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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 26, 2003

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ________ to

Commission File Number 001-31305

FOSTER WHEELER LTD.
(Exact name of registrant as specified in its charter)

 

BERMUDA
22-3802649
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
Perryville Corporate Park, Clinton, NJ
  
08809-4000
(Address of principal executive offices)
  
(Zip Code)
     
Registrant’s telephone number, including area code:(908) 730-4000 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 40,771,560 shares of the Company’s common stock ($1.00 par value) were outstanding as of September 26, 2003.

FOSTER WHEELER LTD.
INDEX

Part I   Financial Information:
     
  Item 1 — Financial Statements:
     
    Condensed Consolidated Balance Sheet at September 26, 2003 and December 27, 2002
     
    Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three and Nine Months Ended September 26, 2003 and September 27, 2002 (Restated)
     
    Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 26, 2003 and September 27, 2002 (Restated)
     
    Notes to Condensed Consolidated Financial Statements
     
  Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
  Item 3 — Quantitative and Qualitative Disclosures about Market Risk
     
  Item 4 — Controls and Procedures
     
Part II   Other Information:
     
  Item 1 — Legal Proceedings
     
  Item 6 — Exhibits and Reports on Form 8-K
     
Signatures

 

PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
(Unaudited)

  September 26, 2003   December 27, 2002  
 
 
 
               ASSETS            
CURRENT ASSETS:            
   Cash and cash equivalents $ 407,703   $ 344,305  
   Short-term investments   13,176     271  
   Accounts and notes receivable, net   508,678     628,221  
   Contracts in process and inventories   197,096     279,824  
   Prepaid, deferred and refundable income taxes   30,724     41,155  
   Prepaid expenses   34,423     36,071  
 
 
 
         Total current assets   1,191,800     1,329,847  
 
 
 
Land, buildings and equipment   703,503     769,680  
Less accumulated depreciation   362,107     361,861  
 
 
 
         Net book value   341,396     407,819  
 
 
 
Restricted cash   49,271     84,793  
Notes and accounts receivable - long-term   31,167     21,944  
Investment and advances   89,826     88,523  
Goodwill, net   50,746     50,214  
Other intangible assets, net   71,428     72,668  
Prepaid pension cost and related benefit assets   23,572     26,567  
Asbestos-related insurance recovery receivable   497,030     534,045  
Other assets   174,464     156,279  
Deferred income taxes   76,217     69,578  
 
 
 
            TOTAL ASSETS $ 2,596,917   $ 2,842,277  
 
 
 
             
      LIABILITIES AND SHAREHOLDERS’ DEFICIT            
CURRENT LIABILITIES:            
   Current installments on long-term debt $ 28,087   $ 31,562  
   Bank loans   121     14,474  
   Accounts payable and accrued expenses   576,770     635,089  
   Estimated costs to complete long-term contracts   608,589     645,763  
   Advance payment by customers   69,774     82,658  
   Income taxes   54,258     64,517  
 
 
 
         Total current liabilities   1,337,599     1,474,063  
 
 
 
Corporate and other debt less current installment   334,112     341,702  
Special-purpose project debt less current installments   172,330     181,613  
Capital lease obligations   61,089     58,237  
Deferred income taxes   8,339     8,333  
Pension, postretirement and other employee benefits   478,940     437,820  
Asbestos-related liability   460,678     519,790  
Other long-term liabilities and minority interest   123,058     109,373  
Subordinated Robbins exit funding obligations less current installment   107,285     107,285  
Convertible subordinated notes   210,000     210,000  
Mandatory redeemable preferred securities of subsidiary trust holding            
   solely junior subordinated deferrable interest debentures   175,000     175,000  
Commitments and contingencies   —     —  
 
 
 
            TOTAL LIABILITIES   3,468,430     3,623,216  
 
 
 
SHAREHOLDERS’ DEFICIT            
Common stock   40,772     40,772  
Paid-in capital   201,841     201,718  
Accumulated deficit   (730,046 )   (653,991 )
Accumulated other comprehensive loss   (384,080 )   (369,438 )
 
 
 
            TOTAL SHAREHOLDERS’ DEFICIT   (871,513 )   (780,939 )
 
 
 
            TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $ 2,596,917   $ 2,842,277  
 
 
 
             
See notes to condensed consolidated financial statements.            

3

FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)

  Three Months Ended   Nine Months Ended  
 
 
 
  September 26,   September 27,   September 26,   September 27,  
 
 
 
 
 
  2003   2002   2003   2002  
 
 
 
 
 
        (Restated)         (Restated)  
        (See Note 2)         (See Note 2)  
Revenues:                        
   Operating revenues $ 886,573   $ 799,069   $ 2,592,903   $ 2,538,812  
   Other income   9,625     15,118     49,969     40,305  
 
 
 
 
 
                         
   Total revenues and other income   896,198     814,187     2,642,872     2,579,117  
 
 
 
 
 
                         
Costs and expenses:                        
   Cost of operating revenues   806,494     857,927     2,392,838     2,465,406  
   Selling, general and administrative expenses   45,978     53,844     145,106     165,808  
   Other deductions   38,651     23,068     85,569     126,093  
   Minority interest   738     955     5,096     4,371  
   Interest expense   21,364     16,904     57,196     48,861  
   Dividends on preferred security of subsidiary trust   4,584     4,199     13,443     12,315  
 
 
 
 
 
                         
   Total costs and expenses   917,809     956,897     2,699,248     2,822,854  
 
 
 
 
 
                         
Loss before income taxes   (21,611 )   (142,710 )   (56,376 )   (243,737 )
Provision for income taxes   5,286     8,300     19,679     18,879  
 
 
 
 
 
                         
Net loss prior to cumulative effect of a                        
   change in accounting principle   (26,897 )   (151,010 )   (76,055 )   (262,616 )
Cumulative effect on prior years (to December 28, 2001)                        
   of a change in accounting principle for goodwill, net                        
   of $0 tax   —     —     —     (150,500 )
 
 
 
 
 
                         
Net loss   (26,897 )   (151,010 )   (76,055 )   (413,116 )
                         
Other comprehensive earnings/(loss):                        
   Foreign currency translation adjustment   (415 )   1,846     (1,131 )   11,252  
   Change in unrealized losses on derivative instruments,                        
      net of tax   —     —     —     (1,679 )
   Reclassification of unrealized gain on derivative                        
      instruments to earnings   —     —     —     (2,155 )
   Minimum pension liability adjustment,                        
      net of $0 tax benefit   —     —     (13,511 )   —  
 
 
 
 
 
                         
Comprehensive loss $ (27,312 ) $ (149,164 ) $ (90,697 ) $ (405,698 )
 
 
 
 
 

See notes to condensed consolidated financial statements.

4

 

   Three Months Ended    Nine Months Ended  
 
 
 
  September 26,   September 27,   September 26,   September 27,  
 
 
 
 
 
   2003    2002    2003    2002  
 
 
 
 
 
        (Restated)         (Restated)  
        (See Note 2)         (See Note 2)  
Loss per share:                        
   Basic:                        
      Net loss prior to cumulative effect of a                        
         change in accounting principle $ (0.65 ) $ (3.69 ) $ (1.85 ) $ (6.42 )
      Cumulative effect on prior years (to December 28,                        
         2001) of a change in accounting principle for                        
         goodwill   —     —     —     (3.67 )
 
 
 
 
 
      Net loss $ (0.65 ) $ (3.69 ) $ (1.85 ) $ (10.09 )
 
 
 
 
 
                         
   Diluted:                        
      Net loss prior to cumulative effect of a                        
         change in accounting principle $ (0.65 ) $ (3.69 ) $ (1.85 ) $ (6.42 )
      Cumulative effect on prior years (to December 28,                        
         2001) of a change in accounting principle for                        
         goodwill   —     —     —     (3.67 )
 
 
 
 
 
      Net loss $ (0.65 ) $ (3.69 ) $ (1.85 ) $ (10.09 )
 
 
 
 
 
                         
                         
                         
Shares outstanding (in thousands):                        
   Basic: weighted average number of shares outstanding   41,041     40,963     41,040     40,943  
   Diluted: effect of share options   —     —     —     —  
 
 
 
 
 
                         
Total diluted   41,041     40,963     41,040     40,943  
 
 
 
 
 
                         
                         
Cash dividends paid per common share $ —   $ —   $ —   $ —  
 
 
 
 
 
                         
                         
See notes to condensed consolidated financial statements.            

5

FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)

   Nine Months Ended  
 
 
  September 26, 2003   September 27, 2002  
 
 
 
          (Restated)  
          (See Note 2)  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $ (76,055 ) $ (413,116 )
Adjustments to reconcile net earnings to cash flows from            
   operating activities:            
   Cumulative effect of a change in accounting principle   —     150,500  
   Provision for impairment loss   15,100     13,400  
   Depreciation and amortization   27,121     33,035  
   Deferred tax   (4,375 )   1,588  
   (Gain)/loss on sale of assets   (16,206 )   50,800  
   Claims write downs and related contract provisions   —     70,600  
   Contract reserves and receivable provisions   34,700     66,800  
   Dividends on Preferred Trust securities   13,443     12,315  
   Equity earnings, net of dividends   (2,884 )   (309 )
   Other   (7,238 )   3,499  
Changes in assets and liabilities:            
   Receivables   107,247     174,639  
   Contracts in process and inventories   11,213     15,426  
   Accounts payable and accrued expenses   (50,324 )   (107,811 )
   Estimated costs to complete long-term contracts   (56,539 )   126,768  
   Advance payments by customers   (17,233 )   9,231  
   Income taxes   1,007     2,052  
   Other assets and liabilities   2,682     8,709  
 
 
 
NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES   (18,341 )   218,126  
 
 
 
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Change in restricted cash   39,581     (78,719 )
Capital expenditures   (10,972 )   (46,377 )
Proceeds from sale of assets   80,290     2,071  
Decrease in investments and advances   —     (3,462 )
(Increase)/decrease in short-term investments   (7,361 )   5  
 
 
 
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES   101,538     (126,482 )
 
 
 
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Distributions to minority shareholder   (2,879 )   (2,061 )
Increase/(decrease) in short-term debt   (14,826 )   8,706  
Proceeds from long-term debt   —     69,244  
Proceeds from lease financing obligation   —     44,900  
Repayment of long-term debt   (20,266 )   (8,715 )
 
 
 
NET CASH (USED)/PROVIDED BY FINANCING ACTIVITIES   (37,971 )   112,074  
 
 
 
             
Effect of exchange rate changes on cash and cash equivalents   18,172     14,988  
 
 
 
             
INCREASE IN CASH AND CASH EQUIVALENTS   63,398     218,706  
Cash and cash equivalents at beginning of year   344,305     224,020  
 
 
 
             
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 407,703   $ 442,726  
 
 
 
             
Cash paid during period:            
Interest (net of amount capitalized) $ 41,203   $ 27,190  
 
 
 
Income taxes $ 7,261   $ 11,291  
 
 
 
             
See notes to condensed consolidated financial statements.            

6

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except per Share Amounts)
(Unaudited)

1. Going Concern
   
   The accompanying condensed consolidated financial statements of Foster Wheeler Ltd., hereinafter referred to as “Foster Wheeler” or the “Company”, are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and in the nine months ended September 26, 2003, and has a shareholder deficit of $871,500 at September 26, 2003. The Company has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. The Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pre-tax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pre-tax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003 the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2003 and 2004.

The Company’s U.S. operations are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to the Company’s indebtedness, obligations to fund U.S. pension obligations, and other expenses related to corporate overhead. As of September 26, 2003, the Company had aggregate indebtedness of approximately $1,100,000, which must be funded primarily from distributions from subsidiaries. As of September 26, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $470,200 compared to $429,000 as of December 27, 2002. Of the $470,200 total at September 26, 2003, approximately $407,100 was held by foreign subsidiaries. The Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations minimum working capital needs. The Company’s current 2003 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, inter-company loans, debt service on inter-company loans, and dividends, of approximately $95,000. As of September 26, 2003, the Company had repatriated $55,700 from its non-U.S. subsidiaries.

There can be no assurance that the balance will be repatriated as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts are well in excess of the $49,300 classified as restricted cash in the accompanying condensed

 

7

consolidated balance sheet. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law, which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.

Management updates its forecasts of U.S. liquidity on a weekly basis. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriated from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. Commercial operations under a contract retained by the Company in the Foster Wheeler Environmental Corporation asset sale that were to commence in the fourth quarter of 2003, have been delayed. This change in timing will delay receipt of a material amount of domestic cash until early 2004. Management initiated a plan to increase the U.S. cash flow in