Foster Wheeler is among the ten largest of the many large and
small companies engaged in the design and construction of petroleum refineries
and chemical plants. In the manufacture of refinery and chemical plant
equipment, neither Foster Wheeler nor any other single company contributes a
large percentage of the total volume of such business.
On an international basis, many companies compete in the energy equipment
segment of Foster Wheeler's business. Management of the Company estimates, based
on industry surveys and trade association materials, that it is among the ten
largest suppliers of utility and industrial-sized steam generating and auxiliary
equipment in the world and among the three largest in the United States.
Foster Wheeler is continually engaged in research and development efforts both
in performance and analytical services on current projects and in development of
new products and processes. During 2001, 2000 and 1999, approximately $12,300,
$12,000 and $12,500, respectively, was spent on Foster Wheeler sponsored
research activities. During the same periods, approximately $39,200, $27,600 and
$27,100, respectively, was spent on research activities that were paid for by
customers of Foster Wheeler.
Foster Wheeler and its domestic subsidiaries are subject to certain Federal,
state and local environmental, occupational health and product safety laws.
Foster Wheeler believes all its operations are in material compliance with such
laws and does not anticipate any material capital expenditures or adverse effect
on earnings or cash flows in maintaining compliance with such laws. In addition,
management believes that the Company is in material compliance with similar laws
and regulations in the non-U.S. countries in which it operates.
3
Foster Wheeler had 10,394 full-time employees on December 28, 2001. Following is
a tabulation of the number of full-time employees of Foster Wheeler in each of
its business groups on the dates indicated:
December 28, December 29, December 31,
2001 2000 1999
---- ---- ----
Engineering and Construction ............ 7,216 7,007 7,160
Energy Equipment ........................ 3,156 3,141 3,035
Corporate and Financial Services ........ 22 22 25
------ ------ ------
10,394 10,170 10,220
====== ====== ======
RISK FACTORS OF THE BUSINESS:
- -----------------------------
(Thousands of Dollars)
The following discussion of risks relating to the Company's business should be
read carefully in connection with evaluating the Company's business, prospects
and the forward-looking statements contained in this Report on Form 10-K and
oral statements made by representatives of the Company from time to time. Any of
the following risks could materially adversely affect the Company's business,
operating results, financial condition and the actual outcome of matters as to
which forward-looking statements are made. For additional information regarding
forward-looking statements, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement."
The Company's business is subject to a number of risks and uncertainties,
including those described below.
THE COMPANY HAS HIGH LEVELS OF DEBT.
The Company has debt under bank loans, other debt securities that have been sold
to investors and subordinated Robbins Facility exit funding obligations. As of
December 28, 2001, the Company's total debt amounted to $864,267, $226,056 of
which was comprised of limited recourse project debt of special purpose
subsidiaries. The total debt includes $210,000 of convertible subordinated
notes. In addition, the Company has $175,000 of preferred trust securities
outstanding.
Over the last five years, the Company has been required to allocate a greater
portion of its earnings to pay interest on its debt. After paying interest on
its debt, the Company has fewer funds available for working capital, capital
expenditures, acquisitions and other business purposes. This could materially
affect its competitiveness by limiting its ability to respond to changing market
conditions, expand through acquisitions or compete effectively in its markets.
Additionally, certain of its borrowings are at variable rates of interest which
exposes the Company to the risk of a rise in interest rates.
THE COMPANY IS IN VIOLATION OF THE TERMS OF ITS REVOLVING CREDIT AGREEMENT.
The Company has received a series of waivers from the required lenders under its
Revolving Credit Agreement of certain covenant violations under the agreement.
The current waiver expires on April 30, 2002 and is subject to the satisfaction
of certain ongoing conditions. The Company is in negotiations with the lenders
under its Revolving Credit Agreement to replace the current Revolving Credit
Agreement with a new or amended credit facility.
If a new or amended credit facility is not completed, the lenders under the
Revolving Credit Agreement would have the ability to accelerate the payment of
amounts borrowed under the Revolving Credit Agreement ($140,000 as of March 29,
2002) and to require the Company to cash collateralize standby letters of credit
outstanding thereunder ($93,000 as of March 29, 2002).
It is unlikely that the Company would be able to repay amounts borrowed or cash
collateralize standby letters of credit issued under the Revolving Credit
Agreement if the banks were to elect their right to accelerate the payment
dates. Failure by the Company to repay such amounts under the Revolving Credit
Agreement would have a material adverse effect on the Company's financial
condition and operations and result in defaults under the terms of the Company's
following indebtedness: the Senior Notes, the Convertible Subordinated Notes,
the Preferred Trust Securities, the subordinated Robbins Facility exit funding
obligations, and certain of the special-purpose project debt which would allow
such debt to be accelerated. It is unlikely that the Company would be able to
repay such indebtedness.
As a result of the Company's failure to comply with the debt covenants as of
December 28, 2001 and its inability to finalize amended agreements or obtain
waivers for the defaults beyond April 30, 2002, the opinion of the Company's
auditors on the financial statements as of December 28, 2001 notes the
uncertainty of the Company's ability to continue as a going concern.
4
There can be no assurance that the Company will receive further extensions of
the waiver from the required lenders under the Revolving Credit Agreement or
that the Company will be able to enter into a new or amended credit facility.
THE WAIVER GRANTED BY THE REQUIRED LENDERS UNDER THE COMPANY'S REVOLVING CREDIT
AGREEMENT IS SUBJECT TO THE SATISFACTION OF CERTAIN ONGOING CONDITIONS.
The required lenders under the Company's Revolving Credit Agreement waived
certain covenant violations by the Company through April 30, 2002, subject to
the Company's ongoing satisfaction of certain conditions. Failure by the Company
to satisfy the conditions of the waiver would give the required lenders the
right to terminate the waiver and accelerate amounts borrowed under the
Revolving Credit Agreement.
The waiver from the required lenders prohibits the Company from, among other
things, making payments under its $50,000 receivables sale arrangement and its
$33,000 lease financing facility. It also prohibits the Company from making any
additional borrowings thereunder or issuing any letters of credit unless cash
collateralized. The Company has received a waiver from the required lenders
under the receivables sale arrangement through April 29, 2002 and has received
forbearance by the required lenders under the lease financing facility through
April 30, 2002.
There can be no assurance that the Company will be able to negotiate extensions
of the receivables sale arrangement waiver or the lease financing forbearance or
that the Company will be able to enter into replacement facilities for either
the receivables sale arrangement or the lease financing. Failure by the Company
to make the payments required upon expiration of the waiver and forbearance
would have a material adverse effect on the Company's financial condition and
operations.
THE COMPANY MAY BE UNABLE TO GET NEW PERFORMANCE BONDS FROM ITS SURETY ON THE
SAME TERMS AS IT HAS PREVIOUSLY.
It is customary in the industries in which the Company operates to provide
performance bonds in favor of its customers to secure its obligations under
contracts. The Company has traditionally obtained performance bonds from a
surety on an unsecured basis. Due to changes in the surety market as well as
declines in the Company's credit rating, the Company may be required to provide
security to the surety in order to obtain new performance bonds.
If the Company is required to provide letters of credit to secure new
performance bonds, its working capital needs would increase. If it is unable to
provide sufficient collateral to secure the performance bonds, its surety may
not issue performance bonds to support its obligations under certain contracts.
The Company's ability to enter into new contracts would be materially limited if
it were unable to obtain performance bonds. There can be no assurance that the
Company will be able to obtain new performance bonds on either a secured or an
unsecured basis.
LUMP-SUM (FIXED PRICE) CONTRACTS MAY RESULT IN SIGNIFICANT LOSSES IF COSTS ARE
GREATER THAN ANTICIPATED.
Under lump-sum contracts, the Company is required to perform a variety of
services including designing, engineering, procuring, manufacturing and/or
constructing equipment or facilities, for a fixed amount, that is generally not
adjusted to reflect the actual costs incurred by the Company to fulfill its
responsibilities under the contract.
Lump-sum contracts are inherently risky because of the possibility of
underestimating costs and the fact that the Company assumes substantially all of
the risks associated with completing the project and the post-completion
warranty obligations. The Company also assumes the project's technical risk,
meaning that it must tailor its products and systems to satisfy the technical
requirements of a project even though, at the time the project is awarded, the
Company may not have previously produced such a product or system. The revenue,
cost and gross profit realized on such contracts can vary, sometimes
substantially, from the original projections due to changes in a variety of
factors, including but not limited to:
o unanticipated technical problems with the equipment being supplied or
developed by the Company which may require that the Company spend its
own money to remedy the problem;
o changes in the costs of components, materials or labor;
o difficulties in obtaining required governmental permits or approvals;
o the Company announced on April 12, 2002 additional charges for the
fourth quarter of 2001 which will increase the net loss for fiscal
year 2001 announced on January 29, 2002 from $263,100 to $309,100.
o changes in local laws and regulations;
o changes in local labor conditions;
o project modifications creating unanticipated costs;
o delays caused by local weather conditions; and
o suppliers or subcontractors failure to perform.
These risks are exacerbated if the duration of the project is long-term because
there is more time for, and therefore an increased risk that, the circumstances
upon which the Company originally bid and developed a price will change in a
manner that increases its costs. In addition, the Company sometimes bears the
risk of delays caused by unexpected conditions or events. The Company's
long-term, fixed price projects often make the Company subject to penalties if
it cannot complete portions of the project in accordance with agreed-upon time
limits. Therefore, losses can result from
5
performing large, long-term projects on a lump-sum basis. These losses may be
material and could negatively impact the Company's business and results of
operations.
THE COMPANY HAS HIGH WORKING CAPITAL REQUIREMENTS WHICH HAVE A NEGATIVE IMPACT
ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company's business requires a significant amount of working capital. Among
other things, use of significant amounts of working capital is required to
finance the purchase of materials and performance of engineering, construction
and other work on projects before payment is received from customers.
Working capital requirements may increase when the Company is required to give
its customers more favorable payment terms under contracts to compete
successfully for certain projects. Such terms generally include lower advance
payments and payment schedules that are less favorable to the Company. In
addition, working capital requirements have increased because of delays in
customer payments resulting from challenges to requests for additional payments
under lump-sum contracts which has resulted in the Company financing amounts
required to complete projects while it is involved in lengthy arbitration or
litigation proceedings to recover these amounts. All of these factors may result
or have resulted in increases in the amount of contracts in process and
receivables and short-term borrowings. Continued higher working capital
requirements would materially harm the Company's financial condition and results
of operations.
THERE MIGHT BE POSSIBLE DELAYS OR CANCELLATION OF PROJECTS INCLUDED IN BACKLOG.
The dollar amount of backlog does not necessarily indicate future earnings
related to the performance of that work. Backlog refers to expected future
revenues under signed contracts, contracts awarded but not finalized and letters
of intent which management has determined are likely to be performed. Although
backlog represents only business which is considered firm, cancellations or
scope adjustments may occur. Due to factors outside the Company's control, such
as changes in project schedules, management cannot predict with certainty when
or if backlog will be performed. In addition, even where a project proceeds as
scheduled, it is possible that parties with which the Company has contracted may
default and fail to pay amounts owed. Any delay, cancellation or payment default
could materially harm the Company's cash flow position, revenues and earnings.
THE ESTIMATE OF THE NUMBER OF ASBESTOS-RELATED CLAIMS AND THE LIABILITY FOR
THOSE CLAIMS IS SUBJECT TO A NUMBER OF UNCERTAINTIES.
Some of the Company's subsidiaries are named as defendants in numerous lawsuits
and out-of-court informal claims pending in the United States in which the
plaintiffs claim damages for personal injury arising from exposure to asbestos
in connection with work performed and heat exchange devices assembled, installed
and/or sold by those subsidiaries, and the subsidiaries expect to be named as
defendants in similar suits and claims filed in the future. The Company has made
an estimate that it believes is reliable, however, there can be no assurances
due to the nature and number of variables associated with such claims. The
Company is unable to reliably estimate the ultimate cost of these claims due to
the nature and number of variables associated with such claims. The Company's
estimates of claims-related costs have increased significantly over time. Some
of the factors that may result in increases in the costs of these claims over
current estimates include: the rate at which new claims are filed; the number of
new claimants; the impact of bankruptcies of other companies currently or
historically defending asbestos claims which reduces the number of possible
solvent defendants and may thereby increase the number of claims and the size of
demands against the Company; the uncertainties surrounding the litigation
process from jurisdiction to jurisdiction and from case to case; the impact of
potential changes in legislative or judicial standards, the type and severity of
the disease alleged to be suffered by the claimants, such as the type of cancer,
asbestosis or other illness, and the disease mix of future claims; increases in
defense and/or indemnity payments which have risen in recent years; and the
development of more expensive medical treatments.
The Company's asbestos liability estimates are based only on claims asserted in
the United States. While the Company's subsidiaries have not received any claims
for personal injury damages based on exposure to asbestos relating to work
performed outside of the United States, management does not know what exposure
the subsidiaries would have if such suits develop.
Increases in the number of claims faced or costs to resolve those claims will
cause the Company to increase further the estimates of the costs associated with
asbestos claims and could have a material adverse effect on the business,
financial condition and results of operations.
THE COMPANY'S INSURANCE RECOVERY IN CONNECTION WITH ASBESTOS LITIGATION IS
UNCERTAIN.
6
To date, insurance policies have provided coverage for substantially all of the
costs incurred in connection with resolving asbestos claims. The Company's
ability to continue to recover costs or any portion thereof relating to the
defense and payment of these claims in the future is uncertain and dependent on
a number of factors, including: disputes over coverage issues with insurance
carriers, including current disputes involving allocations of coverage under
certain policies among the insurers and the insureds; the timely reimbursement
of costs by the insurance carriers; insurance policy coverage limits; the timing
and amount of asbestos claims which may be made in the future and whether such
claims are covered by insurance; the financial solvency of the insurers, some of
which are currently insolvent; and the amount which may be paid to resolve those
claims.
These factors are beyond the Company's control and could materially limit
insurance recoveries, which could have a material adverse effect on its
business, financial condition and results of operations.
In the future, the Company may be required to submit claims for reimbursement to
insolvent insurers, including one insurer that has provided policies for a
substantial amount of coverage. Management cannot predict the amount or timing
of such claims.
An agreement with a number of insurers to allow for efficient and thorough
handling of claims against the Company's subsidiaries will not cover claims
filed after June 12, 2001. The Company is currently in negotiations with its
insurers regarding an arrangement for handling asbestos claims filed after June
12, 2001. Failure to agree on a new arrangement may delay the Company's ability
to get reimbursed on a timely basis by the insurers, which could have a material
adverse effect on results of operations and financial condition. In addition,
management cannot predict the effect of the ultimate allocation of coverage
among the insurers and the Company's subsidiaries as to claims filed after June
12, 2001.
CLAIMS MADE BY THE COMPANY AGAINST PROJECT OWNERS FOR PAYMENT HAVE INCREASED
OVER THE LAST FEW YEARS AND FAILURE BY THE COMPANY TO RECOVER ADEQUATELY ON
THESE CLAIMS WOULD HAVE A MATERIAL ADVERSE EFFECT UPON THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Project claims have increased as a result of the increase in lump-sum contracts
between 1992 and 1999. Project claims are claims brought by the Company against
project owners for additional costs over the contract price or amounts not
included in the original contract price, typically arising from changes in the
initial scope of work or from owner-caused delays. These claims are often
subject to lengthy arbitration or litigation proceedings. The costs associated
with these changes or owner-caused delays include additional direct costs, such
as labor and material costs associated with the performance of the additional
work, as well as indirect costs that may arise due to delays in the completion
of the project, such as increased labor costs resulting from changes in labor
markets. The Company has used significant additional working capital in projects
with cost overruns pending the resolution of the relevant project claims.
Management cannot assure that project claims will not continue to increase.
The portion of project claims that management estimates will be the minimum
amount to be recovered appears on the Company's balance sheet as an asset.
Actual claims the Company has incurred on these projects, however, are
substantially greater than this amount. To the extent that management estimates
recoveries below corresponding estimated costs, a net loss on that portion of
the project is recorded. In addition, if the Company does not recover the
minimum estimated amounts on current project claims, then it will have to
write-down the value of the project claim asset and take a corresponding charge
against earnings. Any such write-down and charge could have a material adverse
effect on the Company's financial condition and results of operations. In the
fourth quarter of 2001, the Company recorded approximately $24,100 in after-tax
contract-related charges as a result of claims reassessment conducted by the
Company's legal staff in conjunction with outside counsel.
The Company also faces a number of counterclaims brought against it by certain
project owners in connection with several of the project claims described above.
If the Company is found liable for any of these counterclaims, such liability
may also result in write-downs and charges against the Company's earnings to the
extent a reserve is not established.
FOSTER WHEELER GUARANTEES CERTAIN OBLIGATIONS OF ITS SUBSIDIARIES.
Foster Wheeler is required by its customers to guarantee the performance of
contracts by its subsidiaries. If its subsidiaries default on these performance
obligations, the Company will be obligated to pay damages to the customer. In
the aggregate, these agreements represent a material contingent liability.
THE COMPANY CONCENTRATES IN PARTICULAR INDUSTRIES.
7
The Company derives a significant amount of its revenues from services provided
to corporations that are concentrated in five industries: power, oil and gas,
pharmaceuticals, environmental and chemical/petrochemical. Unfavorable economic
or other developments in one or more of these industries could adversely affect
these customers and could have a material adverse effect on the Company's
financial condition and results of operations.
THE COMPANY'S INTERNATIONAL OPERATIONS INVOLVE RISKS.
The Company has substantial international operations which are conducted through
foreign and domestic subsidiaries as well as through agreements with foreign
joint venture partners. The Company's international projects accounted for
approximately 60% of its fiscal year 2001 operating revenues. The Company has
international operations around the world including operations in China, Poland
and Thailand. Its foreign operations are subject to risks, including:
o uncertain political, legal and economic environments;
o potential incompatibility with foreign joint venture partners;
o foreign currency controls and fluctuations;
o terrorist attacks against facilities owned or operated by U.S.
companies;
o civil disturbances; and
o labor problems.
Events outside of the Company's control may limit or disrupt operations,
restrict the movement of funds, result in the loss of contract rights, increase
foreign taxation or limit repatriation of earnings. In addition, in some cases,
applicable law and joint venture or other agreements may provide that each joint
venture partner is jointly and severally liable for all liabilities of the
venture. These events and liabilities could have a material adverse effect on
the Company's business and results of operations.
THE COMPANY MAY ENCOUNTER DIFFICULTY IN MANAGING THE BUSINESS DUE TO THE GLOBAL
NATURE OF ITS OPERATIONS.
Foster Wheeler operates in more than 30 countries around the world, with
approximately 6,000, or 60%, of its employees located outside of the United
States. In order to manage its day-to-day operations, the Company must overcome
cultural and language barriers and assimilate different business practices. In
addition, the Company is required to create compensation programs, employment
policies and other administrative programs that comply with the laws of multiple
countries. The Company's failure to successfully manage its geographically
diverse operations could impair its ability to react quickly to changing
business and market conditions and compliance with segment-wide standards and
procedures.
THE COMPANY MAY BE UNABLE TO ACCOMPLISH ITS BUSINESS STRATEGY.
The Company's ability to accomplish its business strategy is subject to many
factors beyond its control. Foster Wheeler cannot give any assurances that it
will be successful in its attempts to increase revenues, introduce new products,
decrease costs, increase its client base, achieve desirable contracts or reduce
its leverage. These goals depend in part on global economic growth, economic
activity within certain markets, regulatory environment, the demand for its
products and the efforts of its competitors. Additionally, one element of its
strategy of reducing leverage depends on its ability to monetize certain
non-core assets. There can be no assurance that efforts to monetize these assets
will be successful. Even if successful, the price received for certain of these
assets may require the Company to report a loss on the sale if the book value is
higher than the price received.
THE COMPANY IS ENGAGED IN HIGHLY COMPETITIVE BUSINESSES AND OFTEN MUST BID
AGAINST COMPETITORS TO OBTAIN ENGINEERING, CONSTRUCTION AND SERVICE CONTRACTS.
The Company is engaged in highly competitive businesses in which customer
contracts are often awarded through bidding processes based on price and the
acceptance of certain risks. The Company competes with other general and
specialty contractors, both foreign and domestic, including large international
contractors and small local contractors. Some competitors have greater financial
and other resources than Foster Wheeler. In some instances this could give them
a competitive advantage.
THE COMPANY'S PUBLICLY AVAILABLE EARNINGS ESTIMATES ARE SUBJECT TO MANY
UNCERTAINTIES.
8
The Company can make no assurances that its publicly available earnings
estimates will be achieved. The Company announced on April 12, 2002 additional
charges for the fourth quarter 2001 which will increase the net loss for fiscal
year 2001 announced on January 29, 2002 from $263,100 to $309,000. Earnings
estimates are subject to change due to many uncertainties including:
o changes in the rate of economic growth in the United States and other
major economies;
o changes in investment by the power, oil and gas, pharmaceutical,
chemical/petrochemical and environmental industries;
o changes in regulatory environment;
o changes in project schedules;
o errors in the estimates made by the Company of costs to complete a
project;
o changes in trade, monetary and fiscal policies worldwide;
o currency fluctuations;
o outcomes of pending and future litigation, including litigation
regarding its liability for damages caused by asbestos exposure;
o the Company's ability to borrow and increases in the cost of
borrowings;
o protection and validity of patents and other intellectual property
rights; and
o increasing competition by foreign and domestic companies.
The Company's earnings estimates were not prepared with a view toward compliance
with published guidelines of the Securities and Exchange Commission, the
American Institute of Certified Public Accountants or generally accepted
accounting principles. No independent accountants have expressed an opinion or
any other form of assurance on these estimates. Earnings estimates are subject
to uncertainty. It can be expected that one or more of the estimates will vary
significantly from actual results, and such variances will be greater with
respect to estimates covering longer periods. Such variances at any time may be
material and adverse.
A FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD HAVE AN ADVERSE EFFECT
ON THE COMPANY.
The Company's ability to attract and retain qualified engineers, scientists and
other professional personnel, either through direct hiring or acquisition of
other firms employing such professionals, will be an important factor in
determining its future success. The market for these professionals is
competitive, and there can be no assurance that it will be successful in its
efforts to attract and retain such professionals. In addition, the Company's
success depends in part on its ability to attract and retain skilled laborers.
Demand for these workers is currently high and the supply is extremely limited.
The Company's failure to attract or retain such workers could have a material
adverse effect on its business and results of operations.
FOSTER WHEELER IS SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS IN THE COUNTRIES
IN WHICH IT OPERATES.
The Company's operations are subject to U.S., European and other laws and
regulations governing the discharge of materials into the environment 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 ("CERCLA"), the
Clean Water Act, the Clean Air Act and similar state and local laws, and
European laws and regulations including those promulgated under the Integrated
Pollution Prevention and Control Directive issued by the European Union in 1996
and the 1991 directive dealing with waste and hazardous waste and laws and
regulations similar to those in other countries in which the Company operates.
Both the E&C Group and the EE Group, make use of and produce as byproducts
substances that are considered to be hazardous under the laws and regulations
referred to above. The Company may be subject to liabilities for environmental
contamination if it does not comply with applicable laws regulating such
hazardous substances, and such liabilities can be substantial.
In addition, the Company may be subject to significant fines and penalties if it
does not comply with environmental laws and regulations including those referred
to above. Some environmental laws, including CERCLA, provide for joint and
several strict liability for remediation of releases of hazardous substances
which could result in a liability for environmental damage without regard to
negligence or fault. Such laws and regulations could expose the Company to
liability arising out of the conduct of operations or conditions caused by
others, or for acts which were in compliance with all applicable laws at the
time the acts were performed. Additionally, the Company may be subject to claims
alleging personal injury or property damage as a result of alleged exposure to
hazardous substances. Changes in the environmental
9
laws and regulations, or claims for damages to persons, property, natural
resources or the environment, could result in material costs and liabilities.
ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S BYE-LAWS AND THE COMPANY'S
SHAREHOLDERS' RIGHTS PLAN MAY DISCOURAGE POTENTIAL ACQUISITION BIDS.
Provisions in the Company's bye-laws and its shareholders' rights plan could
discourage unsolicited takeover bids from third parties and make removal of
incumbent management difficult. As a result, it may be less likely that
shareholders will receive a premium price for their shares in an unsolicited
takeover by another party. These provisions include:
o two-thirds of all shareholders must vote in favor of any merger;
o a classified board of directors; and
o a potential acquirer's interest in the Company may be diluted as a
result of the operation of the shareholders' rights plan.
The Company's board of directors may issue preferred shares and determine their
rights and qualifications. The issuance of preferred shares may delay, defer or
prevent a merger, amalgamation, tender offer or proxy contest involving the
Company. This may cause the market price of the Company's common shares to
significantly decrease.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES:
See Note 22 to Financial Statements in this Form 10-K.
10
ITEM 2. PROPERTIES
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
FOSTER WHEELER REALTY SERVICES, INC. (CF)
Livingston, New Jersey General office & engineering 31.0 acres 288,000 (1)
Union Township, New Jersey Undeveloped 203.8 acres --
General office & engineering 29.4 acres 294,000
General office & engineering 21.0 acres 292,000 2002
Storage and reproduction facilities 10.8 acres 30,400
Livingston, New Jersey Research center 6.7 acres 51,355
Bedminster, New Jersey Office 10.7 acres 135,000(1)(2)
Bridgewater, New Jersey Undeveloped 21.9 acres(5) --
FOSTER WHEELER ENERGY CORPORATION (EE)
Dansville, New York Manufacturing & offices 82.4 acres 513,786
San Diego, California General offices 12,673 2005
FOSTER WHEELER USA CORPORATION (EC)
Houston, Texas General offices -- 107,890 2003
Houston, Texas General offices -- 11,112 2003
FOSTER WHEELER IBERIA, S.A.
Madrid, Spain (EC)/(EE) Office & engineering 5.5 acres 110,000 2015
Tarragona, Spain (EE) Manufacturing & office 25.6 acres 77,794
FOSTER WHEELER FRANCE, S.A. (EC)
Paris, France Office & engineering -- 80,000 2006
Paris, France Archive storage space -- 12,985 2006
FOSTER WHEELER INTERNATIONAL CORP. (THAILAND BRANCH) (EC)
Sriracha, Thailand Office & engineering -- 28,000 2003
FOSTER WHEELER CONSTRUCTORS, INC. (EC)
McGregor, Texas Storage facilities 15.0 acres 24,000
FOSTER WHEELER LIMITED (UNITED KINGDOM) (EC)
Glasgow, Scotland Office & engineering 2.3 acres 28,798
Reading, England Office & engineering -- 84,123(1) 2002/2009
12
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
Reading, England Office & engineering 14.0 acres 365,521 2024
Reading, England Undeveloped 12.0 acres --
Teeside, England Office & engineering -- 18,100 2002/2014
FOSTER WHEELER LIMITED (CANADA) (EE)
Niagara-On-The-Lake, Ontario Office & engineering -- 39,684 2003
FOSTER WHEELER ANDINA, S.A. (EC)
Bogota, Colombia Office & engineering 2.3 acres 26,000
FOSTER WHEELER POWER MACHINERY COMPANY LIMITED (EE)
Xinhui, Guangdong, China Manufacturing & office 29.2 acres 272,537(3) 2045
FOSTER WHEELER ITALIANA, S.P.A. (EC)
Milan, Italy (via S. Caboto,1) Office & engineering -- 161,400 2007
Milan, Italy (via S. Caboto,7) Office & engineering -- 121,870 2002
FOSTER WHEELER BIRLESIK INSAAT VE MUHENDISLIK A.S. (EC)
Istanbul, Turkey Engineering & office -- 26,000 2002
FOSTER WHEELER EASTERN PRIVATE LIMITED (EC)
Singapore Office & engineering -- 29,196 2002
FOSTER WHEELER ENVIRONMENTAL CORPORATION (EC)
Atlanta, Georgia General offices -- 15,623 2004
Bothell, Washington General offices -- 39,125 2005
Boston, Massachusetts General offices -- 20,875 2005
Lakewood, Colorado General offices -- 19,140 2005
Langhorne, Pennsylvania General offices -- 18,202 2005
Morris Plains, New Jersey General offices -- 59,710 2005
Oak Ridge, Tennessee General offices -- 17,973 2004
Richland, Washington General offices -- 14,577 2002
San Diego, California General offices -- 12,957 2006
San Diego, California General offices -- 20,016 2005
Santa Ana, California General offices -- 19,569 2005
12
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
FOSTER WHEELER POWER SYSTEMS, INC. (EE)
Martinez, California Cogeneration plant 6.4 acres --
Charleston, South Carolina Waste-to-energy plant 18.0 acres -- 2010
Hudson Falls, New York Waste-to-energy plant 11.2 acres --
Camden, New Jersey Waste-to-energy plant 18.0 acres -- 2011
Talcahuano, Chile Cogeneration plant-facility site 21.0 acres -- 2028
FOSTER WHEELER ENERGIA OY (EE)
Varkhaus, Finland Manufacturing & offices 22.0 acres 366,527
Karhula, Finland Research center 12.8 acres 15,100 2095
Office and laboratory 57,986 2095
Kaarina, Finland Office -- 24,762 2002
Helsinki, Finland Office -- 13,904 2005
Kouvola, Finland Undeveloped 1.9 acres -- --
Office 1.5 acres -- 2032
Norrkoping, Sweden Manufacturing & offices -- 26,000 2002
FOSTER WHEELER ENERGY FAKOP LTD. (EE)
Sosnowiec, Poland Manufacturing & offices 26.6 acres 474,575(4)
*Designation of Business Segments: EC - Engineering and Construction Group
EE - Energy Equipment Group
CF - Corporate & Financial Services
(1) Portion or entire facility leased or subleased to third parties.
(2) 50% ownership interest.
(3) 52% ownership interest.
(4) 51% ownership interest.
(5) 75% ownership interest.
(6) Represents leases in which Foster Wheeler is the lessee.
Locations of less than 10,000 square feet are not listed. Except as noted above,
the properties set forth are owned in fee. All or part of the listed properties
may be leased or subleased to other affiliates. All properties are in good
condition and adequate for their intended use.
13
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, along with many other companies, are
codefendants in numerous asbestos related lawsuits pending in the United States.
Plaintiffs claim damages for personal injury alleged to have arisen from
exposure to or use of asbestos in connection with work allegedly performed by
the Company and its subsidiaries during the 1970's and prior. For additional
information on the asbestos claims and other material litigation affecting the
Company, see Item 7. "Managements Discussion and Analysis of Financial Condition
and Results of Operations - Significant Accounting Policies" and Note 18 to the
Financial Statements in this Form 10-K.
Under CERCLA and similar state laws, the current owner or operator of real
property and the past owners or operators of real property (if disposal took
place during such past ownership or operation) may be jointly and severally
liable for the costs of removal or remediation of toxic or hazardous substances
on or under their property, regardless of whether such materials were released
in violation of law or whether the owner or operator knew of, or was responsible
for, the presence of such substances. Moreover, under CERCLA and similar state
laws, persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be jointly and severally liable for the costs of the removal
or remediation of such substances at a disposal or treatment site, whether or
not such site was owned or operated by such person (an "off-site facility").
Liability at such off-site facilities is typically allocated among all of the
viable responsible parties based on such factors as the relative amount of waste
contributed to a site toxicity of such waste, relationship of the waste
contributed by a party to the remedy chosen for the site and other factors.
The Company currently owns and operates industrial facilities and has also
transferred its interests in industrial facilities that it formerly owned or
operated. It is likely that as a result of its current or former operations,
such facilities have been impacted by hazardous substances. The Company is not
aware of any conditions at its currently owned facilities in the United States
that it expects will cause the Company to incur material costs.
The Company is aware of potential environmental liabilities at facilities that
it acquired in Europe, but the Company has the benefit of an indemnity from the
seller of such facilities with respect to any required remediation or other
environmental violations that it believes will address the costs of any such
remediation or other required environmental measures. The Company also may
receive claims, pursuant to indemnity obligations from owners of recently sold
European facilities that may require the Company to incur costs for
investigation and/or remediation. Based on currently available information, the
Company does not believe that such costs will be material.
No assurance can be provided that the Company will not discover environmental
conditions at its currently owned or operated properties, or that additional
claims will not be made with respect to formerly owned properties, that would
require the Company to incur material expenditures to investigate and/or
remediate such conditions.
The Company has been notified that it was a potentially responsible party (a
"PRP") under CERCLA or similar state laws at three off-site facilities. At each
of these sites, the Company's liability should be substantially less than the
total site remediation costs because the percentage of waste attributable to the
Company compared to that attributable to all other PRPs is low. The Company does
not believe that its share of cleanup obligations at any of the three off-site
facilities as to which it has received a notice of potential liability will
individually exceed $1.0 million.
Several of the Company's former subsidiaries associated with a waste-to-energy
plant located in the Village of Robbins, Illinois (the "Robbins Facility")
received a Complaint for Injunction and Civil Penalties from the State of
Illinois, dated April 28, 1998 (amended in July 1998) alleging primarily state
air act violations at the Robbins Facility (PEOPLE OF THE STATE OF ILLINOIS V.
FOSTER WHEELER ROBBINS, INC. filed in the Circuit Court of Cook County,
Illinois, County Department, Chancery Division). The United States Environmental
Protection Agency commenced a related enforcement action at approximately the
same time. (EPA-5-98-IL-12 and EPA-5-98-IL-13). Although the actions seek
substantial civil penalties for numerous violations of up to $50,000 for each
violation with additional penalty of $10,000 for each day of each violation, the
maximum allowed under the statute, and an injunction against continuing
violations, the former subsidiaries have reached an agreement in principle with
the government on a Consent Decree that will resolve all violations. The
Company's liability if any, is not expected to be material.
A San Francisco, California jury returned a verdict on March 26, 2002 finding
Foster Wheeler liable for $10.6 million in the case of TODAK VS. FOSTER WHEELER
CORPORATION. The case was brought against Foster Wheeler, the U.S. Navy and
several other companies by a 59-year-old man suffering from mesothelioma which
allegedly resulted from exposure to asbestos. The Company believes there was no
15
credible evidence presented by the plaintiff that he was exposed to asbestos
contained in a Foster Wheeler product. In addition, the Company believes that
the verdict was clearly excessive and should be set aside or reduced on appeal.
The Company intends to move to set aside this verdict. Management of the Company
believes the financial obligation that may ultimately result from entry of a
judgment in this case will be paid by insurance.
On April 3, 2002 the United States District Court for the Northern District of
Texas entered an amended final judgment in the matter of KOCH ENGINEERING
COMPANY. ET AL VS. GLITSCH, INC. ET AL. Glitsch, Inc. (now known as Tray, Inc.)
is an indirect subsidiary of the Company. This lawsuit claimed damages for
patent infringement and trade secret misappropriations and has been pending for
over 18 years. As previously reported by the Company, a judgment was entered in
this case on November 29, 1999 awarding plaintiffs compensatory and punitive
damages plus prejudgment interest in an amount yet to be calculated. This
amended final judgment in the amount of $54.3 million includes such interest for
the period beginning in 1983 when the lawsuit was filed through entry of
judgment. Post-judgment interest will accrue at a rate of 5.471 percent per
annum from November 29, 1999. The management of Tray, Inc. believes that the
Court's decision contains numerous factual and legal errors subject to reversal
on appeal. Tray Inc. has filed a notice of appeal to the court of appeals.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G (3) of Form 10-K information regarding
executive officers is included in PART I.
The executive officers of Foster Wheeler, with the exceptions of Raymond J.
Milchovich and Gilles A. Renaud, have each held executive positions with Foster
Wheeler or its subsidiaries for more than the past five years.
NAME AGE POSITION
---- --- --------
Raymond J. Milchovich 52 Chairman, President and Chief Executive Officer
Henry E. Bartoli 55 Senior Vice President
Thomas R. O'Brien 63 General Counsel and Senior Vice President
Gilles A. Renaud 55 Senior Vice President and Chief Financial Officer
James E. Schessler 56 Senior Vice President
Lisa Fries Gardner 45 Vice President and Secretary
Robert D. Iseman 53 Vice President and Treasurer
Thomas J. Mazza 48 Vice President and Controller
Mr. Raymond J. Milchovich has been the Chairman, President and Chief Executive
Officer of the Company since October 22, 2001. Formerly, he was the Chairman,
President and Chief Executive Officer of Kaiser Aluminum Corporation, a leading
producer and marketer of alumina, aluminum and aluminum fabricated products, and
Kaiser Aluminum & Chemical Corporation ("KACC") since January 2000. Mr.
Milchovich was President of Kaiser Aluminum Corporation and KACC since July
1997. He also served as Chief Operating Officer of Kaiser Aluminum Corporation
and of KACC from July 1997 through May and June 2000, respectively. Prior to
that time, he held several executive positions with Kaiser Aluminum Corporation
and its subsidiaries.
Mr. Gilles A. Renaud was elected Senior Vice President and Chief Financial
Officer of the Company effective March 27, 2000. Prior to assuming this position
with the Company, Mr. Renaud was Vice President and Treasurer of United
Technologies Corporation from July 1996 to March 2000. From September 1987 to
June 1996, Mr. Renaud was Vice President and Chief Financial Officer of Carrier
Corporation, a subsidiary of United Technologies Corporation.
Each officer holds office for a term running until the Board of Directors
meeting following the Annual Meeting of Shareholders and until his or her
successor is elected and qualified. Mr. Milchovich has a five year employment
agreement with the Company, which expires in November 2006, and all other
executive officers of the Company have a Transitional Executive Severance
Agreement which runs through December 31, 2003, except in case of Mr. Renaud,
where certain provision run through March 26, 2004 in accordance with his
employment agreement. There are no family relationships between the officers
listed above. There are no arrangements or understandings between any of the
listed officers and any other person, pursuant to which he or she was elected as
an officer.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. The number
of shareholders of record as of December 28, 2001 was 6,207.
THREE MONTHS ENDED
--------------------------------------------
2001 MARCH 30 JUNE 29 SEPT. 28 DEC. 28
- ---- -------- ------- -------- -------
Cash dividends per share .............. $ .06 $ .06 -- --
Stock prices:
High ................................ $ 18.74 $ 17.75 $ 9.50 $ 5.83
Low ................................. $ 5.3125 $ 7.20 $ 4.30 $ 3.93
THREE MONTHS ENDED
--------------------------------------------
2000 MARCH 31 JUNE 30 SEPT. 29 DEC. 29
- ---- -------- ------- -------- -------
Cash dividends per share .............. $ .06 $ .06 $ .06 $ .06
Stock prices:
High ............................... $ 9.50 $ 9.4375 $ 8.8125 $ 8.4375
Low ................................ $5.1875 $ 5.8125 $ 6.25 $ 3.9375
In July 2001, the common stock dividend was discontinued by the Board of
Directors of the Company.
18
ITEM 6. SELECTED FINANCIAL DATA
COMPARATIVE FINANCIAL STATISTICS
(In Thousands, Except per Share Amounts)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues .................................... $ 3,392,474 $ 3,969,355 $ 3,944,074 $ 4,596,992 $ 4,172,015
(Loss)/earnings before income taxes ......... (206,005) 56,023 (190,526) 47,789 19,516
Provision/(benefit) for income taxes ........ 103,138 16,529 (46,891) 79,295 13,892
Net (loss)/earnings ......................... (309,143)(1)(2) 39,494 (143,635)(4) (31,506)(5) 5,624(6)(7)
Loss)/earnings per share:
Basic ..................................... $ (7.56) $ .97 $ (3.53) $ (.77) $ .14
Diluted ................................... $ (7.56) $ .97 $ (3.53) $ (.77) $ .14
Shares outstanding:
Basic:
Weighted average number of shares outstanding 40,876 40,798 40,742 40,729 40,677
Diluted:
Effect of stock options ............... * 7 * * 127
----------- ----------- ----------- ----------- -----------
Total diluted ............................ 40,876 40,805 40,742 40,729 40,804
=========== =========== =========== =========== ===========
Current assets .............................. $ 1,754,376 $ 1,622,976 $ 1,615,096 $ 1,672,842 $ 1,545,271
Current liabilities ......................... 2,388,620 1,454,603 1,471,552 1,491,666 1,412,302
Working capital ............................. (634,244) 168,373 143,544 181,176 132,969
Land, buildings and equipment (net) ......... 399,198 495,034 648,199 676,786 621,336
Total assets ................................ 3,316,379 3,477,528 3,438,109 3,322,301 3,186,731
Bank loans .................................. 20,244 103,479 63,378 107,051 53,748
Long-term borrowings (including current
installments):
Corporate and other debt ................. 297,627(3) 306,188 372,921 541,173 445,836
Project debt ............................. 226,056(3) 274,993 349,501 314,303 281,360
Subordinated Robbins Facility exit funding
obligations ............................... 110,340(3) 111,715 113,000 -- --
Convertible subordinated notes .............. 210,000(3) -- -- -- --
Preferred trust securities .................. 175,000(3) 175,000 175,000 -- --
Cash dividends per share of common stock .... $ .12 $ .24 $ .54 $ .84 $ .835
Other data:
Unfilled orders, end of year ................ $ 6,004,420 $ 6,142,347 $ 6,050,525 $ 7,411,907 $ 7,184,628
New orders booked ........................... 4,109,321 4,480,000 3,623,202 5,269,398 5,063,940
(1) Includes in 2001, contract write-downs of $160,600 ($104,400 after tax);
restructuring cost of $41,600 ($27,000 after tax) and a reserve for
deferred tax assets of $171,900.
(2) Includes in 2001, loss on sale of cogeneration plants of $40,300 ($27,900
after tax) increased pension cost of $5,000 ($3,300 after tax) and a
provision for CEO retirement of $2,700 ($1,800 after tax).
(3) The corporate and other debt, the subordinated Robbins Facility exit
funding obligations, the convertible subordinated notes, the preferred
trust securities and $88,201 of the project debt have been classified as
current liabilities and are included in the $2,388,620 total current
liabilities balance due to the covenant violations under the Company's
Revolving Credit Agreement and the potential for acceleration of debt
under these various debt agreements. See Note 1 to Financial Statements
for further information.
(4) Includes in 1999 a provision of $37,600 ($27,600 after tax) for cost
realignment and a charge totaling $244,600 ($173,900 after tax) of which
$214,000 relates to the Robbins Facility write-down and $30,600 relates
to the current year operations of the Robbins Facility.
(5) Includes in 1998 a charge for the Robbins Facility of $72,800 ($47,300
after tax) of which $47,000 relates to the Robbins Facility write-down
and $25,800 relates to the current year operations and a provision of
$61,300 for an increase in the income tax valuation allowance for a total
after-tax charge of $108,600.
(6) Includes in 1997 a net charge of $50,900 ($37,400 after tax) consisting
of the following pretax items: gain on sale of Glitsch International,
Inc.'s operations $56,400; provision for reorganization costs of the
Energy Equipment Group $32,000; write-downs of long-lived assets $6,500;
contract write-downs $24,000 (Engineering & Construction Group) and
$30,000 (Energy Equipment Group); and realignment of the Engineering &
Construction Group's European operations $14,800.
(7) Includes in 1997 an operating loss for the Robbins Facility of $38,900
($25,300 after tax).
* The effect of the stock options were not included in the calculation of
diluted earnings per share as these options were antidilutive due to the
2001, 1999 and 1998 losses. In 2001, the effect of the convertible notes
was not included in the calculation as the effect was antidilutive.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Thousands of Dollars, Except per Share Amounts)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements that are based on management's assumptions, expectations and
projections about the various industries within which the Company operates. Such
forward-looking statements by their nature involve a degree of risk and
uncertainty. The Company cautions that a variety of factors, including but not
limited to the following, could cause business conditions and results to differ
materially from what is contained in forward-looking statements such as: changes
in the rate of economic growth in the United States and other major
international economies, changes in investment by the power, oil and gas,
pharmaceutical, chemical/petrochemical and environmental industries, changes in
regulatory environment, changes in project schedules, changes in trade, monetary
and fiscal policies worldwide, currency fluctuations, terrorist attacks on
facilities either owned or where equipment or services are or may be provided,
outcomes of pending and future litigation including litigation regarding the
Company's liability for damages and insurance coverage for asbestos exposure,
protection and validity of patents and other intellectual property rights and
increasing competition by foreign and domestic companies, monetization of
certain facilities and recoverability of claims against customers. For
additional information, see Item 1. "Business - Risk Factors of the Business".
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
THREE YEARS ENDED DECEMBER 28, 2001
RESULTS OF OPERATIONS
CONSOLIDATED DATA
2001 2000 1999
---- ---- ----
Unfilled orders..................... $ 6,004,400 $6,142,300 $6,050,500
New orders.......................... 4,109,300 4,480,000 3,623,200
Revenues............................ 3,392,500 3,969,400 3,944,100
Net (loss)/earnings................. (309,100) 39,500 (143,600)
(Loss)/earnings per share:
Basic and diluted.............. (7.56) .97 (3.53)
In the fourth quarter of 2001, the Company took after-tax contract and
restructuring charges of $131,400 and established a valuation allowance for
deferred tax assets of $171,900 for a total after-tax charge of $303,300. Shown
below is a table that details the pretax and after-tax impact of the various
components of the charge.
PRE-TAX AFTER TAX
------- ---------
Contract Related:
HRSGs (a) $ 84,400 $ 54,800
Warranty and Rework (b) 11,100 7,200
Accounts receivable-trade (c) 28,100 18,300
Claims Reassessment (d) 37,000 24,100
------ ------
160,600 104,400
------- -------
Restructuring:
Company-owned life insurance
plan Termination (e) 20,000 13,000
Other Restructuring (e) 21,600 14,000
Increase in Valuation Allowance
for Deferred Tax Assets (f): - 171,900
------------- -------------
Total $ 202,200 $ 303,300
============ =============
20
a) Approximately $54,800 after-tax relates to heat recovery steam generators
("HRSG's"). During 2000 and early 2001, the Company had been extremely
successful in marketing these products, however, it was determined that
the Company had underestimated the cost on seven contracts. The cost
underestimates were primarily related to construction and subcontracted
fabrication. Corrective action was taken on these projects resulting in a
$54,800 after-tax charge. This product line is part of the Energy
Equipment Group.
b) Warranty and rework issues for one project resulted in an after-tax cost
of $7,200 in the E&C Group. This cost related to a technical production
issue on a refinery unit.
c) During the fourth quarter, the Company made an aggressive commitment to
either collect the cash due or establish reserves for past due
receivables. The Company was successful in collecting some trade
receivables, which contributed to the improved cash position in the fourth
quarter. Based on a variety of factors, including clients' ability to pay,
a decision was made to establish after-tax reserves of $18,300 for
approximately 20 receivable balances. The largest was for an Indonesian
customer in the amount of $4,000.
d) Approximately $24,100 in after-tax contract-related charges resulted from
claims reassessment conducted by the Company's legal staff in conjunction
with outside counsel. The claims have been brought by the Company against
its customers and many were in the process of being submitted for
litigation or arbitration.
e) The Company also recorded an after-tax restructuring charge of $27,000
which included $14,000 for workforce reductions in the United States and
subsidiary closures to be finalized in early 2002. The Company also
canceled a company-owned life insurance plan ("COLI") for certain managers
resulting in a $13,000 after-tax charge to earnings.
f) The Company established a valuation allowance of $171,900 primarily for
domestic deferred tax assets under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS 109"). Such action is required when there is evidence of losses
from domestic operations in the three most recent fiscal years. As a
result of the fourth quarter charge, the Company on average experienced
losses during the past three years. For statutory purposes, the majority
of the tax benefits for which the valuation allowance was provided in the
current year, do not begin to expire until 2020 and beyond, based on the
current tax laws.
In aggregate, the future cash impact of all of these charges and the tax
reserve is slightly positive, primarily due to proceeds to be received in
2002 from the cancellation of the company-owned life insurance plan.
Subsequent to year-end and prior to the issuance of the financial statements,
the Company performed a further review of the North American Energy Equipment
Group projects, primarily HRSG contracts. At that time, it was determined that
incremental losses were required to be taken in fiscal 2001 as a result of
changes in the estimated final costs of these projects. The Company recorded the
incremental charge of $46,000, primarily related to construction activities.
This charge is included in the amounts discussed above.
The Company's continuing business strategy is to maintain focus on its core
business segments in engineering and construction and energy equipment. In order
to remain competitive in these segments while improving margins, during 1999 and
2000 the Company reduced costs through staff reduction and closure of some
smaller operating facilities. These changes included the reduction of
approximately 1,600 permanent positions, including 500 overhead and other
support positions from its worldwide workforce. In addition, approximately 800
agency personnel within the E&C Group were eliminated during the course of
fiscal 1999. The positions eliminated included engineering, clerical, support
staff and manufacturing personnel.
In connection with this cost realignment plan, the Company recorded charges in
the third quarter of 1999 of approximately $37,600 ($27,600 after-tax). The
pre-tax charge by group was as follows: $19,600 for the Engineering &
Construction Group, $2,500 for the Energy Equipment Group and $15,500 for
Corporate and Financial Services. Approximately $22,600 represented employee
severance costs. The related benefits and the balance represented asset
write-downs and provisions for closing some offices. The plan was completed
prior to the end of the first quarter 2000, with no additional charges being
recorded.
On October 21, 1999, the Company announced it had reached an agreement (the
"Robbins Agreement") with the holders of approximately 80% of the principal
amount of bonds issued in connection with the financing of the Robbins Facility.
Under the Robbins Agreement, the $320,000 aggregate principal amount of existing
bonds were exchanged for $273,000 aggregate principal amount of new bonds on
February 3, 2000, $113,000 of which (the "Company-supported Robbins Bonds") will
be funded by payments from the Company and the balance of which (the
"Non-recourse Robbins Bonds") will be non-recourse to the Company. In addition,
pursuant to the Robbins Agreement the Company exited from its
20
operating role in respect to the Robbins Facility.
Specific elements of the Robbins Agreement are as follows:
o The new Company-supported Robbins Bonds consist of (a) $95,000 aggregate
principal amount of 7.25% amortizing term bonds, $17,800 of which mature on
October 15, 2009 and $77,200 of which mature on October 15, 2024 (see Note
11 to Financial Statements for sinking fund requirements) (the "1999C
Bonds") and (b) $18,000 aggregate principal amount of 7% accretion bonds
maturing on October 15, 2009 with all interest to be paid at maturity (the
"1999D Bonds");
o The Company agreed to operate the Robbins Facility for the benefit of the
bondholders until the earlier of the sale of the Robbins Facility or
October 15, 2001, on a full-cost reimbursable basis with no operational or
performance guarantees;
o Any remaining obligations of the Company under a $55,000 additional credit
support facility in respect of the existing bonds were terminated;
o The Company would continue to prosecute certain pending litigation (the
"Retail Rate Litigation") against various officials of the State of
Illinois (See Note 18 to Financial Statements, "Litigation and
Uncertainties"); and
o The Company would cooperate with the bondholders in seeking a new
owner/operator for the Robbins Facility.
On December 1, 1999, three special purpose subsidiaries of the Company commenced
reorganization proceedings under Chapter 11 of the Bankruptcy Code in order to
effectuate the terms of the Robbins Agreement. On January 21, 2000, these
subsidiaries' plan of reorganization was confirmed and the plan was consummated
on February 3, 2000.
On August 8, 2000, the Company initiated the final phase of its exit from the
Robbins Facility. As part of the Robbins Agreement, the Company agreed to
operate the Robbins Facility subject to being reimbursed for all costs of
operation. Such reimbursement did not occur and, therefore, pursuant to the
terms of the Robbins Agreement, the Company on October 10, 2000, completed the
final phase of its exit from the project. The Company had been administering the
project companies through a Delaware business trust which owns the project on
behalf of the bondholders. As a result of its exit from the project, the Company
is no longer administering the project companies. In 2002, a subsidiary of the
Company reached an agreement with the debtor project companies and the requisite
holders of the bonds which agreement is expected to favorably resolve any issues
related to the exit from the project.
In the fourth quarter of 1999, the Company recorded a pre-tax charge of
approximately $214,000. This charge fully recognized all existing obligations of
the Company related to the Robbins Facility, including (a) pre-tax lease expense
of $45,600, (b) $20,400 of outstanding bonds issued in conjunction with the
equity financing of the Robbins Facility and (c) transaction expenses of $4,500.
The liability for all of the Company-supported bonds were recorded at the net
present value of $133,400 with $113,000 being subordinated obligations and
$20,400 as senior Company obligations. The Company is considered to be the
primary obligor on these bonds. The ongoing legal expenses relating to the
Retail Rate Litigation (See Note 18 to Financial Statements, "Litigation and
Uncertainties") are expensed as incurred.
The Company's consolidated unfilled orders at the end of fiscal 2001 were
$6,004,400, a decrease of $137,900 over the amount reported for the end of
fiscal 2000 of $6,142,300 which in turn represented an increase of $91,800 from
unfilled orders at the end of fiscal 1999 of $6,050,500. The dollar amount of
unfilled orders is not necessarily indicative of the future earnings of the
Company related to the performance of such work. Although unfilled orders
represent only business which is considered firm, there can be no assurance that
cancellations or scope adjustments will not occur. Due to additional factors
outside of the Company's control, such as changes in project schedules, the
Company cannot predict with certainty the portion of unfilled orders which may
not be performed. Unfilled orders have been adjusted to reflect project
cancellations, deferrals and revised project scopes and costs. The net reduction
in unfilled orders from project adjustments and cancellations for fiscal 2001
was $781,900, compared with $279,900 in fiscal 2000 and $880,100 in fiscal 1999.
The large size and uncertain timing of projects can create variability in the
Company's contract awards, and therefore, future award trends are difficult to
predict.
New orders awarded for fiscal 2001 ($4,109,300) were 8% lower than new orders
awarded for fiscal 2000 ($4,480,000) which in turn were 24% higher than new
orders awarded in fiscal 1999 ($3,623,200). A total of 55% of new orders in
fiscal 2001 were for projects awarded to the Company's subsidiaries located
outside of the United States as compared to
21
63% in fiscal 2000 and 55% in fiscal 1999. Key geographic regions outside of the
United States contributing to new orders awarded in fiscal 2001 were Europe,
Asia and the Middle East.
Operating revenues of $3,315,300 in fiscal 2001 represent a decrease of $576,100
or 14.8% compared to 2000. The 2000 revenues of $3,891,400 were approximately
the same as 1999. The decrease in 2001 related primarily to a decrease in
flow-through costs and a shift in the United Kingdom towards reimbursable
service-only contracts.
Gross earnings from operations, which are equal to operating revenues minus the
cost of operating revenues ("gross earnings") decreased $174,900 or 53.6% in
fiscal 2001 as compared to fiscal 2000, to $151,300 from $326,200 which was an
increase of approximately 9.5% from fiscal 1999. The gross earnings in 2001 were
reduced by $160,600 due to the fourth quarter charge to earnings previously
discussed. The gross earnings in 1999 were reduced by the Robbins operating loss
of $23,500 and the cost realignment of $17,500.
Selling, general and administrative expenses increased $3,100, or 1.4% in fiscal
2001 as compared to fiscal 2000 to $222,500 from $219,400, which in turn
represented a decrease of $16,200 from expenses reported in fiscal 1999 of
$235,600. The $3,100 increase in 2001 includes severance costs of approximately
$2,000, which were included in the fourth quarter charge. The decrease for 2000
was primarily due to the cost reduction plan implemented in 1999, as well as
lower proposal costs in both the Engineering and Construction Group and the
Energy Equipment Group.
Other income in fiscal 2001 of $77,200 was approximately the same as fiscal 2000
of $78,000 and in 1999 of $77,000.
Other deductions in fiscal 2001 increased by $80,700 from fiscal 2000. The
primary reasons for the 2001 increase were the fourth quarter loss on the sale
of the Mt. Carmel co-generation facility of $35,300; the second quarter loss on
the sale of two hydrogen production plants of $5,000; the fourth quarter
restructuring cost of $39,300; and increased pension and postretirement cost of
$8,000. These were partially offset by non-recurrence of the 2000 provision for
a French lawsuit regarding an indemnity that was given to the purchaser of a
former Foster Wheeler subsidiary in the amount of $6,000. Other deductions in
fiscal 2000 decreased by $900 from fiscal 1999.
The tax provision for fiscal 2001 was $103,100 on losses before tax of $206,000.
The change from a benefit of $68,800 to a provision of $103,100 was primarily
due to the establishment of a valuation allowance for domestic deferred tax
assets of $171,900 in the fourth quarter of 2001. The establishment of a
valuation allowance was required under the provisions of SFAS 109 due to the
cumulative losses incurred domestically in the three years ended December 28,
2001. For statutory purposes, the majority of the domestic federal tax benefits,
against which reserves are being taken, do not expire until 2020 and beyond,
based on current tax laws. In 2000, the low effective tax rate of 29.5% was
primarily due to non-recurring foreign tax benefits. The tax benefit for fiscal
1999 was $46,900 on losses before income taxes of $190,500. The low effective
tax rate benefit of 24.6% in 1999 was primarily due to an increase of $15,000 in
the valuation allowance, caused by losses related to the Robbins Facility, of
which $10,000 related to federal income taxes and $5,000 to state income taxes.
The net loss for fiscal 2001 was $309,100 or $7.56 diluted per share. The
previously described fourth quarter charge impacted the 2001 results by
$303,300, which included an increase in the tax valuation of $171,900. The net
earnings for fiscal 2000 were $39,500 or $.97 diluted per share. The net loss
for fiscal 1999 was $143,600 or $3.53 diluted per share which included net
losses for the Robbins Facility of $173,900 (write-down - $154,000 and operating
losses - $19,900) and cost realignment of $27,600.
ENGINEERING AND CONSTRUCTION GROUP
2001 2000 1999
---- ---- ----
Unfilled orders ...................... $4,539,300 $4,534,600 $4,741,500
New orders ........................... 2,808,700 3,094,600 2,752,200
Operating revenues ................... 2,162,100 2,933,100 2,975,500
Gross earnings from operations ....... 85,300 184,700 189,600
22
The E&C Group's unfilled orders at the end of fiscal 2001 were approximately the
same as 2000, which in turn represented a 4% decrease from unfilled orders at
the end of fiscal 1999.
New orders awarded to the E&C Group in fiscal 2001 decreased by 9.2% compared to
fiscal 2000. The decrease in Continental Europe of $480,000 was partially offset
by increased awards in the other operating units. The 2001 decrease in
Continental Europe was due to the award of a significant Middle Eastern contract
in 2000 that was not repeated in 2001.
Operating revenues for fiscal 2001 decreased $771,000 or 26% from fiscal 2000.
Operating revenues in 2001 decreased primarily due to the lower level of
flow-through costs and a shift in the United Kingdom towards reimbursable
service only contracts. The Company includes pass-through costs on cost-plus
contracts which are customer-reimbursable materials, equipment and subcontractor
costs when the Company determines that it is responsible for the engineering
specification, procurement and management of such cost components on behalf of
the customer. The percentage relationship between pass-through costs of
contracts and revenues will fluctuate from year to year depending on a variety
of factors including the mix of business in the years compared. The E&C Group
reported a slight decrease in operating revenues in fiscal 2000 as compared to
fiscal 1999. The decrease in 2000 operating revenues was due to decreased
activities in the United States, United Kingdom and Italy.
The E&C Group's gross earnings decreased $99,400 in fiscal 2001 as compared with
fiscal 2000 or 53.8% which in turn represented a decrease of 2.6% from gross
earnings in fiscal 1999. The gross earnings for 2001 in the E&C Group were
impacted negatively by $67,200 due to the fourth quarter charge, which included
$29,000 for claims reassessments and receivable and contract write-downs of
$38,200. The decrease in 2000 was primarily due to activities in the United
Kingdom and Continental Europe.
ENERGY EQUIPMENT GROUP (EXCLUDING THE ROBBINS FACILITY)
The Company continues to review various methods of monetizing selected power
systems facilities. Based on current economic conditions, management has
concluded that it will continue to operate the facilities in the normal course
of business. Management has reviewed these facilities for impairment on an
undiscounted cash flow basis and determined that no adjustment to the carrying
amounts is required. If the Company was able to monetize these assets, it is
possible that the amounts realized could differ materially from the balances
reflected in the financial statements. In the first quarter of 2002, the Company
has entered a preliminary agreement of sale with a buyer for one of its waste to
energy facilities. If the sale is consummated under the terms of the preliminary
agreement, the Company will recognize a pre-tax loss on the sale of
approximately $19,500.
In addition, the Company anticipates taking a charge in 2002 of approximately
$25,000 for the impairment of goodwill related to a waste-to-energy facility as
required under the provisions of SFAS 142. While no additional charges are
currently anticipated, the Company is still in the process of evaluating the
impact of the adoption of SFAS 142.
2001 2000 1999
---- ---- ----
Unfilled orders .................... $1,493,100 $1,727,400 $1,445,800
New orders ......................... 1,314,500 1,468,700 1,045,900
Operating revenues ................. 1,228,900 1,057,400 982,500
Gross earnings from operations ..... 64,900 139,700 129,700
The Energy Equipment Group's unfilled orders decreased $234,300 at the end of
fiscal 2001, representing a 13.6% decrease from fiscal 2000 which in turn
represented an 19.5% increase from unfilled orders at the end of fiscal 1999.
The decrease in 2001 was due to the lower level of new orders as described
below.
New orders for fiscal 2001 decreased $154,200 or 10.5% from fiscal 2000 which in
turn represented a 40.4% increase from fiscal 1999. New orders for 2001 and 1999
were lower than 2000 primarily due to the high level of orders experienced in
2000 for Heat Recovery Steam Generators (HRSG) and Selective Catalytic Reduction
(SCR) units.
23
Operating revenues for fiscal 2001 increased $171,500 or 16.2% from fiscal 2000
which in turn represented a 7.6% increase from fiscal 1999. Work was performed
during 2001 on the significant awards achieved in 2000.
The gross earnings from operations decreased $74,800 or 53.5% from fiscal 2000.
The gross earnings for 2001 were negatively impacted by the fourth quarter
charge in the amount of $88,400 which included $71,600 for HRSG's and $16,800
for accounts receivable and disputed claims. The 2000 increase of $10,000 or
7.7% from fiscal 1999 was in line with the increase in operating revenues during
that fiscal year.
RESEARCH AND DEVELOPMENT
The Company is continually engaged in research and development efforts, both in
performance and analytical services on current projects and in development of
new products and processes. During fiscal years 2001, 2000 and 1999,
approximately $12,300, $12,000 and $12,500, respectively, were spent on
Company-sponsored research activities. During the same periods, approximately
$39,200, $27,600 and $27,100, respectively, were spent on research activities
that were paid by customers of the Company.
FINANCIAL CONDITION
Shareholders' equity at the end of fiscal 2001 was $7,500 as compared to
$364,100 at the end of fiscal 2000 and $375,900 at the end of fiscal 1999. The
decrease for 2001 relates to the loss for the year of $309,100, a net minimum
pension liability adjustment of $36,800 included in other comprehensive loss, a
change in the accumulated translation adjustment of $10,200 and dividend
payments of $4,900. These were partially offset by net gains on derivative
instruments of approximately $3,800 included in other comprehensive loss. The
decrease for 2000 relates to a change in the accumulated translation adjustment
of $20,000; a net minimum pension liability adjustment of $21,500 included in
other comprehensive loss and dividend payments of $9,800 which were offset by
earnings for the year of $39,500.
For fiscal 2001, 2000 and 1999, investments in land, buildings and equipment
were $34,000, $45,800 and $128,100, respectively. The decreases in 2001 and 2000
are primarily due to lower investments in foreign build, own and operate plants
which is in line with the previously announced repositioning plan for these
types of plants. Capital expenditures will continue to be directed primarily
toward strengthening and supporting the Company's core businesses.
Net debt increased by $38,700 during fiscal 2001 compared to a decrease of
$109,000 during fiscal 2000. Net debt includes corporate and other debt, special
purpose project debt, bank loans, subordinated Robbins Facility exit funding
obligations, convertible subordinated notes and preferred trust securities net
of cash and short term investments. The 2001 increase was primarily due to the
significant use of cash by operating activities during the year. In 2001, the
Company issued $210,000 principal amount of convertible subordinated notes, the
net proceeds of which were used to repay $76,300 under the 364-day revolving
credit facility that expired on May 30, 2001 and to reduce advances outstanding
under the Revolving Credit Agreement. The 2000 decrease was accomplished
primarily by the sale of a 50 percent interest in a waste-to-energy facility in
Italy. Also, the Company entered into a sale/leaseback of an office building in
Spain, which resulted in gross proceeds of approximately $21,000. In 1999, the
Company issued $175,000 of Preferred Trust Securities, the proceeds of which
were used to reduce the Company's indebtedness under its senior credit
facilities. In 1999, the Company entered into a sale/leaseback of an office
building in the United Kingdom, which resulted in gross proceeds of $126,800.
LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 2001, the Company had cash and cash equivalents on hand and
short-term investments of $224,300. Management of the Company does not believe
that this amount will be adequate to meet the Company's working capital and
liquidity needs in the absence of a new or amended credit facility which
replaces the Revolving Credit Agreement. While the waivers remain in effect the
Company cannot make any additional borrowings under the Revolving Credit
Agreement or issue any letters of credit that are not cash collateralized.
Although the Company is in negotiations with its lenders for a new or amended
credit facility, there can be no assurances that the Company will be successful
in entering into a new or amended credit facility.
If the Company fails to enter into a new or amended credit facility during the
pendency of the waiver, which expires April 30, 2002, the lenders under the
Revolving Credit Agreement could accelerate the repayment of amounts borrowed
under such agreement ($140,000 as of March 29, 2002) and to require the Company
to cash collateralize standby letters of credit outstanding thereunder ($93,000
as of March 29, 2002). Acceleration of the Revolving Credit Agreement would
result in a default under the following agreements: the Senior Notes, the
Convertible Subordinated Notes, the Preferred Trust
24
Securities, the Subordinated Robbins Facility exit funding obligations and
certain of the special-purpose project debt, which would allow such debt to be
accelerated. It is unlikely that the Company would be able to repay amounts
borrowed if the payment dates were accelerated. Failure by the Company to repay
such amounts would have a material adverse effect on the Company's financial
condition and operations.
The Company also has in place a receivables sale arrangement pursuant to which
the Company has sold receivables totaling $50,000. The bank that is party to
this financing has elected to terminate the agreement in accordance with its
terms. Notwithstanding the election to terminate the agreement, the bank has
provided extensions while the Company negotiates with other providers to replace
this financing.
The Company is also a lessee under an operating lease financing agreement
relating to a corporate office building in the amount of $33,000 with a
consortium of banks. The lease financing facility matured on February 28, 2002.
The banks that are party to that agreement have provided forbearance through
April 30, 2002 while the Company is negotiating with another financial
institution to replace this lease financing.
There can be no assurance that the Company will be able to negotiate extensions
of the receivables sale arrangement or the lease financing forbearance or that
the Company will be able to enter into replacement facilities for either the
receivables sale arrangement or the lease financing. Failure by the Company to
make the payments required upon expiration of the receivable sale arrangement or
lease financing forbearance would have a material adverse effect on the
Company's financial condition and operations.
The Company has initiated a comprehensive plan to enhance cash generation and to
improve profitability. The operating performance portion of the plan
concentrates on the quality and quantity of backlog, the execution of projects
in order to achieve or exceed the profit and cash targets and the optimization
of all non-project related cash sources and uses. In connection with this plan a
group of outside consultants has been hired for the purpose of carrying out a
performance improvement intervention. The Company's recently appointed Chief
Executive Officer has utilized this approach on several previous occasions with
significant success. The tactical portion of the performance improvement
intervention concentrates on booking current projects, executing twenty-two
"high leverage projects" and generating incremental cash from high leverage
opportunities such as overhead reductions, procurement and accounts receivable.
The systemic portion of the performance improvement intervention concentrates on
sales effectiveness, estimating, bidding and project execution procedures.
While there is no assurance that funding will be available to execute its plan
to enhance cash generation and to improve profitability, the Company is
continuing to seek financing to support the plan and its ongoing operations. To
date, the Company has been able to obtain sufficient financing to support its
ongoing operations. The Company has also initiated a liquidity action plan,
which focuses on accelerating the collection of receivables, claims recoveries
and asset sales.
Cash and cash equivalents amounted to $224,000 at December 28, 2001, an increase
of $32,100 from the prior fiscal year-end. Short-term investments decreased
$1,500 to $300 at the end of 2001. During fiscal 2001, the Company paid $4,900
in shareholder dividends, repaid short and long-term debt in the amount of
$296,800 and received proceeds from short and long-term borrowings of $185,000.
In fiscal 2001, cash flows used by operating activities totaled $88,700 compared
to cash flows used by operating activities of $16,700 in 2000, an increase of
$72,000. The increase was due to $110,500 less cash provided by the EE Group
offset by the lower use of the E&C Group of $29,800 and by the Corporate and
Financial Services Group of $8,700. The $110,500 decrease in cash provided by
the EE Group was primarily due to lower cash generated by the EE Groups' North
American operations.
During fiscal 2000, cash flows used by operating activities totaled $16,700
compared to cash flows used by operating activities of $5,600 in 1999. The
increase of $11,100 was primarily due to a $60,000 increase in the use of cash
by the E&C Group and a $90,900 increase in the use of cash by the Corporate and
Financial Services Group offset by a $139,800 change in the EE Group.
The Company's contracts in process and inventories increased by $39,800 during
2001 from $464,300 at December 29, 2000, to $504,100 at December 28, 2001. This
increase can be attributed to contract activity in the E&C Group of $35,800
primarily due to a higher level of contracts in process. In addition, accounts
receivable increased by $57,100 in fiscal 2001 to $946,300 from $889,200 in
fiscal 2000.
The Company's working capital varies from period to period depending on the mix,
stage of completion and commercial terms and conditions of the Company's
contracts. Working capital needs have increased during the past several years as
a result of the Company's satisfying requests from its customers for more
favorable payment terms under contracts. Such requests generally include reduced
advance payments and less favorable payment schedules to the Company.
In the third quarter of 1998, a subsidiary of the Company entered into a
three-year agreement with a financial institution whereby the subsidiary would
sell an undivided interest in a designated pool of qualified accounts
receivable. Under the terms of the agreement, new receivables are added to the
pool as collections reduce previously sold accounts receivable. The credit risk
of uncollectible accounts receivable has been transferred to the purchaser. The
Company services, administers and collects the receivables on behalf of the
purchaser. Fees payable to the purchaser under this agreement are equivalent to
rates afforded high quality commercial paper issuers plus certain administrative
expenses and are included in other deductions in the Consolidated Statement of
Earnings and Comprehensive Income. The agreement contains certain covenants and
provides for various events of termination. The Company has received a waiver
under this
25
receivables sale agreement and management is in discussions with its lenders
regarding a replacement for this receivables sale arrangement as previously
discussed. There can be no assurance that the Company will be able to negotiate
further waivers or a replacement agreement. As of December 28, 2001 and December
29, 2000, $50,000 in receivables were sold under the agreement and are therefore
not reflected in the accounts receivable - trade balance in the Consolidated
Balance Sheet.
On January 13, 1999, FW Preferred Capital Trust I, a Delaware business trust
issued $175,000 of Preferred Trust Securities. These Preferred Trust Securities
are entitled to receive cumulative cash distributions at an annual rate of 9.0%.
Distributions are paid quarterly in arrears on April 15, July 15, October 15 and
January 15 of each year, beginning April 15, 1999. Such distributions may be
deferred for periods up to five years during which time additional interest
accrues at 9.0%. On January 15, 2002, the Company exercised its option under the
Preferred Trust Securities to defer the distribution payable on that date. On
April 2, 2002, the Company stated it will also exercise its option to defer the
distribution payable on April 15, 2002. The maturity date of the Trust Preferred
Securities is January 15, 2029. Foster Wheeler can redeem these Preferred Trust
Securities on or after January 15, 2004. The proceeds were used to reduce
borrowing under the Company's Revolving Credit Agreement. See Note 9 to
Financial Statements for further information regarding the Company's Revolving
Credit Agreement.
In May and June 2001, the Company issued convertible subordinated notes in an
aggregate principal amount of $210,000. The notes are due in 2007 and bear
interest at 6.5% per annum, payable semi-annually on June 1 and December 1 of
each year. The notes may be converted into common shares at an initial
conversion rate of 62.3131 common shares per $1,000 principal amount or $16.05
per common share subject to adjustment under certain circumstances. The net
proceeds of approximately $202,900 were used to repay advances outstanding under
the Revolving Credit Agreement. Debt issuance costs are a component of interest
expense over the term of the notes.
The Board of Directors of the Company discontinued the common stock dividend in
July 2001.
The Company has contractual obligations comprised of bank loans, corporate and
other debt, special purpose project debt, subordinated Robbins Facility exit
funding obligations, convertible subordinated notes and preferred trust
securities. The Company is also obligated under non-cancelable operating lease
obligations. The aggregate maturities as of December 28, 2001, of these
contractual obligations are as follows:
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Bank Loans ................................. $ 20,244 $ 20,244
Corporate and other debt ................... 297,627 297,627
Special-purpose project debt ............... 226,056 88,201 $15,912 $13,913 $14,910 $15,799 $77,321
Subordinated Robbins Facility exit
funding obligations..................... 110,340 110,340
Convertible subordinated notes ............. 210,000 210,000
Preferred trust securities ................. 175,000 175,000
Operating lease commitments ................ 249,500 27,300 21,600 20,500 16,900 12,200 151,000
---------- -------- ------- ------- ------- ------- -------
Total Contractual Cash Obligations ......... $1,288,767 $928,712 $37,512 $34,413 $31,810 $27,999 $228,321
========== ======== ======= ======= ======= ======= =======
In certain instances in its normal course of business, the Company has provided
security for contract performance consisting of standby letters of credit, bank
26
guarantees and surety bonds. As of December 28, 2001, such commitments and their
period of expiration are as follows:
TOTAL LESS THAN 1 YEAR 1-2 YEARS 4-5 YEARS OVER 5 YEARS
----- ---------------- --------- --------- ------------
Bank issued letters of
credit and guarantees ........... $ 558,294 $ 258,508 $ 276,033 $ 16,491 $ 7,262
Surety bonds ........................ 467,317 404,544 61,774 44 955
---------- ---------- ---------- ---------- ----------
Total Commitments ................... $1,025,611 $ 663,052 $ 337,807 $ 16,535 $ 8,217
========== ========== ========== ========== ==========
The Company may experience difficulty in obtaining surety bonds on an unsecured
basis in the future due to the changing view of sureties with respect to risk of
loss given current market conditions and the Company's credit-related matter as
discussed above. This may impact the Company's ability to secure new busin