-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ft8Ua9cuXsTga6mBd6rCJGSNKk5n4LHkvOsxtYVnz80IBNOsEf96WTfk1t7bSBEk i+SC6qeK1oWDWOlsOAuhmQ== 0000909012-99-000435.txt : 19990809 0000909012-99-000435.hdr.sgml : 19990809 ACCESSION NUMBER: 0000909012-99-000435 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990625 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSTER WHEELER CORP CENTRAL INDEX KEY: 0000038321 STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600] IRS NUMBER: 131855904 STATE OF INCORPORATION: NY FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00286 FILM NUMBER: 99679185 BUSINESS ADDRESS: STREET 1: PERRYVILLE CORPORATE PARK STREET 2: SERVICE ROAD EST 173 CITY: CLINTON STATE: NJ ZIP: 08809 BUSINESS PHONE: 9087304090 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 25, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-286-2 FOSTER WHEELER CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW YORK 13-1855904 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) PERRYVILLE CORPORATE PARK, CLINTON, N. J. 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 (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 40,725,887 shares of the Corporation's common stock ($1.00 par value) were outstanding as of June 25, 1999. FOSTER WHEELER CORPORATION INDEX Part I Financial Information: Item 1 - Financial Statements: Condensed Consolidated Balance Sheet at June 25, 1999 and December 25, 1998 Condensed Consolidated Statement of Earnings and Comprehensive Income Three and Six Months Ended June 25, 1999 and June 26, 1998 Condensed Consolidated Statement of Cash Flows Six Months Ended June 25, 1999 and June 26, 1998 Notes to Condensed Consolidated Financial Statements Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information: Item 1 - Legal Proceedings Item 6 - Exhibits and Reports on Form 8-K Signatures 1 PART I FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FOSTER WHEELER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands of Dollars)
June 25, 1999 December 25, (UNAUDITED) 1998 * ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $ 171,535 $ 180,068 Short-term investments ................................. 34,094 61,223 Accounts and notes receivable .......................... 849,724 857,005 Contracts in process and inventories ................... 458,179 478,481 Prepaid, deferred and refundable income taxes .......... 60,214 66,068 Prepaid expenses ....................................... 20,757 29,997 ----------- ----------- Total current assets .............................. 1,594,503 1,672,842 ----------- ----------- Land, buildings and equipment .......................... 1,042,081 1,015,795 Less accumulated depreciation .......................... 351,331 339,009 ----------- ----------- Net book value .................................... 690,750 676,786 ----------- ----------- Notes and accounts receivable - long-term .............. 102,951 103,612 Investments and advances ............................... 105,490 95,827 Intangible assets, net ................................. 277,039 285,245 Prepaid pension cost and benefits ...................... 193,782 196,812 Other, including insurance recoveries .................. 277,723 286,886 Deferred income taxes .................................. 4,627 4,291 ----------- ----------- TOTAL ASSETS .................................. $ 3,246,865 $ 3,322,301 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current installments on long-term debt ................. $ 19,892 $ 19,751 Bank loans ............................................. 173,688 107,051 Accounts payable and accrued expenses .................. 641,057 718,337 Estimated costs to complete long-term contracts ........ 531,381 563,271 Advance payments by customers .......................... 51,553 56,630 Income taxes ........................................... 12,376 26,626 ----------- ----------- Total current liabilities ......................... 1,429,947 1,491,666 Corporate and other debt less current installments ..... 362,810 540,827 Special-purpose project debt less current installments . 312,928 294,898 Deferred income taxes .................................. 81,373 85,484 Postretirement and other employee benefits other than pensions .......................................... 163,382 168,799 Other long-term liabilities and minority interest ...... 173,015 168,509 Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures .................... 175,000 -- ----------- ----------- TOTAL LIABILITIES ............................. 2,698,455 2,750,183 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock ........................................... 40,748 40,748 Paid-in capital ........................................ 201,057 201,158 Retained earnings ...................................... 380,839 377,147 Accumulated other comprehensive loss ................... (73,924) (46,349) ----------- ----------- 548,720 572,704 Less cost of treasury stock ............................ 310 586 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY .................... 548,410 572,118 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 3,246,865 $ 3,322,301 =========== ===========
See notes to financial statements. * Reclassified to conform to 1999 presentation, see Note 1. 2 FOSTER WHEELER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 25, 1999 JUNE 26, 1998 JUNE 25, 1999 JUNE 26, 1998 ------------- ------------- ------------- ------------- Revenues: Operating revenues $ 854,958 $ 1,033,825 $ 1,853,728 $ 2,061,786 Other income 18,805 16,794 38,013 26,587 ------------ ------------ ------------ ------------ Total revenues 873,763 1,050,619 1,891,741 2,088,373 ------------ ------------ ------------ ------------ Cost and expenses: Cost of operating revenues 788,295 949,674 1,701,524 1,891,508 Selling, general and adminis- trative expenses 59,043 60,485 114,255 116,899 Other deductions/minority interest 11,455 18,920 36,177 37,202 Dividend on preferred security of subsidiary trust 4,025 -- 7,306 -- ------------ ------------ ------------ ------------ Total costs and expenses 862,818 1,029,079 1,859,262 2,045,609 ------------ ------------ ------------ ------------ Earnings before income taxes 10,945 21,540 32,479 42,764 Provision for income taxes 5,560 8,695 11,691 16,634 ------------ ------------ ------------ ------------ Net earnings 5,385 12,845 20,788 26,130 Other comprehensive loss: Foreign currency translation adjustment (12,712) (8,076) (27,575) (15,868) ------------ ------------ ------------ ------------ Comprehensive (loss)/income $ (7,327) $ 4,769 $ (6,787) $ 10,262 ============ ============ ============ ============ Earnings per share: Basic $.13 $.32 $.51 $.64 ==== ==== ==== ==== Diluted: $.13 $.32 $.51 $.64 ==== ==== ==== ==== Shares outstanding: Basic 40,732,135 40,736,754 40,730,985 40,735,809 Diluted 10,621 7,463 116 7,300 ------------ ------------ ------------ ------------ Total diluted 40,742,756 40,744,217 40,731,101 40,743,109 ============ ============ ============ ============ Cash dividends paid per common share $.21 $.21 $.42 $.42 ==== ==== ==== ====
See notes to financial statements. 3 FOSTER WHEELER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands of Dollars) (Unaudited)
SIX MONTHS ENDED JUNE 25, 1999 JUNE 26, 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings ......................................................... $ 20,788 $ 26,130 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation and amortization ........................................ 30,213 29,746 Noncurrent deferred tax .............................................. (2,771) 5,876 Equity earnings, net of dividends .................................... (7,282) (3,283) Other ................................................................ (6,675) (3,682) Changes in assets and liabilities: Receivables .......................................................... (41,016) 35,291 Contracts in process and inventories ................................. 7,873 (65,437) Accounts payable and accrued expenses ................................ (34,726) (30,562) Estimated costs to complete long-term contracts ...................... (5,758) (64,897) Advance payments by customers ........................................ (2,527) 9,305 Income taxes ......................................................... (11,913) 1,775 Other assets and liabilities ......................................... 3,175 (910) --------- --------- NET CASH USED BY OPERATING ACTIVITIES ................................ (50,619) (60,648) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ................................................. (59,730) (58,404) Proceeds from sale of properties ..................................... 2,082 2,225 Decrease/(increase) in investments and advances ...................... 16,246 (5,201) Decrease in short-term investments ................................... 26,884 21,351 Partnership distributions ............................................ (4,385) (4,256) --------- --------- NET CASH USED BY INVESTING ACTIVITIES ................................ (18,903) (44,285) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends to stockholders ............................................ (17,096) (17,101) Proceeds from the exercise of stock options .......................... -- 51 Repurchase of common stock ........................................... (860) -- Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holdings Solely Junior Subordinated Deferrable Interest Debentures .................................. 169,178 -- Increase in short-term debt .......................................... 74,201 28,337 Proceeds from long-term debt ......................................... 24,470 83,288 Repayment of long-term debt .......................................... (174,348) (9,403) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 75,545 85,172 --------- --------- Effect of exchange rate changes on cash and cash equivalents ......... (14,556) (3,274) --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS ................................ (8,533) (23,035) Cash and cash equivalents at beginning of year ....................... 180,068 167,417 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 171,535 $ 144,382 ========= ========= Cash paid during period: Interest (net of amount capitalized) ................................. $ 29,945 $ 20,783 Income taxes ......................................................... $ 9,541 $ 10,740
See notes to financial statements. 4 FOSTER WHEELER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. The condensed consolidated balance sheet as of June 25, 1999, and the related condensed consolidated statements of earnings and comprehensive income and cash flows for the three and six month periods ended June 25, 1999 and June 26, 1998 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 this Form 10-Q and do not contain certain information included in Foster Wheeler Corporation's Annual Report on Form 10-K for the fiscal year ended December 25, 1998 filed with the Securities and Exchange Commission on March 18, 1999. The Condensed Consolidated Balance Sheet as of December 25, 1998 has been derived from the audited Consolidated Balance Sheet included in the 1998 Annual Report on Form 10-K. A summary of Foster Wheeler Corporation's significant accounting policies is presented on pages 27, 28 and 29 (not shown) of its 1998 Annual Report on Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the 1998 Annual Report on Form 10-K when reviewing interim financial results. There has been no material change in the accounting policies followed by Foster Wheeler Corporation (hereinafter referred to as "Foster Wheeler" or the "Corporation") during the first six months of 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Significant estimates are used when accounting for long-term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, and contingencies, among others. In March of 1999, the Corporation reflected its investment in a joint venture in Chile on the equity method of accounting. The December 1998 balance sheet has been reclassified to conform to the 1999 presentation. This change had no impact on the June and the December 1998 Consolidated Statements of Earnings and Comprehensive Income. The assets and liabilities of the joint venture included in the December balance sheet were as follows: total assets $242,662, total liabilities $182,225 and net assets $60,437. 2. In the ordinary course of business, the Corporation and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be brought against the Corporation by customers alleging deficiencies in either equipment design or plant construction. Based on its knowledge of the facts and circumstances relating to the Corporation's liabilities, if any, and to its insurance coverage, management of the Corporation believes that the disposition of such suits will not result in charges against assets or earnings materially in excess of amounts previously provided in the accounts. 5 The Corporation and its subsidiaries, along with many other companies, are codefendants in numerous lawsuits pending in the United States. Plaintiffs claim damages for personal injury alleged to have arisen from exposure to or use of asbestos in connection with work performed by the Corporation and its subsidiaries during the 1970s and prior. As of June 25, 1999, there were approximately 72,100 claims pending. During 1999, approximately 16,400 new claims were filed and approximately 6,600 were either settled or dismissed without payment. The Corporation has agreements with insurance carriers covering significantly more than a majority of the potential costs relating to these exposures. The Corporation has recorded an asset relating to the probable insurance recoveries and a liability relating to probable losses. These assets and liabilities were estimated based on historical data developed in conjunction with outside experts. Management of the Corporation has carefully considered the financial viability and legal obligations of its insurance carriers and has concluded that except for those insurers that have become or may become insolvent, the insurers will continue to adequately fund claims and defense costs relating to asbestos litigation. In 1997, the United States Supreme Court effectively invalidated New Jersey's long-standing municipal solid waste flow rules and regulations. The immediate effect was to eliminate the guaranteed supply of municipal solid waste to the Camden County Waste-to-Energy Project (the "Project") with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the plant. Those market-based revenues are not expected to be sufficient to cover the operating expenses and to service the debt on outstanding bonds that were issued to construct the plant and to acquire a landfill for Camden County's use. Although the debt is reflected in the consolidated financial statements of the Corporation the bonds were issued by the Pollution Control Financing Authority of Camden County. This debt is collateralized by a pledge of certain revenues and assets of the project but not the plant. The Corporation's obligation is to fund the debt to the extent the project generates positive cash flows. The Corporation has filed suit against the involved parties, seeking among other things to void the applicable contracts and agreements governing the Project. Pending outcome of the litigation and the results of legislative initiatives in New Jersey to resolve the issue, management believes that the plant will continue to operate at full capacity while receiving market rates for waste disposal. At this time, management cannot determine the ultimate outcome and its effect on the Project. In 1994, the Corporation entered into a lease agreement for a 1,600-ton-per-day recycling and waste-to-energy plant located in Robbins, Illinois (the "Robbins Facility"), which went into commercial operation in January 1997. The terms of the agreement are to lease the facility under a long-term operating lease for 32 years. As a result of the partial repeal of the Illinois Retail Rate Law and increased operating costs, the facility is not generating cash flows sufficient to cover the required lease payments. Due to the limited liability project structure, annual lease expense will be the aggregate of (1) the annual amortization of prepaid lease cost over the term of the lease, (2) amounts due in accordance with the terms of the lease agreement to the extent of cash flows generated from operations (before lease expense) and (3) the amounts funded under the corporate guarantees up to the total of $79,600. These guarantees are estimated to be paid out as follows: $5,400 in 1999, $13,100 for 2000, $14,300 in 2001 and the balance in 2002 and thereafter. Such estimates depend upon the actual results of the project and are subject to change if the agreement with bondholders as announced on July 27, 1999 is finalized (see "Subsequent Events", Note 13, for details). The ultimate legal and financial liability of the Corporation with respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Corporation becomes known, the Corporation reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters, which are subject to change as events evolve and as additional information becomes available during the administration and litigation process. 6 3. The Corporation maintains two revolving credit agreements with a syndicate of banks. One is a short-term revolving credit agreement of $90,000 with a maturity of 364 days and the second is a $270,000 revolving credit agreement with a maturity of four years (collectively, the "Revolving Credit Agreements"). These Revolving Credit Agreements require, among other things, the maintenance of a maximum Consolidated Leverage Ratio and a minimum Consolidated Fixed Charges Coverage Ratio. As of June 25, 1999, the Corporation was in compliance with both of these provisions; however, if the charge relating to the Robbins Facility discussed below in Note 13 is taken in 1999, the Corporation will be required to obtain a waiver from the lenders under the Revolving Credit Agreements. On January 13, 1999, FW Preferred Capital Trust I, a Delaware business trust, issued $175,000 in Trust Preferred Securities. These Trust Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of 9.0%. Distributions will be paid quarterly in arrears on April 15, July 15, October 15 and January 15 of each year, beginning April 15, 1999. The maturity date is January 15, 2029. Foster Wheeler can redeem these Trust Preferred Securities on or after January 15, 2004. The Corporation has a total of $125,000 that has not been issued under its existing shelf registration statement. 4. A total of 4,355,528 shares of common stock were reserved for issuance under the stock option plans; of this total 1,849,916 were not under option. 5. Basic per share data has been computed based on the weighted average number of shares of common stock outstanding. Diluted per share data has been computed on the basic plus the dilution of stock options. In the second quarter of 1999, the Corporation adopted a "Directors Deferred Compensation and Stock Award Plan." Each non-employee director is credited initially with units representing 1,000 shares of the Corporation's common stock and 300 shares annually. In the second quarter 9,000 units were issued and are included in the calculation of basic earnings per share data. 6. Interest income and cost for the following periods are: THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 25, JUNE 26, JUNE 25, JUNE 26, 1999 1998 1999 1998 ---- ---- ---- ---- Interest Income $ 2,093 $ 5,368 $ 5,391 $11,369 ======= ======= ======= ======= Interest Cost $18,293 $18,442 $36,846 $35,311 ======= ======= ======= ======= Included in interest cost is interest capitalized on self-constructed assets for the three and the six months ended June 25, 1999 of $1,439 and $2,061, respectively, compared to $2,926 and $5,790 for the comparable periods in 1998. Included in interest cost is dividends on Trust Preferred Securities which for the three and six months ended June 25, 1999, amounted to $4,025 and $7,306, respectively. 7 7. The Financial Accounting Standards Board released in June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. The Corporation is currently assessing the impact of adoption of this new Statement. The effective date of this Statement has been deferred by the issuance of Statement of Financial Accounting Standards No. 137 until the fiscal year beginning after June 15, 2000. In the second quarter of 1998, the Accounting Standard Executive Committee of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This statement provides guidance on financial reporting of start-up costs and organizational costs. This Statement of Position is effective for financial statements for fiscal years beginning after December 15, 1998. This Statement of Position requires start-up costs to be expensed as incurred. The Corporation has adopted this Statement of Position in the first quarter of 1999 without a material impact on the financial results of the Corporation. 8. In the third quarter 1998, a subsidiary of the Corporation entered into a three year agreement with a financial institution whereby the subsidiary would sell an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. The credit risk of uncollectible accounts receivable has been transferred to the purchaser. The Corporation services, administers and collects the receivables on behalf of the purchaser. Fees payable to the purchaser under this agreement are equivalent to rates afforded high quality commercial paper issuers plus certain administrative expenses and are included in other deductions in the Consolidated Statement of Earnings. The agreement contains certain covenants and provides for various events of termination. At June 25, 1999, $40,000 in receivables were sold under the agreement and are therefore not reflected in the accounts receivable balance in the Condensed Consolidated Balance Sheet. 8 9. Changes in equity for the six months ended June 25, 1999 were as follows: (In Thousands of Dollars)
ACCUMULATED OTHER TOTAL COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS LOSS SHARES AMOUNT EQUITY ------------ -------- ------- -------- ---------------- ------ ------- ------------ Balance December 25, 1998 40,747,668 $ 40,748 $ 201,158 $ 377,147 $ (46,349) (30,804) $ (586) $ 572,118 Net income 20,788 20,788 Dividends paid - common (17,096) (17,096) Purchase of treasury stock (71,000) (860) (860) Foreign currency translation adjustment (27,575) (27,575) Issued under incentive plan (101) 80,023 1,136 1,035 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance June 25, 1999 40,747,668 $ 40,748 $ 201,057 $ 380,839 $ (73,924) (21,781) $ (310) $ 548,410 =========== =========== =========== =========== =========== =========== =========== ===========
9 10. Major Business Groups
FOR SIX MONTHS ENGINEERING CORPORATE AND - -------------- AND ENERGY POWER FINANCIAL TOTAL CONSTRUCTION EQUIPMENT SYSTEMS SERVICE (1) ----- ------------ --------- ------- ----------- ENDED - ----- JUNE 25, 1999 - ------------- Revenues $1,891,741 $1,457,623 $ 365,673 $ 98,049 $ (29,604) Interest expense(2) 34,785 2,794 6,407 13,905 11,679 Earnings/(loss) before income taxes 32,479 53,771 11,157 (6,310) (26,139) Income taxes/(benefit) 11,691 19,315 3,455 (1,904) (9,175) ---------- ---------- ---------- ---------- ---------- Net earnings/(loss) $ 20,788 $ 34,456 $ 7,702 $ (4,406) $ (16,964) ========== ========== ========== ========== ========== ENDED - ----- JUNE 26, 1998 - ------------- Revenues $2,088,373 $1,547,806 $ 540,010 $ 84,821 $ (84,264) Interest expense 29,520 4,430 3,657 11,165 10,268 Earnings/(loss) before income taxes 42,764 48,030 22,407 (6,903) (20,770) Income taxes/(benefit) 16,634 17,507 8,251 (1,844) (7,280) ---------- ---------- ---------- ---------- ---------- Net earnings/(loss) $ 26,130 $ 30,523 $ 14,156 $ (5,059) $ (13,490) ========== ========== ========== ========== ========== (1) Includes intersegment eliminations (2) Includes dividend on trust preferred securities.
10 11. Consolidating Financial Information Separate financial statements and other disclosures with respect to the subsidiary guarantees have not been made because management has determined that such information is not material to holders of the Notes (as defined below). The following represents summarized consolidating financial information as of June 25, 1999 with respect to the financial position, and for the six months ended June 25, 1999, for results of operations and cash flows of the Corporation and its wholly-owned and majority-owned subsidiaries. In February 1999 Foster Wheeler USA Corporation, Foster Wheeler Energy Corporation and Foster Wheeler Energy International, Inc. issued guarantees in favor of the holders of the Corporation's 6 3/4% Notes due November 15, 2005 (the "Notes"). Each of the guarantees is full and unconditional, and joint and several. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the wholly-owned subsidiary guarantors. None of the subsidiary guarantors are restricted from making distributions to the Corporation. CONDENSED CONSOLIDATING BALANCE SHEET June 25, 1999
GUARANTOR NON-GUARANTOR ASSETS FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ --- ------------ ------------ ------------ ------------ Current assets $ 483,293 $360,102 $1,595,227 $(844,119) $1,594,503 Investment in subsidiaries 898,920 311,320 51,044 (1,261,284) -0- Land, buildings & equipment (net) 48,378 29,220 619,880 (6,728) 690,750 Notes and accounts receivable - long-term 92,753 11,416 475,575 (476,793) 102,951 Intangible assets (net) -0- 89,681 187,358 -0- 277,039 Other non-current assets 264,677 23 225,023 91,899 581,622 ---------- -------- ---------- ----------- ---------- TOTAL ASSETS $1,788,021 $801,762 $3,154,107 $(2,497,025) $3,246,865 ========== ======== ========== =========== ========== LIABILITIES & STOCKHOLDERS' EQUITY ---------------------------------- Current liabilities $ 420,801 $342,686 $1,512,523 $ (846,063) $1,429,947 Long-term debt 547,959 23,000 583,420 (478,641) 675,738 Other non-current liabilities 270,851 6,142 224,015 (83,238) 417,770 Preferred trust securities -0- -0- 175,000 -0- 175,000 ---------- -------- ---------- ----------- ---------- TOTAL LIABILITIES 1,239,611 371,828 2,494,958 (1,407,942) 2,698,455 TOTAL STOCKHOLDERS' EQUITY 548,410 429,934 659,149 (1,089,083) 548,410 ---------- -------- ---------- ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,788,021 $801,762 $3,154,107 $(2,497,025) $3,246,865 ========== ======== ========== ============ ==========
11 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS DATA For the Six Months Ended June 25, 1999
GUARANTOR NON-GUARANTOR FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --- ------------ ------------ ------------ ------------ Revenues $ 15,639 $365,033 $1,679,486 $(168,417) $1,891,741 Cost of operating revenues -0- 351,242 1,489,833 (139,551) 1,701,524 Selling, general and administrative, other deductions and minority interests 37,899 24,504 124,201 (28,866) 157,738 Equity in net earnings of subsidiaries 35,340 7,316 -0- (42,656) -0- ---------- -------- ---------- --------- ---------- Earnings before income taxes 13,080 (3,397) 65,452 (42,656) 32,479 Provisions for income taxes (7,708) (4,532) 23,931 -0- 11,691 ---------- -------- ---------- --------- ---------- Net earnings $ 20,788 $ 1,135 $ 41,521 $ (42,656) $ 20,788 ========= ======== ========== ========= ==========
12 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW DATA For the Six Months Ended June 25, 1999
GUARANTOR NON-GUARANTOR FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --- ------------ ------------- ------------ ------------ NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES $ (40,123) $ (18,864) $ (119) $ 8,487 $ (50,619) --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (3,010) (56,720) (59,730) Proceeds from sale of properties 2,082 2,082 Decrease/(increase) in investment 1,820 16,439 (2,013) 16,246 and advances Decrease in short-term investments 26,884 26,884 Other 500 (4,885) (4,385) --------- --------- --------- --------- --------- NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 1,820 (2,510) (14,450) (2,013) (18,903) --------- --------- --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Dividends to Stockholders (17,096) (17,096) Issuance of trust preferred securities 169,178 169,178 Increase in short-term debt 69,300 4,901 74,201 Proceeds from long-term debt 24,470 24,470 Repayment of long-term debt (170,000) (4,348) (174,348) Other 143,829 18,011 (156,226) (6,474) (860) --------- --------- --------- --------- --------- NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 26,033 18,011 37,975 (6,474) 75,545 --------- --------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents (14,556) (14,556) Decrease in cash and cash equivalents (12,270) (3,363) 7,100 (8,533) Cash and cash equivalents, beginning of period 13,720 6,552 159,796 180,068 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 1,450 $ 3,189 $ 166,896 $ -0- $ 171,535 ========= ========= ========= ========= =========
13 12. The Corporation owns a non-controlling equity interest in three cogeneration projects; two of which are located in Italy and one in Chile. In addition, the Corporation owns an equity interest in a hydrogen producing plant in Venezuela. Following is summarized financial information for the Corporation's equity affiliates combined, as well as the Corporation's interest in the affiliates. JUNE 25, DECEMBER 25, 1999 1998 ------------- ------------ BALANCE SHEET DATA: ------------------- Current assets $ 87,554 $ 83,871 Other assets (primarily buildings and equipment) 508,884 541,507 Current liabilities 31,778 35,126 Other liabilities (primarily long-term debt) 417,632 461,972 Net assets 147,028 128,280 INCOME STATEMENT DATA: ---------------------- Total revenues $ 60,742 Income before income taxes 15,924 Net earnings 16,882 As of June 25, 1999, the Corporation's share of the net earnings and investment in the equity affiliates totaled $9,032 and $105,490, respectively. Dividends of $1,750 were received during the first six months of 1999. The Corporation has guaranteed certain performance obligations of such projects. The Corporation's obligations under such guarantees are approximately $1,500 per year for the three projects. The Corporation has provided a $10,000 debt service reserve letter of credit providing liquidity for debt service payments. No amounts have been drawn under the letter of credit. The earning results for the six months of 1998 were $1,173 for these operations. 13. Subsequent Events: On July 27, 1999, the Corporation announced it had reached a preliminary agreement with holders of a majority of the principal amount of bonds issued in connection with the financing of the Robbins Facility. Under the agreement, the project will be restructured by, among other things, exchanging existing bonds for new bonds, selling the facility to a third-party owner/operator and allowing Foster Wheeler to exit from its operating role. Specific elements are that Foster Wheeler will: -- Provide subordinated guarantees on $113,000 aggregate principal amount of tax-exempt bonds to be issued by the Village of Robbins, Illinois, in exchange for a portion of the existing bonds, including $95,000 of amortizing 25-year bonds and $18,000 of 10-year accretion bonds with interest paid at maturity; -- Pending sale of the facility, operate the facility for up to two years with no operational guarantees and full cost reimbursement; 14 -- Pay in October 1999 approximately $5,400 of its existing $55,000 support obligation (the remaining obligations under the $55,000 support will be terminated upon consummation of the exit transaction and the issuance of the $113,000 of Foster Wheeler supported bonds); -- Continue to prosecute the retail rate litigation against various Illinois State officials, and, -- Cooperate with the bondholders in seeking a new third-party owner/operator for the facility. The transaction is subject to due diligence, requires third-party and bondholder approvals and execution of a definitive agreement. After the transaction is consummated, the Corporation does not expect to incur any further operating losses from the Robbins project. During the third quarter, assuming that a definitive agreement is executed, the Corporation will take a pretax charge of approximately $210,000. The charge will fully write off all existing obligations of Foster Wheeler related to the Robbins Resource Recovery Facility, including the prepaid lease expense, $20,000 of outstanding bonds issued in conjunction with the equity financing of the facility, transaction expenses and ongoing legal expenses associated with the Retail Rate Law litigation. COST REDUCTIONS The Corporation's continuing business strategy is to maintain focus on its core business segments in engineering and construction and energy equipment. In order to remain competitive in these segments while improving margins, the Corporation is reducing costs through staff reduction and closure of some smaller operating facilities. These changes include the reduction of approximately 1,600 permanent positions, including 300 overhead and other support positions from its worldwide workforce of 11,000. In addition, approximately 800 agency personnel within the Engineering & Construction Group will be reduced during the course of this year. The positions eliminated will include engineering, clerical, support staff and manufacturing personnel. The Corporation expects to take a pretax charge of approximately $35,000 in the third quarter as a result of implementation of this plan. At the end of July, the Corporation is approximately 35% complete with these reductions. DIVIDEND REDUCTION The Corporation's Board of Directors meeting held on July 27, 1999 reduced the quarterly dividend to $0.06 per share from $0.21 per share, payable on September 15, 1999 to stockholders of record as of August 16, 1999. 15 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Millions of Dollars, except per Share Amounts) The following is Management's Discussion and Analysis of certain significant factors that have affected the financial condition and results of operations of the Corporation for the periods indicated below. This discussion and analysis should be read in conjunction with the 1998 Annual Report on Form 10-K filed on March 18, 1999. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 25, 1999 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 26, 1998 CONSOLIDATED DATA THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 25, JUNE 26, JUNE 25, JUNE 26, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Backlog $ 6,991.8 $ 7,796.4 $ 6,991.8 $ 7,796.4 ========== ========== ========== ========== New orders $ 1,059.4 $ 1,369.7 $ 1,969.9 $ 2,818.6 ========== ========== ========== ========== Revenues $ 873.7 $ 1,050.7 $ 1,891.7 $ 2,088.4 ========== ========== ========== ========== Net earnings $ 5.4 $ 12.8 $ 20.8 $ 26.1 ========== ========== ========== ========== The Corporation's consolidated backlog at June 25, 1999 totaled $6,991.8, which represented a decrease of 10% from the amount reported as of June 26, 1998. This decrease was due primarily to low level of new orders recorded in 1999 by the Engineering and Construction Group. The dollar amount of backlog is not necessarily indicative of the future earnings of the Corporation related to the performance of such work. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which management has determined are likely to be performed. Although backlog represents only business which is considered firm, cancellations or scope adjustments may occur. Due to factors outside the Corporation's control, such as changes in project schedules, the Corporation cannot predict with certainty the portion of backlog not to be performed. Backlog is adjusted to reflect project cancellations, deferrals, sale of subsidiaries and revised project scope and cost. This adjustment for the six months ended June 25, 1999 was $277.7, compared with $146.5 for the six months ended June 26, 1998. Furthermore, the Corporation's future award prospects include several large-scale international projects and, because the large size and uncertain timing of these projects can create variability in the Corporation's contract awards, future award trends are difficult to predict. New orders awarded for the three and six months ended June 25, 1999 were $1,059.4 and $1,969.9 compared to $1,369.7 and $2,818.6 for the periods ended June 26, 1998. Approximately 59% of new orders booked in the six months ended June 25, 1999 were for projects awarded to the Corporation's subsidiaries located outside the United States. Key countries and geographic areas contributing to new orders awarded for the six months ended June 25, 1999 were the United States, Europe, the Philippines, Malaysia and Eastern Europe. 16 Operating revenues decreased in the three months ended June 25, 1999 compared to the three months ended June 26, 1998 to $854.9 from $1,033.8. The most recent six month period reflects a decrease in operating revenue of $208.1 from $2,061.8 in 1998 to $1,853.7. The decrease in the Engineering and Construction Group for the three and six months of 1999 compared to the same periods for 1998 was $80.7 and $96.9, respectively. The Energy Equipment Group decreased for the three and six months of 1999 compared to 1998 by $103.1 and $175.2, respectively. Gross earnings, which are equal to operating revenue minus the cost of operating revenue decreased by $18.1 in the six months ended June 25, 1999 as compared with the six months ended June 26, 1998 to $152.2 from $170.3. Gross earnings decreased by $17.5 in the three months ended June 25, 1999 as compared with the three months ended June 26, 1998 to $66.7 from $84.2. The decrease in gross earnings for the three and six month period for 1999 to 1998 can be attributed to the Energy Equipment Group and the Power Systems Group. (See "Engineering and Construction Group" and "Energy Equipment Group" below). Selling, general and administrative decreased by 2% in the six months ended June 25, 1999 as compared with the same period in 1998 from $116.9 to $114.3. Selling, general and administrative expense decreased by 2% in the three months ended June 25, 1999 as compared with the same period in 1998, from $60.5 to $59.0 Other income in the six months ended June 25, 1999 as compared with June 26, 1998 increased to $38.0 from $26.6. Other income in the three months ended June 25, 1999 as compared with June 26, 1998 increased to $18.8 from $16.8. The increase for both the six and three months periods can be attributed to equity earnings offset by lower interest income. Other deductions and dividends on Trust Preferred for the six months ended June 25, 1999 were $5.4 higher than that reported in the six months ended June 26, 1998. The increase in other deductions can be attributed to higher interest expense. Interest expense for the six months of 1999 was $34.8 compared to $29.5 for the same period in 1998. The effective tax rate was 36.0% for the six months ended June 25, 1999, as compared to 38.9% for the same period in 1998. Net earnings for the six months ended June 25, 1999 were $20.8 or $.51 per share-basic compared to $26.1 or $.64 per share-basic for the six months ended June 26, 1998. Net earnings for the three months ended June 25, 1999 were $5.4 or $.13 per share-basic compared to $12.8 or $.32 per share-basic for the three months ended June 26, 1998. ENGINEERING AND CONSTRUCTION GROUP THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 25, JUNE 26, JUNE 25, JUNE 26, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Backlog $ 5,516.2 $ 6,108.2 $ 5,516.2 $ 6,108.2 ========== ========== ========== ========== New orders $ 745.1 $ 1,148.3 $ 1,490.7 $ 2,408.0 ========== ========== ========== ========== Operating revenues $ 642.8 $ 723.5 $ 1,433.3 $ 1,530.2 ========== ========== ========== ========== Gross earnings from operations $ 51.7 $ 50.7 $ 100.1 $ 103.9 ========== ========== ========== ========== 17 The Engineering and Construction Group ("E&C Group"), had a backlog of $5,516.2 at June 25, 1999, which represented a decrease of $592.0 from June 26, 1998. New orders booked for the six month period ended June 25, 1999 decreased by 38% compared with the period ended June 26, 1998. These decreases were primarily the result of the significant orders taken by the Continental European and United States operating subsidiaries in the first six months of 1998, which were not repeated in 1999. Operating revenues for the six month period ended June 25, 1999 decreased 6% compared to the six month period ended June 26, 1998. Gross earnings from operations decreased by 4% for the six month period ended June 25, 1999, compared with the corresponding period ended June 26, 1998. The gross earnings for the six month period were lower primarily due to the decrease reported by the Italian subsidiary ($12.1), which were offset by an increase in equity earnings of unconsolidated subsidiaries. ENERGY EQUIPMENT GROUP THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 25, JUNE 26, JUNE 25, JUNE 26, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Backlog $ 1,509.3 $ 1,451.9 $ 1,509.3 $ 1,451.9 ========== ========== ========== ========== New orders $ 452.2 $ 202.4 $ 573.9 $ 342.5 ========== ========== ========== ========== Operating revenues $ 191.4 $ 294.6 $ 360.2 $ 535.4 ========== ========== ========== ========== Gross earnings from operations $ 25.2 $ 31.9 $ 51.2 $ 61.2 ========== ========== ========== ========== The Energy Equipment Group had a backlog of $1,509.3 at June 25, 1999, which represented a 4% increase from June 26, 1998 due primarily to orders awarded in the second quarter of 1999. Approximately 32% of the Energy Equipment Group's backlog as of June 25, 1999 represents orders from Asia. These orders are for large utility size boilers, payments under which are supported by financing agreements guaranteed by United States, European or Japanese export credit agencies. New orders booked for the six month period ended June 25, 1999 increased by 68% from corresponding periods in 1998. This is due to an order taken in the second quarter of 1999 for boilers in Eastern Europe. Operating revenues for the six month period ended June 25, 1999 decreased by 33% primarily due to the low level of new orders booked during 1998. Gross earnings from operations decreased by $10.0 for the six month period ended June 25, 1999 compared with the period ended June 26, 1998, related primarily to the lower level of operating revenues. POWER SYSTEMS GROUP THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 25, JUNE 26, JUNE 25, JUNE 26, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Backlog $ 173.5 $ 271.8 $ 173.5 $ 271.8 ========== ========== ========== ========== New orders $ 34.9 $ 33.6 $ 82.4 $ 94.0 ========== ========== ========== ========== Operating revenues $ 31.4 $ 36.8 $ 83.2 $ 77.2 ========== ========== ========== ========== Gross (loss)/ earnings from operations $ (10.9) $ 1.0 $ (0.3) $ 4.0 ========== ========== ========== ========== 18 The Power Systems Group's gross earnings from operations for the six month period ended June 25, 1999 decreased due to 1999 losses related to the Robbins Facility of $16.2 of which $15.6 was incurred in the second quarter. The second quarter included approximately $12.2 associated with the maintenance and technical enhancements performed, a portion of which was made in anticipating a transfer of Foster Wheeler's interest to other parties. The future earnings of the Power Systems Group will be negatively impacted by the Robbins Facility due to (1) funding of the Corporation's guarantees of $79.6 and (2) the unamortized prepaid lease expense of $42.2. A preliminary agreement has been announced regarding the Robbins Facility that could significantly change the timing and amount of the Robbins losses (see "Subsequent Events" below for details). FINANCIAL CONDITION The Corporation's consolidated financial condition declined during the six months ended June 25, 1999 as compared to December 25, 1998. Stockholders' equity for the six months ended June 25, 1999 decreased by $23.7, due primarily to changes in the foreign currency translation adjustment of $27.6 and dividends paid of $17.1, offset by earnings of $20.8. During the six months ended June 25, 1999, long-term investments in land, buildings and equipment were $59.7 as compared with $58.4 for the comparable period in 1998. Approximately $34.1 was invested in a waste-to-energy project in Italy during the first six months of 1999. Since December 25, 1998, long-term debt, including current installments and bank loans, decreased by $75.7, primarily due to payment of debt from the proceeds of Trust Preferred. On January 13, 1999, FW Preferred Capital Trust I, a Delaware business trust, issued $175,000 in Preferred Trust Securities. These Preferred Trust Securities are entitled to receive cumulative cash distributions at an annual rate of 9%. In the ordinary course of business, the Corporation and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be brought against the Corporation by customers alleging deficiencies in either equipment design or plant construction. Based on its knowledge of the facts and circumstances relating to the Corporation's liabilities, if any, and to its insurance coverage, management of the Corporation believes that the disposition of such suits will not result in charges against assets or earnings materially in excess of amounts provided in the accounts. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $171.5 at June 25, 1999, a decrease of $8.5 from fiscal year end 1998. Short-term investments decreased by $27.1 to $34.1. During the six months of fiscal 1999, the Corporation paid $17.1 in dividends to stockholders. Cash used by operating activities amounted to $50.6. Over the last several years, working capital needs have increased as a result of the Corporation satisfying its customers' requests for more favorable payment terms under contracts. Such requests generally 19 include reduced advance payments and more favorable payment schedules. Such terms, which require the Corporation to defer receipt of payments from its customers, have had a negative impact on the Corporation's available working capital. The Corporation intends to satisfy its continuing working capital needs by borrowing under its Revolving Credit Agreements, through internal cash generation and third party financings in the capital markets. The Corporation's pricing of contracts recognizes costs associated with the use of working capital. The Corporation estimates payments under the corporate guarantees for the Robbins Facility to be $5.4 in 1999; $13.1 in 2000; $14.3 in 2001; and $46.8 in 2002 and thereafter. These foregoing estimates are subject to change based on factors included in the preliminary agreement with the holder of a majority of bonds issued to finance the Robbins Facility (see "Subsequent Events" below for details). Management of the Corporation believes that cash and cash equivalents of $171.5 and short-term investments of $34.1 at June 25, 1999, combined with cash flows from operating activities, amounts available under its Revolving Credit Agreements and access to third-party financings in the capital markets will be adequate to meet its working capital and liquidity needs for the foreseeable future. During the second quarter of 1998, the Corporation filed a Registration Statement on Form S-3 relating to up to $300.0 of debt, equity, and other securities, $175.0 of which have been issued as of June 25, 1999. The Corporation is reviewing various methods to monetize selected Power Systems assets and will be concentrating on reducing both corporate and project debt, and improving cash flow. OTHER MATTERS The Corporation and its subsidiaries, along with many other companies, are codefendants in numerous lawsuits pending in the United States. Plaintiffs claim damages for personal injury alleged to have arisen from exposure to or use of asbestos in connection with work performed by the Corporation and its subsidiaries during the 1970s and prior. As of June 25, 1999, there were approximately 72,100 claims pending. During 1999, approximately 16,400 new claims have been filed and approximately 6,600 have been either settled or dismissed without payment. The Corporation has agreements with insurance carriers covering significantly more than a majority of the potential costs relating to these exposures. The Corporation has recorded, with respect to asbestos litigation, an asset relating to the probable insurance recoveries and a liability relating to probable losses. These assets and liabilities were estimated based on historical data developed in conjunction with outside experts. Management of the Corporation has carefully considered the financial viability and legal obligations of its insurance carriers and has concluded that except for those insurers that have become or may become insolvent, the insurers will continue to adequately fund claims and defense costs relating to asbestos litigation. In 1997, the United States Supreme Court effectively invalidated New Jersey's long-standing municipal solid waste flow rules and regulations. The immediate effect was to eliminate the guaranteed supply of municipal solid waste to the Camden Project with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to 20 the plant. Those market-based revenues are not expected to be sufficient to service the debt on outstanding bonds, which were issued to construct the plant and to acquire a landfill for Camden County's use. The debt although reflected in the consolidated financial statements of the Corporation has been issued by the Pollution Control Financing Authority of Camden County. This debt is collateralized by pledging certain revenue and assets of the project but not the plant. The Corporation's obligation is to fund the debt to the extent the project generates a positive cash flow. The Corporation has filed suit against certain involved parties seeking among other things, to void the applicable contracts and agreements governing the Camden Project. Pending final outcome of the litigation and the results of legislative initiatives in New Jersey to resolve the issues relating to the debt obligations associated with the Camden Project, management believes that the plant will continue to operate at full capacity while earning sufficient revenues to cover its fees as operator of the plant. However, at this time, management cannot determine the effect of the foregoing on the Camden Project. The equity partner's interest in the Camden Project will be purchased by the Corporation in December 1999 for approximately $26.0. The ultimate legal and financial liability of the Corporation in respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Corporation becomes known, the Corporation reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters, which are subject to change as events evolve and as additional information becomes available during the administration and litigation process. SUBSEQUENT EVENTS On July 27, 1999, the Corporation announced it had reached a preliminary agreement with holders of a majority of the principal amount of bonds issued in connection with the financing of the Robbins facility. Under the agreement, the project will be restructured by, among other things, exchanging existing bonds for new bonds, selling the facility to a third-party owner/operator and allowing Foster Wheeler to exit from its operating role. Specific elements are that Foster Wheeler will: -- Provide subordinated guarantees on $113.0 aggregate principal amount of tax-exempt bonds to be issued by the Village of Robbins, Illinois, in exchange for a portion of the existing bonds, including $95.0 of amortizing 25-year bonds and $18.0 of 10-year accretion bonds with interest paid at maturity; -- Pending sale of the facility, operate the facility for up to two years with no operational guarantees and full cost reimbursement; -- Pay in October 1999 approximately $5.4 of its existing $55.0 support obligation (the remaining obligations under the $55.0 support will be terminated upon consummation of the exit transaction and the issuance of the $113.0 of Foster Wheeler supported bonds); -- Continue to prosecute the retail rate litigation against various Illinois State officials, and, -- Cooperate with the bondholders in seeking a new third-party owner/operator for the facility. The transaction is subject to due diligence, requires third-party and bondholder approvals and execution of a definitive agreement. After the transaction is consummated, the Corporation does not expect to incur any further operating losses from the Robbins project. 21 During the third quarter, assuming that a definitive agreement is executed, the Corporation will take a pretax charge of approximately $210.0. The charge will fully write off all existing obligations of Foster Wheeler related to the Robbins Resource Recovery Facility, including the prepaid lease expense, $20.0 of outstanding bonds issued in conjunction with the equity financing of the facility, transaction expenses and ongoing legal expenses associated with the Retail Rate Law litigation. If the charge relating to the Robbins Facility, discussed above, is taken in 1999, the Corporation will be required to obtain a waiver from the lenders under the Revolving Credit Agreements. COST REDUCTIONS The Corporation's continuing business strategy is to maintain focus on its core business segments in engineering and construction and energy equipment. In order to remain competitive in these segments while improving margins, the Corporation is reducing costs through staff reduction and closure of some smaller operating facilities. These changes include the reduction of approximately 1,600 permanent positions, including 300 overhead and other support positions from its worldwide workforce of 11,000. In addition, approximately 800 agency personnel within the Engineering & Construction Group will be reduced during the course of this year. The positions eliminated will include engineering, clerical, support staff and manufacturing personnel. The annual savings from the reduction in overhead and other support positions and facility closures are expected to be approximately $16-18. The Corporation expects to take a pretax charge of approximately $35.0 in the third quarter as a result of implementation of this plan. At the end of July, the Corporation has completed approximately 35% of these reductions. DIVIDEND REDUCTION The Corporation's Board of Directors at a meeting held July 27, 1999 reduced the quarterly dividend to $0.06 per share from $0.21 per share, payable on September 15, 1999 to stockholders of record as of August 16, 1999. The Board of Directors' decision to reduce the dividend was based on a variety of market factors, and the previously stated goal of improving cash flow. The improved cash flow will further the Corporation's goal of reducing its debt levels and promote financial flexibility in the future conduct of the business. 22 YEAR 2000 GENERAL For purposes of this statement the "Year 2000 Problem" is defined to mean the inability of a computer or other device to perform properly because it does not interpret date information correctly. It is believed that cases of misinterpretation might result from computer hardware, firmware or software using only two digits to identify year information, and therefore not being able to distinguish the year 1900 from the year 2000. However, other date-related misinterpretations may also occur, including one, which could occur when the date February 29, 2000 is processed. Also for purposes of this statement "Year 2000 Compliant" means that the performance or functionality of a device (including software) is not affected by dates prior to, during or after the Year 2000. STATE OF READINESS/BUSINESS CONTINUATION PLAN The Corporation and its subsidiaries initiated Year 2000 activities in 1996. In 1997 a formal Year 2000 Problem management strategy was prepared. At that time the Corporation formed a company-wide committee (the "Y2K Committee") to develop a Business Continuation Plan focused on the Year 2000 Problem. Each of the Corporation's subsidiaries formed similar committees and coordinated their efforts through Chairmen selected for each Committee. Each subsidiary committee also prepared a Business Continuation Plan. Each Committee Chairman reports on a quarterly basis to the Corporation's Y2K Committee Chairman, who then reports to the Corporation's Executive Committee. In 1997, the Y2K Committee prepared a plan to safeguard against interruption of the Corporation's (and its subsidiaries') business activities as a result of Year 2000 Problems. The plan included an Assessment Step, a Testing Step, a Remediation Step and a Confirmation Step. Since 1996 the Corporation and/or its subsidiaries have been investigating the IT and non-IT equipment, software and services they use to identify, evaluate, modify and/or replace goods or services which are not Year 2000 Compliant. The Corporation and its subsidiaries have all completed the Assessment Step and are substantially advanced in the Testing and Remediation Steps. Some subsidiaries, such as Foster Wheeler Power Systems, Inc., and its subsidiaries, must wait for scheduled outage periods in order to complete Testing and/or Remediation activities, but all are expected to do so by the third quarter of 1999. All subsidiaries have reported that they have completed at least seventy-five percent (75%) of their Testing Step activities. The primary computerized reporting and control system used by the Corporation and most of its subsidiaries, which was provided by J.D. Edwards, has been confirmed by the vendor to be Year 2000 Compliant. LIABILITY EXPOSURE MANAGEMENT In 1997 the Corporation formed a group to develop a strategy for managing liability exposures which could result from the Year 2000 Problem (the "Y2K Liaison Group"). Since then the Y2K Liaison Group has developed guidelines for the Corporation's subsidiaries that address future, current and completed contract activities, and has also conducted global conferences for the Corporation's subsidiaries to discuss how those guidelines should be implemented. The Corporation's Executive Committee adopted the Y2K Liaison Group's guidelines as business policies in 1998. 23 The Corporation has owned the stock of various companies which are no longer operating or whose stock or assets were sold to others. When the Corporation sold the stock or assets of such companies, it transferred the company's records to the purchaser. The Corporation has evaluated its legal obligations in regard to equipment and software that was created and sold by those companies during the time that the Corporation owned them and has taken steps to manage liability exposures which those companies' activities may present. In some cases, the Corporation was not able to find records that would allow it to identify the nature of the equipment and software or the identities of the owners of the equipment and software. THIRD PARTY REVIEW In 1998 the Corporation engaged a third party to conduct a review of certain aspects of the Corporation's and its subsidiaries' Business Continuation Plans. This review was completed during November 1998, and the resulting report is being acted on by management. The Corporation also engaged several law firms to prepare reports regarding liabilities which the Corporation and its subsidiaries may face, and recommendations for liability exposure management. This work was completed in August 1998. The Corporation formed a team of in-house lawyers and others to conduct a Y2K legal liability audit of the Corporation. The Corporation engaged an outside law firm to review and report on the adequacy of the audit to identify potential Y2K liability. The audit is expected to be completed during the third quarter of 1999 and a report of the outside law firm is expected to be received during the third quarter of 1999. COORDINATION WITH OUTSIDE PARTIES The Corporation and its subsidiaries coordinate with insurers, clients, vendors, contractors and trade organizations to keep abreast of Year 2000 matters. The Corporation also has participated and plans to participate in conferences, seminars and other gatherings to improve its Year 2000 readiness condition as the Year 2000 approaches. COSTS The total cost associated with required modifications to become Year 2000 Compliant is not expected to be material to the Corporation's financial position. The estimated total cost of the Year 2000 Project is approximately $10.0. Items of a capital nature will be capitalized while all other costs will be expensed as incurred. This estimate does not include a share of Year 2000 costs that may be incurred by partnerships and joint ventures in which the Corporation or its subsidiaries participate. The total amount expended on the Business Continuation Plan through June 25, 1999 was $5.5, of which approximately $5.0 related to the cost to repair or replace software and related hardware problems, and approximately $0.5 related to the cost of identifying and communicating with vendors and/or contractors. The estimated future cost of completing implementation of the Business Continuation Plan is estimated to be approximately $4.5. All Year 2000 expenses will be funded from operations. 24 CONTINGENCY PLANS Although the Corporation and its subsidiaries expect to be ready to continue their business activities without interruption by a Year 2000 Problem, they recognize that they depend on outsiders (such as suppliers, contractors and utility companies) to provide various goods and services necessary for doing business. The Corporation is now developing a contingency plan for itself, and has required each of its subsidiaries to do likewise. Each plan will address alternative arrangements to cope with Year 2000 Problems caused by others, and back-up strategies to follow if a subsidiary's software or equipment does not perform properly, even though it appears now to be Year 2000 Compliant. Draft contingency plans have been prepared by several of the Corporation's subsidiaries. All subsidiaries contingency plans should be finalized by the end of the third quarter 1999. RISKS The failure to correct a Year 2000 Problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures are not expected to materially adversely affect the Corporation's results of operations and financial condition. However, due to the general uncertainty inherent in the Year 2000 Problem, resulting in part from the uncertainty about the Year 2000 readiness of vendors, contractors and customers, the Corporation is unable to determine at this time whether the consequences of Year 2000 Problems will have a material impact on the Corporation's results of operations or financial condition. The completion of the Business Continuation Plan is expected to significantly reduce the Corporation's level of uncertainty about the Year 2000 Problem and, in particular, about Year 2000 Compliance and readiness of vendors, contractors and customers. The Corporation believes that the implementation of new business systems and the complete implementation of the Business Continuation Plan should reduce the possibility of significant interruptions of normal operation. It is not possible to describe a "most reasonably likely worst case Year 2000 scenario" without making a variety of assumptions. The Corporation's Business Continuation Plan assumes that parties which provide us goods or services necessary for its operations will continue to do so, or that the contingency features of the Corporation's Plan will respond to address its needs. Based upon those assumptions the Corporation believes that a most likely worst case Year 2000 scenario may make it necessary to replace some suppliers or contractors, rearrange some work plans or even interrupt some field activities. The Corporation does not believe that such circumstances will materially adversely affect the financial condition or results of operations, even if it is necessary to incur costs to do so. Readers are cautioned that forward-looking statements contained in the Year 2000 Statement should be read in conjunction with the Corporation's risk disclosures under the heading: "Safe Harbor Statement." 25 SAFE HARBOR STATEMENT This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report on Form 10-Q contain forward-looking statements that are based on management's assumptions, expectations and projections about the various industries within which the Corporation operates. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Corporation cautions that a variety of factors, including but not limited to the following, could cause business conditions and results to differ materially from what is contained in forward-looking statements: changes in the rate of economic growth in the United States and other major international economies, changes in investment by the energy, power and environmental industries, changes in regulatory environment, changes in project schedules, changes in trade, monetary and fiscal policies worldwide, currency fluctuations, outcomes of pending and future litigation, protection and validity of patents and other intellectual property rights and increasing competition by foreign and domestic companies. In addition, there can be no assurance that a definitive agreement with bondholders with respect to the Robbins Facility will be reached, or if reached that the terms will not be materially different from the terms set forth in the preliminary agreement. The Corporation's management continues to evaluate the Corporation's condition of readiness relating to the Year 2000 Problem and the costs and risks arising from the Year 2000 Problem, and is designing and developing the Corporation's contingency plan, based on its best estimates of certain factors, which estimates were derived by relying on numerous assumptions about future events. However, there can be no guarantee that these assumptions or estimates have been correctly made, or that there will not be a delay in, or increased costs associated with, the implementation of the Corporation's Business Continuation Plan. A delay in the implementation of the Business Continuation Plans of the Corporation or of the Corporation's subsidiaries could also affect the Corporation's readiness for the Year 2000. Specific factors that might cause actual outcome to differ from the projected outcome include, without limitation, the continued availability and cost of consulting services and of personnel trained in the computer programming necessary for remediation of the Year 2000 issue, the ability to locate and correct all relevant computer code, timely responses by third parties and suppliers, and the ability to implement interfaces between the new systems and the systems not being replaced. 26 PART II OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state laws, the current owner or operator of real property and the past owners or operators of real property (if disposal took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or remediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person ("off-site facility"). Liability at such off-site facilities is typically allocated among all of the viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site, and other factors. The Corporation currently owns and operates industrial facilities and has also transferred its interests in industrial facilities that it formerly owned or operated. It is likely that as a result of its current or former operations, such facilities have been impacted by hazardous substances. The Corporation is not aware of any conditions at its currently owned facilities in the United States that it expects will cause the Corporation to incur significant costs. The Corporation is aware of potential environmental liabilities at facilities that it recently acquired in Europe, but the Corporation has the benefit of an indemnity from the Seller with respect to any required remediation or other environmental violations that it believes will address the costs of any such remediation or other required environmental measures. The Corporation also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities that may require the Corporation to incur costs for investigation and/or remediation. Based on the available information, the Corporation does not believe that such costs will be material. No assurance can be provided that the Corporation will not discover environmental conditions at its currently owned or operated properties, or that additional claims will be made with respect to formerly owned properties, that would require the Corporation to incur material expenditures to investigate and/or remediate such conditions. The Corporation had been notified that it was a potentially responsible party ("PRP") under CERCLA or similar state laws at three off-site facilities, excluding sites as to which the Corporation has resolved its liability. At each of these sites, the Corporation's liability should be substantially less than the total site remediation costs because the percentage of waste attributable to the Corporation compared to that attributable to all other PRPs is low. The Corporation does not believe that its share of cleanup obligations at any of the three off-site facilities as to which it has received a notice of potential liability will individually exceed $1.0 million. The Corporation received an Administrative Order and Notice of Civil Administrative Penalty Assessment (the "Administrative Order") dated April 1, 1997 alleging state air act violations at the Camden Project in New Jersey. The Administrative Order seeks a penalty of $32,000 and 27 revocation of the Certificate to Operate. The Corporation requested an administrative hearing to challenge the Administrative Order, which request automatically stayed any permit revocation. The Corporation expects an additional penalty demand to increase to more than $100,000 as a result of other violations which the Corporation expects the state to allege. The Corporation believes that it will be able to address all issues of concern to the state and that the resulting civil penalty will not be material to the Corporation. The Corporation received a Complaint for Injunction and Civil Penalties from the State of Illinois dated April 28, 1998 alleging primarily state air act violations at the Robbins Facility (PEOPLE OF THE STATE OF ILLINOIS V. FOSTER WHEELER ROBBINS, INC., filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division). Although the complaint seeks substantial civil penalties for numerous violations of up to $50,000 for each violation, with an additional penalty of $10,000 for each day of each violation, the maximum allowed under the statute, and an injunction against continuing violations, the Corporation has submitted a plan to the state designed to correct all violations and expects that the resulting penalty will not be material to the Corporation. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS -------- EXHIBIT NUMBER EXHIBIT ------ ------- 12-1 Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges and Combined Fixed Charges 27 Financial Data Schedule (For the informational purposes of the Securities and Exchange Commission only.) (b) REPORTS ON FORM 8-K ------------------- None 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FOSTER WHEELER CORPORATION (Registrant) Date: AUGUST 5, 1999 /S/ RICHARD J. SWIFT ------------------------ --------------------- Richard J. Swift (Chairman, President and Chief Executive Officer) Date: AUGUST 5, 1999 /S/ DAVID J. ROBERTS ------------------------ --------------------- David J. Roberts (Vice Chairman and Chief Financial Officer) 29 EX-12 2 STATEMENT OF COMP. OF RAT. OF EARN. EXHIBIT 12-1 FOSTER WHEELER CORPORATION STATEMENT OF COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES ($000'S) UNAUDITED
6 months 1999 ---- EARNINGS: Net Earnings $ 20,788 Taxes on Income 11,691 Total Fixed Charges 46,406 Capitalized Interest (2,061) Capitalized Interest Amortized 1,092 Equity Earnings of non-consolidated associated companies accounted for by the equity method, net of dividends (7,282) -------- $ 70,634 ======== FIXED CHARGES: Interest Expense $ 34,785 Capitalized Interest 2,061 Imputed Interest on non-capitalized lease payments 9,560 -------- $ 46,406 ======== Ratio of Earnings to Fixed Charges 1.52 ======== ---------------- * There were no preferred shares outstanding during any of the periods indicated and therefore the consolidated ratio of earnings to fixed charges and combined fixed charges and preferred share dividend requirements would have been the same as the consolidated ratio of earnings to fixed charges and combined fixed charges for each period indicated.
EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary of financial information extracted from the condensed consolidated balance sheet and statement of earnings for the six months ended June 25, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS JUN-25-1999 DEC-26-1998 JUN-25-1999 171,535 34,094 849,724 0 458,179 1,594,503 1,042,081 351,331 3,246,865 1,429,947 675,738 175,000 0 40,748 507,662 3,246,865 1,853,728 1,891,741 1,815,779 1,815,779 0 0 34,785 32,479 11,691 20,788 0 0 0 20,788 .51 .51
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