UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
 |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 27, 2002
OR
 |
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from .......... to ..........
Commission file number 001-31305
FOSTER WHEELER LTD.
(Exact Name of Registrant as Specified
in its Charter)
BERMUDA |
22-3802649 | |
(State
or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
Perryville
Corporate Park, Clinton, New Jersey |
08809-4000 | |
(Address
of Principal Executive Offices) |
(Zip Code) |
(908) 730-4000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
(Title
of Each Class) |
(Name of Each Exchange on which Registered) | |
Foster
Wheeler Ltd. Common Stock, $1.00 par value |
New York Stock Exchange | |
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. 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.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No
As of June 28, 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 $65,234,496 (based on the last price on that date of $1.60 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 April 29, 2003 are incorporated by reference in Part III of this report. |
FOSTER WHEELER LTD.
2002 Form 10-K Annual Report
Table of Contents
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth in this Report. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement” for further information.
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PART I
ITEM 1. BUSINESS |
General Development of
Business: |
Foster Wheeler Ltd. was incorporated under the laws of Bermuda in 2001. Effective May 25, 2001, Foster Wheeler Corporation, which was originally incorporated under the laws of the State of New York in 1900, underwent a reorganization pursuant to which shareholders received one share of Foster Wheeler Ltd. for each share of Foster Wheeler Corporation they owned. Foster Wheeler Ltd. is incorporated under the laws of Bermuda and is essentially a holding company that owns the stock of various subsidiary companies. Except as the context otherwise requires, the terms “Foster Wheeler” or the “Company”, as used herein, include Foster Wheeler Ltd. and its direct and indirect subsidiaries.
Foster Wheeler maintains a website located at www.fwc.com where copies of all periodic public filings with the Securities and Exchange Commission are available as well as other information about the Company.
Recent Developments (Amounts in Thousands of Dollars) |
The Company sold the operating business of its wholly-owned subsidiary, Foster Wheeler Environmental Corporation (“FWENC”) on March 7, 2003. The Company received immediate net cash proceeds of approximately $80,000 consisting of $72,000 of sales proceeds and the balance from cash retained within the business. The Company expects to receive an additional $57,000 before year end pursuant to the terms of a government contract which was not included in the sale. The cash proceeds will be available for general corporate purposes.
Financial Information About Industry Segments: |
See Note 23 to Financial Statements in this Form 10-K.
Narrative Description of Business: (Amounts in Thousands of Dollars) |
The business of the Company falls within two business groups. The Engineering and Construction Group (the “E&C Group”) designs, engineers, and constructs petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment and water treatment facilities. The E&C Group provides direct technical and management services, and purchases equipment, materials and services from third party vendors and subcontractors. The group has industry leading technology in delayed coking, solvent de-asphalting and hydrogen production. The E&C Group also provides a broad range of environmental remediation services, together with related technical, design and regulatory services. The Energy Group designs, manufactures and erects steam genera ting and auxiliary equipment for power stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized bed and conventional boilers firing coal, oil, gas, biomass and municipal solid waste, waste wood, and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment and low-NOx burners. Site services related to these products encompass full plant construction, maintenance engineering, plant upgrading and life extension and plant repowering. The Energy Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solids mechanics. In addition, the Energy Group builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries. The Energy Group generates revenues from construction and operating activities pursuant to long-term sale o f project outputs (i.e., electricity contracts), operating and maintenance agreements and from returns on its equity positions.
Foster Wheeler markets its services and products through a worldwide staff of sales and marketing personnel, and through a network of sales representatives. The Company’s businesses are not seasonal nor are
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they dependent on a limited group of customers. No single customer accounted for ten percent or more of Foster Wheeler’s consolidated revenues in fiscal 2002, 2001 or 2000.
The materials used in Foster Wheeler’s manufacturing and construction operations are obtained from both domestic US 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. The Company continues to monitor this issue on an ongoing basis and has not encountered, nor foresees, any significant price increases or availability impacts as a result of this proclamation.
On November 25, 2002, President Bush signed the National Security Act that, in part, imposed new regulations pertaining to the importation of goods into the United States. As a frequent importer of project materials, the Company is in the process of adjusting its importation procedures and controls to ensure compliance with this Act. Actions taken to date include reducing the number of entities empowered via Letter of Attorney to handle imports for the Company and restricting the roster of customs brokers the Company will use. These changes will improve the Company’s control and record keeping associated with the importation of goods into the United States and have been endorsed by industry experts consulted by the Company.
Foster Wheeler owns and licenses patents, trademarks and know-how, which are used in each of its business groups. The life cycle of the patents and trademarks are of varying durations. Neither business group is materially dependent on any particular or related patent or trademark. Foster Wheeler has licensed companies throughout the world to manufacture marine and stationary steam generators and related equipment and certain of its other products. Principal licensees are located in Finland, Japan, China, Italy, Taiwan, and India.
For the most part, Foster Wheeler’s products are custom designed and manufactured, and are not produced for inventory. Clients often make a down payment at the time a contract is executed and continue to make progress payments until the contract is completed and the work has been accepted as meeting contract guarantees. Generally, contracts are awarded on the basis of price, delivery schedule, performance and service.
Foster Wheeler’s unfilled orders as of December 27, 2002 and December 28, 2001 are detailed below.
| 2002 | 2001 | ||||||
Engineering and Construction Group |
$ | 4,018,000 | $ | 4,475,400 | |||
Energy Group |
1,436,300 | 1,548,400 | |||||
Corporate and Financial Services (including eliminations) |
(8,400 | ) | (19,400 | ) | |||
| $ | 5,445,900 | $ | 6,004,400 | ||||
Unfilled orders of projects at December 27, 2002 and December 28, 2001 consisted of:
| 2002 | 2001 | ||||||
Signed contracts |
$ | 5,312,900 | $ | 5,867,200 | |||
Letters of intent and contracts awarded but not finalized |
133,000 | 137,200 | |||||
| $ | 5,445,900 | $ | 6,004,400 | ||||
The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of unfilled orders is not necessarily indicative of the future earnings of the Company related to the performance of such work. The E&C Group frequently purchases materials, equipment, and third party services at cost for clients on a cash neutral/reimbursable basis. Such amounts are recorded both as revenues and cost of operating revenues, with no profit recognized. Although unfilled orders represent only business that is considered firm, there can be no assurance that cancellations or scope adjustments will not occur. The Company cannot predict with certainty the portion of unfilled orders that will be performed, or the
3
timing of the projects’ execution, because of factors outside of the Company’s control. These factors include client mandated changes to project scope and schedule or project cancellations.
Refer to Part II, Item 7 for a discussion of the changes in unfilled orders for the periods presented.
Many companies compete in the engineering and construction 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 designing, engineering and constructing petroleum refineries, petrochemical, chemical and pharmaceutical facilities. Neither Foster Wheeler nor any other single company contributes a large percentage of the total design, engineering and construction business servicing the global businesses previously noted.
Many companies compete in the global energy segment of Foster Wheeler’s business. Industry surveys and trade association materials indicate that the Company 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 and its domestic subsidiaries are subject to certain Federal, state and local environmental, occupational health and product safety laws. Foster Wheeler believes all its operations are in material compliance with such laws and does not anticipate any material capital expenditures or adverse effect on earnings or cash flows in maintaining compliance with such laws. In addition, management believes that the Company is in material compliance with similar laws and regulations in the non-U.S. countries in which it operates.
Foster Wheeler employed 8,945 full-time employees in 2002. The following table indicates the number of full-time employees in each of its business groups on the dates indicated. Common services performed prior to 2002 by Corporate and Financial Services (“C&F”) on behalf of the E&C and Energy Groups were estimated allocations.
| December 27, 2002 |
December 28, 2001 |
December 29, 2000 |
||||||||
Engineering and Construction |
6,136 | 7,216 | 7,007 | |||||||
Energy Group |
2,744 | 3,156 | 3,141 | |||||||
Corporate and Financial Services |
65 | 22 | 22 | |||||||
| 8,945 | 10,394 | 10,170 | ||||||||
Risk Factors of the Business: (Amounts in Thousands of Dollars) |
The following discussion of risks relating to the Company’s business should be read carefully in connection with evaluating the Company’s business, prospects and the forward-looking statements contained in this Report on Form 10-K and oral statements made by representatives of the Company from time to time. Any of the following risks could materially adversely affect the Company’s business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made. For additional information regarding forward-looking statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement.”
The Company’s business is subject to a number of risks and uncertainties, including those described below.
The Company may be unable to repatriate funds from its non-U.S. subsidiaries without incurring significant costs.
As of December 27, 2002, the Company had cash and cash equivalents on hand, short-term investments and restricted cash of $429,000, of which approximately $343,000 was held by the Company’s non-U.S. subsidiaries. The Company faces significant restrictions on its ability to repatriate these funds from its non-U.S. subsidiaries. Certain of the Company’s subsidiaries are parties to loan agreements that limit the amount of money that the subsidiary may distribute in any period. Distributions in excess of the specified amounts
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would cause the Company to violate the terms of the agreements. In addition, the repatriation of funds may subject those funds to taxation. As a result, the Company may not be able to utilize money held by its foreign subsidiaries to fund working capital or repay debt in its other operations without incurring significant costs.
The Company may sell assets in order to increase liquidity. This plan may impair the Company’s growth.
The Company is exploring the sale of certain of its operating subsidiaries, as well as the sale of other assets, to improve liquidity. As part of this strategy, the Company may sell assets or subsidiaries that are profitable or that have significant growth potential. As a result of these potential sales, the Company’s growth and future economic results may be limited.
If the Company’s common shares are delisted by the New York Stock Exchange, shareholder ability to sell shares would be harmed.
The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “FWC”. There are a number of continuing requirements that must be satisfied in order for a company’s stock to remain eligible for quotation on the NYSE. These requirements include maintaining a total market capitalization of not less than $50,000 over a 30 day trading period and shareholders’ equity of not less than $50,000 and an average closing price of not less than $1.00 over a consecutive 30 day period. On March 18, 2003, the Company received a formal notice from the NYSE indicating that it was below the market capitalization/shareholders’ equity standard. The Company expects to submit a business plan that will demonstrate compliance with this continued listing standard within 18 months of notice from the NYSE. There can be no assurance that the NYSE will accept the Company’s business plan and, if accepted, whethe r the business plan will be successful. In addition, while the Company is currently in compliance with the minimum price standard, the Company’s shares have recently traded at levels below $1.00.
If the Company fails to satisfy the continued listing requirements of the NYSE, the Company’s common shares may be subject to suspension or delisting. The delisting of the Company’s common shares from the NYSE could have a material adverse effect on the market price of, and the liquidity of the trading market for, the Company’s common shares. Delisting could also reduce the ability of holders of the Company’s common shares to purchase or sell shares as quickly and as efficiently as they have done historically. This lack of liquidity would make it more difficult for the Company to raise capital in the future or to use its shares to extinguish all or part of its debt. Each of these events could have a material adverse effect on the Company’s business, financial condition and operating results. The Company anticipates that if its common shares are delisted from NYSE, it may seek to trade on another exchange or through a quotation system or in the pink sheets maintained by the National Quotation Bureau, Inc., but there can be no assurance that the Company would be successful in such efforts.
The Company has high levels of debt.
The Company has debt in the form of bank loans, and other debt securities that have been sold to investors, and subordinated obligations from the Robbins Facility exit funding agreement. As of December 27, 2002, the Company’s total debt amounted to $1,119,873, $205,840 of which was comprised of limited recourse project debt of special purpose subsidiaries. The total debt includes $210,000 of convertible subordinated notes and $175,000 of preferred trust securities.
Over the last five years, the Company has been required to allocate a significant 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. In addition, certain of its borrowings are at variable rates of interest that exposes the Company to the risk of a rise in interest rates.
The various credit agreements require the Company to comply with certain debt covenants. Failure to comply with the debt covenants may allow lenders to elect to accelerate the repayment dates. It is unlikely that the Company would be able to repay amounts borrowed or cash collateralize standby letters of credit issued under the Senior Credit Facility if the banks were to elect their right to accelerate the payment dates. Failure by the Company to repay such amounts under the Senior Credit Facility would have a material
5
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, the sale/leaseback agreement, 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.
The Company may be unable to get new letters of credit, bank guarantees, and performance bonds from its banks and surety on the same terms as it has historically.
It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees, or performance bonds in favor of its clients to secure its obligations under contracts. The Company has traditionally obtained letters of credit or bank guarantees from its banks, or performance bonds from a surety on an unsecured basis. Due to changes in the bank and surety markets, as well as declines in the Company’s credit rating, the Company is required in certain circumstances to provide security to banks and the surety to obtain new letters of credit, bank guarantees, and performance bonds.
Providing security to obtain letters of credit, bank guarantees and performance bonds increases the Company’s working capital needs. If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees and performance bonds, the Company’s ability to enter into new contracts could be materially limited. There can be no assurance that the Company will be able to continue obtaining new letters of credit, bank guarantees, and performance bonds on either a secured or an unsecured basis in sufficient quantities to match its business requirements.
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. In 2002 and 2001, the Company took charges in the amounts of $216,700 and $160,600, respectively, relating to underestimated costs and post-completion warranty obligations on lump-sum projects. 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:
| • | Unanticipated technical problems with the equipment being supplied or developed by the Company which may require that the Company spend its own money to remedy the problem; |
| • | Changes in the costs of components, materials or labor; |
| • | Difficulties in obtaining required governmental permits or approvals; |
| • | Changes in local laws and regulations; |
| • | Changes in local labor conditions; |
| • | Project modifications creating unanticipated costs; |
| • | Delays caused by local weather conditions; and |
| • | 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
6
the Company subject to penalties if portions of the project are not completed in accordance with agreed-upon time limits. Therefore, losses can result from 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 that have a negative impact on its financial condition and results of operations.
Certain aspects of the Company’s business may require utilization of a significant amount of working capital. Among other things, use of significant amounts of working capital could be 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 may include reduced advance payments, and payment schedules that are less favorable to the Company. In addition, working capital requirements have increased in recent years because of delays in customer payments resulting from challenges to requests for additional payments under lump-sum contracts that have 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 that is considered firm, cancellations or scope adjustments may occur. Due to factors outside the Company’s control, such as changes in project scope and schedule, 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 alleged 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 certain estimates of future claims and associated costs that it believes are reasonable. However, there can be no assurances due to the nature and number of variables associated with such claims that such estimates will not change. 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 subsidiaries; 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 total estimated liability recorded by the Company includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are expected to be incurred over the next sixteen years during which period new claims are expected to decline from year
7
to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2018 but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs which might be incurred after 2018. Nonetheless, the Company plans to update its forecasts periodically to take into consideration its future experience and other considerations, such as legislation, to continuously update its estimates of future costs and expected insurance recoveries.
The Company’s asbestos liability estimates are based only on claims asserted in the United States. A subsidiary of the Company in the United Kingdom has also received a limited number of claims alleging personal injury arising from exposure to asbestos. None of these claims have resulted in material costs to the Company. If the number of claims received in the future exceeds the Company’s estimate, it is likely that the costs of defense and indemnity will similarly exceed the Company’s estimates.
Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with asbestos claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.
The Company’s insurance recovery in connection with asbestos litigation is uncertain.
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, such as 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 precisely predict the amount or timing of such claims or the ultimate recovery.
An agreement with a number of insurers to allow for efficient and thorough handling of claims against the Company’s subsidiaries does not cover claims filed after June 12, 2001. The Company is currently in negotiations with 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 insurers, which could have a material adverse effect on results of operations and financial condition. In addition, management cannot precisely 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 future claims could have a material adverse effect upon the Company’s financial condition, results of operations, and cash flows.
Project claims increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for additional costs exceeding the contract price or amounts not included in the original contract price, 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
8
capital in projects with cost overruns pending the resolution of the relevant project claims. Management cannot assure that project claims will not continue in the future.
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 asserted by the Company on these projects, however, are substantially greater than this amount. To the extent that management estimates recoveries that are less than 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.
The Company reduced its estimates of claim recoveries to reflect recent adverse experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. In 2002 and 2001, the Company recorded approximately $136,200 and $37,000 in pre-tax contract-related charges as a result of claims reassessment. The Company continues to pursue these claims.
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.
It is customary in the industries in which the Company operates to provide clients with Company performance guarantees supporting contracts executed by Company subsidiaries. If its subsidiaries default on these performance obligations, the Company will be obligated to pay damages to the client. In the aggregate, these agreements represent a material contingent liability.
The Company concentrates in particular industries.
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 that 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 62% of its fiscal year 2002 operating revenues. The Company has international operations throughout the world including operations in Western Europe, the Middle East, Asia, and South America. Its foreign operations are subject to risks, including:
| • | uncertain political, legal and economic environments; |
| • | potential incompatibility with foreign joint venture partners; |
| • | foreign currency controls and fluctuations; |
| • | terrorist attacks against facilities owned or operated by U.S. companies; |
| • | war, civil disturbances; and |
| • | 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.
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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 6,300, or 70%, 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 comply 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 usually 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 US, 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.
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 and other professional personnel will be an important factor in determining its future success. The market for these professionals is competitive, and there can be no assurance that the Company 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. 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 US, European and other laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws include US 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 Energy 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 ma y 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
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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 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:
| • | two-thirds of all shareholders must vote in favor of any merger; |
| • | a classified board of directors; and |
| • | 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 23 to Financial Statements in this Form 10-K.
Available Information |
Our website address is www.fwc.com. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports at our investor relations website, www.fwc.com, under the heading “Investor Relations” and selecting the heading “SEC Filings.” These reports are available on our investor relations website as soon as reasonably practicable after we electronically file them with the SEC.
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ITEM 2. PROPERTIES |
Company (Business Segment*) and Location |
Use |
Land Area |
Building Square Feet |
Lease Expires(6) |
|||||||||
| Foster Wheeler Realty Services, Inc. (C&F) | |||||||||||||
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 | 2022 | ||||||||||
| General office & engineering | 21.0 acres | 292,000 | |||||||||||
| Storage and reproduction facilities | 10.8 acres | 30,400 | |||||||||||
Livingston, New Jersey |
Research center | 6.7 acres | 51,355 | ||||||||||
Bedminster, New Jersey |
Office | 10.7 acres | 135,000 | (1)(2) | |||||||||
Bridgewater, New Jersey |
Undeveloped | 21.9 acres | (5) | — | |||||||||
| Foster Wheeler Energy Corporation (E) | |||||||||||||
Dansville, New York |
Manufacturing & offices | 82.4 acres | 513,786 | ||||||||||
| Foster Wheeler Energy Services, Inc. (E) | |||||||||||||
San Diego, California |
General offices | — | 12,673 | 2005 | |||||||||
| Foster Wheeler USA Corporation (E&C, E) | |||||||||||||
Houston, Texas |
General offices | — | 107,890 | 2003 | |||||||||
Aiken, South Carolina |
General offices | — | 15,000 | 2007 | |||||||||
Texas City, Texas |
Storage Facilities | — | 13,259 | 2004 | |||||||||
| Foster Wheeler Iberia, S.A. | |||||||||||||
Madrid, Spain (E&C)/(E) |
Office & engineering | 5.5 acres | 110,000 | 2015 | |||||||||
Tarragona, Spain (E) |
Manufacturing & office | 25.6 acres | 77,794 | ||||||||||
| Foster Wheeler France, S.A. (E&C) | &n | ||||||||||||