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 24, 2004 |
||
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. |
||
Bermuda |
22-3802649 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
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: 129,059,955 shares of the Company’s common stock ($1.00 par value) were outstanding as of October 25, 2004.
FOSTER WHEELER LTD.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEET
(in thousands of dollars, except share data
and per share amounts)
(Unaudited)
| September 24, 2004 | December 26, 2003 | |||||
| ASSETS | ||||||
| Current Assets: | ||||||
| Cash and cash equivalents | $ | 286,375 | $ | 364,095 | ||
| Short-term investments | 21,246 | 13,390 | ||||
| Accounts and notes receivable, net | 493,567 | 556,414 | ||||
| Contracts in process and inventories | 215,138 | 173,293 | ||||
| Prepaid, deferred and refundable income taxes | 22,483 | 37,160 | ||||
| Prepaid expenses | 28,476 | 30,024 | ||||
| Total current assets | 1,067,285 | 1,174,376 | ||||
| Land, buildings and equipment | 603,477 | 622,729 | ||||
| Less accumulated depreciation | 324,301 | 313,114 | ||||
| Net book value | 279,176 | 309,615 | ||||
| Restricted cash | 64,259 | 52,685 | ||||
| Notes and accounts receivable - long-term | 11,272 | 6,776 | ||||
| Investments and advances | 101,547 | 98,651 | ||||
| Goodwill, net | 51,060 | 51,121 | ||||
| Other intangible assets, net | 68,673 | 71,568 | ||||
| Prepaid pension cost and related benefit assets | 6,695 | 7,240 | ||||
| Asbestos-related insurance recovery receivable | 398,992 | 495,400 | ||||
| Other assets | 156,166 | 182,151 | ||||
| Deferred income taxes | 63,219 | 56,947 | ||||
| TOTAL ASSETS | $ | 2,268,344 | $ | 2,506,530 | ||
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||
| Current Liabilities: | ||||||
| Current installments on long-term debt | $ | 23,918 | $ | 20,979 | ||
| Bank loans | — | 121 | ||||
| Accounts payable | 234,212 | 305,286 | ||||
| Accrued expenses | 352,276 | 381,376 | ||||
| Estimated costs to complete long-term contracts | 477,899 | 552,754 | ||||
| Advance payments by customers | 119,582 | 50,248 | ||||
| Income taxes | 71,467 | 62,996 | ||||
| Total current liabilities | 1,279,354 | 1,373,760 | ||||
| Corporate and other debt less current installment | 285,124 | 333,729 | ||||
| Special-purpose project debt less current installments | 109,026 | 119,281 | ||||
| Capital lease obligations | 63,789 | 62,373 | ||||
| Deferred income taxes | 8,735 | 9,092 | ||||
| Pension, postretirement and other employee benefits | 287,424 | 295,133 | ||||
| Asbestos-related liability | 436,490 | 526,200 | ||||
| Other long-term liabilities and minority interest | 123,132 | 124,792 | ||||
| Subordinated Robbins exit funding obligations less current installment | 20,827 | 111,589 | ||||
| Convertible subordinated notes | 3,070 | 210,000 | ||||
| Mandatorily redeemable preferred securities of subsidiary trust holding | ||||||
| solely junior subordinated deferrable interest debentures | — | 175,000 | ||||
| Deferred accrued mandatorily redeemable preferred security distributions | ||||||
| of subsidiary trust | — | 38,021 | ||||
| Subordinated deferrable interest debentures | 71,250 | — | ||||
| Deferred accrued interest on subordinated deferrable interest debentures | 21,361 | — | ||||
| Commitments and contingencies | ||||||
TOTAL LIABILITIES |
2,709,582 | 3,378,970 | ||||
| Shareholders’ Deficit: | ||||||
| Preferred shares | ||||||
| $1.00 par value; authorized - 1,500,000 shares; issued - 599,850 shares | 600 | — | ||||
| Common shares | ||||||
| $1.00 par value; authorized - 160,000,000 shares; issued - 102,014,706 shares | 102,015 | 40,772 | ||||
| Paid-in capital | 763,101 | 201,841 | ||||
| Accumulated deficit | (1,000,987 | ) | (811,054 | ) | ||
| Accumulated other comprehensive loss | (305,967 | ) | (303,999 | ) | ||
| TOTAL SHAREHOLDERS’ DEFICIT | (441,238 | ) | (872,440 | ) | ||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 2,268,344 | $ | 2,506,530 | ||
See notes to condensed consolidated financial statements. |
||||||
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 24, | September 26, | September 24, | September 26, | |||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Revenues and other income: | ||||||||||||
| Operating revenues | $ | 720,554 | $ | 886,573 | $ | 2,021,932 | $ | 2,592,903 | ||||
| Other income | 11,843 | 9,625 | 82,613 | 49,969 | ||||||||
| Total revenues and other income | 732,397 | 896,198 | 2,104,545 | 2,642,872 | ||||||||
| Costs and expenses: | ||||||||||||
| Cost of operating revenues | 673,487 | 806,494 | 1,793,628 | 2,392,838 | ||||||||
| Selling, general and administrative expenses | 54,860 | 45,978 | 168,502 | 145,106 | ||||||||
| Other deductions | 6,680 | 38,651 | 32,255 | 85,569 | ||||||||
| Loss on equity-for-debt exchange | 174,941 | — | 174,941 | — | ||||||||
| Minority interest | 1,941 | 738 | 4,912 | 5,096 | ||||||||
| Interest expense | 21,722 | 21,364 | 63,109 | 57,196 | ||||||||
| Mandatorily redeemable preferred security distributions of subsidiary trust | — | 4,584 | — | 13,443 | ||||||||
| Interest expense on subordinated deferrable interest debentures | 4,752 | — | 14,445 | — | ||||||||
| Total costs and expenses | 938,383 | 917,809 | 2,251,792 | 2,699,248 | ||||||||
| Loss before income taxes | (205,986 | ) | (21,611 | ) | (147,247 | ) | (56,376 | ) | ||||
| Provision for income taxes | 9,484 | 5,286 | 42,686 | 19,679 | ||||||||
| Net loss | (215,470 | ) | (26,897 | ) | (189,933 | ) | (76,055 | ) | ||||
| Other comprehensive income/(loss): | ||||||||||||
| Foreign currency translation adjustments | 7,730 | (415 | ) | (1,968 | ) | (1,131 | ) | |||||
| Minimum pension liability adjustments, net of $0 tax benefit | — | — | — | (13,511 | ) | |||||||
| Net comprehensive loss | $ | (207,740 | ) | $ | (27,312 | ) | $ | (191,901 | ) | $ | (90,697 | ) |
| Loss per share: | ||||||||||||
| Basic and diluted | $ | (5.16 | ) | $ | (0.65 | ) | $ | (4.60 | ) | $ | (1.85 | ) |
See notes to condensed consolidated financial statements.
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
| Nine Months Ended | ||||||
| September 24, | September 26, | |||||
| 2004 | 2003 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net cash used by operating activities | $ | (46,326 | ) | $ | (18,341 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Change in restricted cash | (12,200 | ) | 39,581 | |||
| Capital expenditures | (7,477 | ) | (10,972 | ) | ||
| Proceeds from sale of assets | 17,051 | 80,290 | ||||
| Increase in short-term investments | (7,330 | ) | (7,361 | ) | ||
|
|
||||||
| Net cash (used)/provided by investing activities | (9,956 | ) | 101,538 | |||
|
|
||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Partnership distributions to minority shareholders | (2,663 | ) | (2,879 | ) | ||
| Decrease in short-term debt | (121 | ) | (14,826 | ) | ||
| Proceeds from long-term debt | 120,000 | — | ||||
| Repayment of long-term debt | (138,723 | ) | (20,266 | ) | ||
|
|
||||||
| Net cash used by financing activities | (21,507 | ) | (37,971 | ) | ||
|
|
||||||
| Effect of exchange rate changes on cash and cash equivalents | 69 | 18,172 | ||||
|
|
||||||
| (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | (77,720 | ) | 63,398 | |||
| Cash and cash equivalents at beginning of period | 364,095 | 344,305 | ||||
|
|
||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 286,375 | $ | 407,703 | ||
NON-CASH FINANCING ACTIVITIES
On September 24, 2004, the Company exchanged $61,243 of common shares, $600 of preferred shares, warrants to purchase 139,748,960 common shares and $147,095 of long-term debt for $592,959 of existing debt and trust securities. See Note 3 for information regarding the equity-for-debt exchange.
See notes to condensed consolidated financial statements.
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,” were 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. The 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 operate profitably, 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’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant operating losses during the nine months ended September 24, 2004 and in each of the years in the three-year period ended December 26, 2003, and has a shareholders’ deficit of $441,238 as of September 24, 2004. | |
| On September 24, 2004, the Company completed an equity-for-debt exchange offer in which it issued common shares, preferred shares, warrants to purchase common shares, or in some cases to purchase preferred shares, and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced the Company’s existing debt (excluding a reduction in deferred accrued interest of $31,105) by $436,933, improved the Company’s shareholders’ deficit by $448,162 and when combined with the proceeds from the issuance of the 2011 Senior Notes that were used to repay amounts that were outstanding under the Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. A pretax charge of $174,941 relating primarily to the Convertible Notes that were exchanged, substantially all of which was non-cash, was recorded in conjunction with the completion of the exchange offer. After completing the exchange offer, the Company had outstanding debt obligations of approximately $577,000 as of September 24, 2004. (Refer to Note 3 to the condensed consolidated financial statements for further details of the exchange offer.) | |
| In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. Over the course of 2002 and 2003, the Company obtained amendments to this facility to provide covenant relief and to allow for the equity-for-debt exchange offer. These amendments are described below. In connection with the equity-for-debt exchange offer, the Company repaid the term loan and all amounts outstanding under the revolving credit facility in full. In addition, the Senior Credit Facility was amended (Amendment No. 5) to reduce the availability under the letter of credit facility to $125,000 and to terminate the revolving credit facility, as described below. | |
| The Company is currently seeking a new multi-year revolving credit agreement and letter of credit facility. As of September 24, 2004, the Company had letters of credit outstanding under the Senior Credit Facility of $81,400. Letters of credit outstanding upon maturity of the Senior Credit Facility will either need to be replaced by a new facility or funded with cash. There can be no assurance that the Company will be able to obtain a new revolving credit and letter of credit facility on acceptable terms or at all. | |
| The Senior Credit Facility covenants include a maximum senior leverage ratio and a minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”). Compliance with these covenants is measured quarterly. The maximum senior leverage covenant compares actual average rolling four quarter EBITDA, as defined in the Senior Credit Facility, to actual total senior debt, as defined. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. The minimum EBITDA covenant requires the actual average rolling four quarter EBITDA, as defined in the Senior Credit Facility, to meet minimum EBITDA targets. Management’s current forecast indicates that the Company will be in compliance with the financial covenants contained in the Senior Credit Facility throughout the facility’s term. | |
The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries.
The Senior Credit Facility requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. The $77,000 threshold was exceeded during the second quarter of 2003. Accordingly, principal repayments of $12,300 and $1,800 were made on the term loan in the first nine months of 2004 and during the full year of 2003, respectively, as a result of asset sales during those periods.
Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provided for the exclusion of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002 for covenant calculation purposes. The amendment further provided that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. As of December 26, 2003, $31,000 of the contingency risks was favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.
Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modified (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.
Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the equity-for-debt exchange offer, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004. The annual interest rate on borrowings under the Senior Credit Facility increased each quarter until the term loan and revolving credit facility were repaid on September 24, 2004.
Amendment No. 4 to the Senior Credit Facility, entered into on October 30, 2003, modified certain definitions and representations to allow for the maintenance and administration of certain bank accounts of the Company.
Amendment No. 5 to the Senior Credit Facility, entered into on May 14, 2004, amended and waived certain affirmative and negative covenants necessary to permit the equity-for-debt exchange offer as well as to allow for a reduction of $25,000 in the Company’s letter of credit facility. In consideration for the amendments and waivers obtained in this amendment, the Company is obligated to pay, on November 30, 2004, a fee equal to 1.25% of the lenders’ outstanding letter of credit exposure and a further fee equal to 0.75% of the lenders’ outstanding letter of credit exposure for each additional month thereafter through the expiration date of the Senior Credit Facility of April 30, 2005.
The Company finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, the Company leases the facility for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation of $44,600 as of September 24, 2004 is included in capital lease obligations in the accompanying condensed consolidated balance sheet. The Company entered into a binding agreement in the first quarter 2004 to sell the second corporate office building. The sale closed in the second quarter 2004 and generated net cash proceeds of $16,400. Of this amount, 50% was used to prepay amounts outstanding under the term loan portion of the Senior Credit Facility in the second quarter of 2004.
7
The Senior Credit Facility and the sale/leaseback arrangement have quarterly debt covenant compliance requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2005, provided the Company successfully obtains a new letter of credit facility. However, there can be no assurance that the Company will comply with the covenants. If the Company violates a covenant under the Senior Credit Facility or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated. Acceleration of these facilities would result in a cross default under the following agreements: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Notes, the trust preferred securities, the Robbins Bonds, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $474,000 as of September 24, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
One of the Company’s foreign subsidiaries is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio. One of the performance bond facilities is dedicated to a specific project and, as of September 24, 2004, had performance bonds outstanding equivalent to approximately $40,000 (none of which has been drawn). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of September 24, 2004, had performance bonds outstanding in favor of several clients equivalent to approximately $13,000 (none of which has been drawn).
As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities. The waiver for the project specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum amounts and the performance bonds are outstanding. The equity of the Company’s subsidiary remained below the minimum equity ratio as of September 24, 2004. The waiver for the general performance bond facility was initially effective through October 31, 2004 and was subsequently extended through November 30, 2004. In the event that the Company is unable to obtain a further waiver or amendment, it will pursue a replacement for this bonding facility. In addition, the subsidiary has sufficient cash on hand to collateralize the obligations supported by the performance bonds in the event it is unable to obtain a waiver or an alternative bonding facility. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenants is reflected in the Company’s liquidity forecasts.
The Company’s U.S. operations, which include the corporate functions, are cash flow negative and are expected to continue to incur negative cash flow due to a number of factors including costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate functions and other corporate overhead.
Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2005, provided the Company successfully replaces the letter of credit facility contained in the Senior Credit Facility. Ensuring adequate domestic liquidity remains a priority for the Company’s management, however, there can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast.
As of September 24, 2004, the Company had cash and cash equivalents, short-term investments, and restricted cash totaling $371,900, compared to $430,200 as of December 26, 2003. Of the $371,900 total at September 24, 2004, approximately $311,900 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities and such amounts are included in restricted cash. The amount of restricted cash at September 24, 2004 was $64,300, of which $59,800 relates to the non-U.S. operations.
Restricted cash at September 24, 2004 consists of approximately $4,100 held primarily by special purpose entities and restricted for debt service payments, approximately $57,800 that was required to collateralize letters of credit and bank guarantees, and approximately $2,400 of client escrow funds. Domestic restricted cash totals approximately $4,500, which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $59,800 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.
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 and to service its debt. The Company’s current 2004 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $79,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In the first nine months of 2004 and the full year of 2003, the Company repatriated approximately $65,000 and $100,000, respectively, from its non-U.S. subsidiaries.
There can be no assurance that the forecasted foreign cash repatriation will occur, as there are significant contractual and statutory restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory 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 and 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 in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.
Commercial operations under a domestic contract retained by the Company in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), as described further in Note 11 to the condensed consolidated financial statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. As of September 24, 2004, the project generated year-to-date net cash flow of approximately $52,800. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.
On February 26, 2004, the California Public Utilities Commission approved certain changes to Pacific Gas and Electric Company’s rates. As relevant to the Company’s subsidiary’s Martinez Project, the E-20T rate has been decreased by approximately 15% retroactive to January 1, 2004, having a negative effect on the subsidiary’s 2004 cash flow and earnings. This rate change has been reflected in the Company’s liquidity forecast.
In connection with the equity-for-debt exchange offer, the holders of the Company’s Senior Notes due November 15, 2005 agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes. Holders of the Company’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The Senior Credit Facility is also secured by the stock, debt and assets of certain subsidiaries and has priority over the 2011 Senior Notes in such security.
The 2011 Senior Notes contain incurrence covenants that must be met should the Company choose to undertake certain actions including incurring debt, making payments and investments, granting liens, making asset sales and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure it is aware of the actions the Company is permitted to take pursuant to the 2011 Senior Notes Indenture.
In the third quarter of 2002, the Company also entered into a receivables financing arrangement of up to $40,000. The Company, in agreement with the lenders, reduced the maximum borrowing capacity to $30,000 effective May 28, 2004 thereby reducing unused commitment fees incurred. No amounts were drawn during 2004 or 2003, and the Company voluntarily terminated the receivable financing arrangement on September 30, 2004. A termination fee of $400 was accrued in the third quarter of 2004 and paid to the lending group on September 30, 2004.
On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital, which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump-sum engineering, procurement and construction contracts. The facility is secured by substantially all of the assets of these subsidiaries and is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of September 24, 2004, the facility remained undrawn.
Since January 15, 2002, the Company has exercised its right to defer payments on the junior subordinated debentures underlying the 9.00% Preferred Capital Trust I securities and, as a result, to defer payments on those securities. The aggregate liquidation amount of the trust preferred securities at September 24, 2004 was $71,250, after completing the equity-for-debt exchange. See Note 3 for further details of the exchange offer. The Senior Credit Facility, as amended, requires the Company to defer the payment of the dividends on the trust preferred securities and no dividends were paid during 2003 or the first three quarters of 2004. As of September 24, 2004, the amount of dividends deferred plus accrued interest approximates $21,400. The Company intends to continue to defer payment of the dividends on the trust preferred securities until January 15, 2007 — the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, the Company has the right to defer subsequent dividend payments for an additional 20 consecutive quarters.
On November 14, 2003, the New York Stock Exchange (“NYSE”) de-listed the Company’s common stock as well as its related security, 9.00% FW Preferred Capital Trust I, based on the Company’s inability to meet its listing criteria. The Company’s common and preferred shares and the 9.00% FW Preferred Capital Trust I securities are quoted on the Over-the-Counter Bulletin Board (“OTCBB”).
Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company’s de-listing, this exemption was no longer available. To address this issue, the Company obtained the consent of the BMA for transfers between non-residents for so long as the Company’s shares continue to be quoted in the Pink Sheets or on the OTCBB. The Company believes that this consent will continue to be available. |
|
| 2. | Summary of Significant Accounting Policies |
| The condensed consolidated balance sheet as of September 24, 2004 and December 26, 2003 and the related condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 24, 2004 and September 26, 2003 and the condensed consolidated statement of cash flows for the nine months ended September 24, 2004 and September 26, 2003 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments only consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. | |
| The financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 26, 2003 (“2003 Form 10-K”) filed with the SEC on June 9, 2004. The condensed consolidated balance sheet as of December 26, 2003 has been derived from the audited consolidated balance sheet included in the 2003 Form 10-K. A summary of the Company’s significant accounting policies is presented below. There has been no material change in the accounting policies followed by the Company during the first nine months of 2004. | |
| Principles of Consolidation — The condensed consolidated financial statements include the accounts of Foster Wheeler and all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated. | |
| Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Changes in estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others. At September 24, 2004, the Company had approximately $12,000 in requests for equitable adjustments recorded in contracts in process. This amount relates primarily to a claim against a U.S. Government agency for a project currently being executed. If this claim were to be unsuccessful, the costs would be charged to cost of operating revenues. | |
| Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method. | |
| Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs. | |
11
Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this reevaluation process, in the third quarter of 2004, twenty individual projects had final estimated profit revisions exceeding $500. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty related costs. The net aggregate dollar value of the accrued contract loss resulting from these estimate changes during the third quarter of 2004 amounted to $12,300. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records claims in accordance with paragraph 65 of SOP 81-1. This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings. As of September 24, 2004 and December 26, 2003, the Company had recorded a commercial claims receivable of approximately $2,300 and $0, respectively. The claims were recorded in the Company’s European operations.
Certain special-purpose subsidiaries in the Global Power Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.
Cash and Cash Equivalents — Cash and cash equivalents include liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of approximately $230,900 are maintained by foreign subsidiaries as of September 24, 2004. These subsidiaries require a substantial portion of these funds to support their liquidity and to comply with contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.
Restricted Cash — Restricted cash at September 24, 2004 consists of approximately $4,100 held primarily by special purpose entities and restricted for debt service payments, approximately $57,800 that was required to collateralize letters of credit and bank guarantees, and approximately $2,400 of client funds held in escrow. Domestic restricted cash totals approximately $4,500, and foreign restricted cash totals approximately $59,800.
Restrictions on Shareholders’ Dividends — The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during 2004 and 2003 and does not expect to pay dividends on the common or preferred shares for the foreseeable future.
12
Restricted Net Assets — One of the Company’s foreign subsidiaries is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio. The covenants are tested quarterly.
One of the performance bond facilities is dedicated to a specific project and, as of September 24, 2004, had performance bonds outstanding equivalent to approximately $40,000 (none of which has been drawn). The second facility is a general performance bond facility and, as of September 24, 2004, had performance bonds outstanding in favor of several clients equivalent to approximately $13,000 (none of which has been drawn).
As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the performance bond facilities. On August 6, 2004 and August 9, 2004 the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities. The waiver for the project specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum amounts and the performance bonds are outstanding. The waiver for the general performance bond facility was initially effective through October 31, 2004 and was subsequently extended through November 30, 2004. In the event that the Company is unable to obtain a further waiver or amendment, it will pursue a replacement for this bonding facility. In addition, the subsidiary has sufficient cash on hand to collateralize the obligations supported by the performance bonds in the event it is unable to obtain a waiver or an alternative bonding facility. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenants is reflected in the Company’s liquidity forecasts.
Short-term Investments — Short-term investments consist primarily of certificates of deposit and are classified as held to maturity under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”
Accounts and Notes Receivable, Net — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld may not be received within a one-year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.
Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also considered when evaluating the necessity of a provision.
The current portion of the asbestos-related insurance recovery receivables discussed in Note 4 and foreign refundable value-added tax are included within the Accounts and Notes Receivable line item.
13
Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.
Investments and Advances — The Company uses the equity method of accounting for investment ownership in affiliates of between 20% and 50%, unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates are recorded using the equity method.
Income Taxes — Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company’s tax return, deferred tax assets, as adjusted for any valuation allowance, are recognized for the carryforward amounts.
Provision is made for Federal income taxes which may be payable on foreign subsidiary earnings to the extent that the Company anticipates they will be remitted.
Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at month-end exchange rates and income and expenses and cash flows are translated at monthly weighted-average rates.
The Company enters into foreign exchange contracts in its management of foreign currency exposures related to commercial contracts. Changes in the fair value of derivative contracts that qualify as designated cash flow hedges are deferred until the hedged forecasted transaction affects earnings. Amounts receivable (gains) or payable (losses) under foreign exchange contracts are recognized as deferred gains or losses and are included in either contracts in process or estimated costs to complete long-term contracts. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At September 24, 2004 and September 26, 2003, the Company did not meet the requirements for deferral of gains or losses on derivative instruments under SFAS No. 133 and recorded net after-tax losses of approximately $420 and $1,940 for the three and nine months ended September 24, 2004, respectively, and recorded net after-tax losses of approximately $1,210 and $1,830 for the three and nine months ended September 26, 2003, respectively.
Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.
Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.
14
Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Goodwill was allocated to the reporting units based on the original purchase price allocation. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.
The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
As of September 24, 2004 and December 26, 2003, the Company had unamortized goodwill of $51,060 and $51,121, respectively. The decrease in goodwill of $61 resulted from foreign currency exchange losses. All of the goodwill at September 24, 2004 related to the Global Power Group. In 2003, the fair value of the reporting units exceeded the carrying amounts.
As of September 24, 2004 and December 26, 2003, the Company had unamortized identifiable intangible assets of patents and trademarks of $68,673 and $71,568, respectively. The following table details amounts relating to those assets.
| As of September 24, 2004 | As of December 26, 2003 | ||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||
| Amount | Amortization | Amount | Amortization | ||||||||||||
| Patents | $ | 36,643 | $ | (15,168 | ) | $ | 36,703 | $ | (13,802 | ) | |||||
| Trademarks | 61,847 | (14,649 | ) | 61,943 | (13,276 | ) | |||||||||
| Total | $ | 98,490 | $ | (29,817 | ) | $ | 98,646 | $ | (27,078 | ) | |||||
Amortization expense related to patents and trademarks for the three and nine months ending September 24, 2004 was $895 and $2,739, respectively. Amortization expense for the comparable periods in 2003 was $920 and $2,750, respectively. Amortization expense is expected to approximate $3,600 each year in the next five years.
Preferred Shares — The Company issued approximately 599,850 preferred shares in connection with the equity-for-debt exchange offer consummated on September 24, 2004. Approximately 94 additional preferred shares were issued as part of the subsequent offering period, which expired on October 20, 2004. Each preferred share is optionally convertible into 1,300 common shares provided the Company’s shareholders approve an increase in the number of authorized common shares at a shareholders’ meeting currently scheduled for November 29, 2004. The preferred shareholders currently have voting rights on an “as-converted” basis, meaning each preferred share has 1,300 votes. However, if the preferred shares become convertible into common shares, the preferred shares will cease to have voting rights except in certain limited circumstances. At all times, the preferred shares have the right to receive dividends and other distributions, including liquidating distributions, on an as-converted basis if declared by the Company and paid on the common shares. The preferred shares have a $0.01 liquidation preference.
15
Earnings/(Loss) per Share — Basic and diluted loss per share is computed as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||