<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1997
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
(Not Applicable)
Former name, former address and former fiscal year, if changed since last
report.
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 September 26, 1997 was 40,731,864 shares.
<PAGE> 2
FOSTER WHEELER CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information:
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheet at
September 26, 1997 and December 27, 1996 2
Condensed Consolidated Statement of Earnings
Three and Nine Months Ended September 26, 1997 and
September 27, 1996 3
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 26, 1997 and
September 27, 1996 4
Notes to Condensed Consolidated Financial
Statements 5 - 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 12
Part II Other Information:
Item 6 - Exhibits and Reports on Form 8-K 13
</TABLE>
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<PAGE> 3
ITEM 1. - FINANCIAL STATEMENTS
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS September 26, 1997 December 27,
(Unaudited) 1996
- ------ ------------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 142,412 $ 267,149
Short-term investments 113,892 137,180
Accounts and notes receivable 860,700 885,785
Contracts in process 317,664 363,716
Inventories 8,360 39,799
Prepaid and refundable income taxes 32,145 38,627
Prepaid expenses 46,310 30,192
----------- -----------
Total Current Assets 1,521,483 1,762,448
----------- -----------
Land, buildings and equipment 1,092,443 1,054,786
Less accumulated depreciation 303,541 330,007
----------- -----------
Net book value 788,902 724,779
----------- -----------
Notes and accounts receivable - long-term 86,338 74,296
Investments and advances 125,257 73,725
Intangible assets - net 301,534 331,463
Prepaid pension costs and benefits 172,098 180,473
Other, including insurance recoveries 406,856 359,362
Deferred income taxes 6,910 3,788
----------- -----------
Total Assets $ 3,409,378 $ 3,510,334
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments on long-term debt $ 33,296 $ 32,764
Bank loans 54,982 52,278
Accounts payable and accrued expenses 590,945 635,030
Estimated cost to complete long-term contracts 696,510 562,984
Advance payments by customers 80,922 116,903
Income taxes (2,765) 41,935
----------- -----------
Total Current Liabilities 1,453,890 1,441,894
Other long-term debt 343,819 416,995
Special-purpose project debt 436,122 379,284
Postretirement and other employee benefits
other than pensions 160,137 180,210
Other long-term liabilities, deferred credits and
minority interest in subsidiary companies 362,119 372,898
Deferred income taxes 27,508 30,095
----------- -----------
Total Liabilities 2,783,595 2,821,376
----------- -----------
Stockholders' Equity:
Common stock 40,743 40,651
Paid-in capital 201,010 197,970
Retained earnings 433,018 471,177
Accumulated translation adjustment (48,693) (20,545)
----------- -----------
626,078 689,253
Less cost of treasury stock (295) (295)
----------- -----------
Total Stockholders' Equity 625,783 688,958
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,409,378 $ 3,510,334
=========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 4
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
September 26, 1997 September 27, 1996 September 26, 1997 September 27, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $ 1,029,994 $ 960,912 $ 3,025,742 $ 2,775,363
Other income 19,795 7,598 99,648 25,174
------------ ----------- ------------ -----------
Total revenues 1,049,789 968,510 3,125,390 2,800,537
------------ ----------- ------------ -----------
Cost and expenses:
Cost of operating revenues 1,010,507 832,901 2,772,708 2,412,583
Selling, general and administrative
expenses 63,368 74,784 207,352 214,495
Other deductions/Minority interest 17,186 20,683 58,213 58,913
Special charges -- -- 98,500 --
------------ ----------- ------------ -----------
Total costs and expenses 1,091,061 928,368 3,136,773 2,685,991
------------ ----------- ------------ -----------
(Loss)/earnings before income taxes (41,272) 40,142 (11,383) 114,546
(Benefit)/provision for income taxes (11,924) 16,177 1,374 42,080
------------ ----------- ------------ -----------
Net (loss)/earnings $ (29,348) $ 23,965 $ (12,757) $ 72,466
============ =========== ============ ===========
Weighted average number of common
shares outstanding 40,687,568 40,620,729 40,657,417 40,576,513
============ =========== ============ ===========
(Loss)/earnings per share $ (.72) $ .59 $ (.31) $ 1.79
============ =========== ============ ===========
Cash dividends paid per common share $ .21 $ .205 $ .625 $ .605
============ =========== ============ ===========
</TABLE>
See notes to financial statements.
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<PAGE> 5
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
September 26, 1997 September 27, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/ earnings $ (12,757) $ 72,466
Adjustments to reconcile net (loss)/earnings
to cash flows from operating activities:
Depreciation and amortization 46,173 45,985
Noncurrent deferred tax (4,903) 8,889
Gain on sale of subsidiary (56,400) --
Special charges 98,500 --
Other (17,849) (4,212)
Changes in assets and liabilities, net of effects of divestitures:
Receivables (109,555) (40,870)
Contracts in process and inventories 13,923 (38,630)
Accounts payable and accrued expenses (34,589) (28,474)
Estimated cost to complete long-term contracts 118,050 5,957
Advance payments by customers (17,391) 25,118
Income taxes (46,566) 14,512
Other assets and liabilities (80,344) (15,714)
--------- ---------
NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES (103,708) 45,027
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (135,794) (92,261)
Proceeds from sale of subsidiary 195,283 --
Proceeds from sale of properties 5,038 1,525
Increase in investments and advances (46,712) (5,567)
Decrease/(increase) in short-term investments 14,099 (23,876)
Partnership distributions (4,800) (4,859)
--------- ---------
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 27,114 (125,038)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (25,403) (24,539)
Proceeds from exercise of stock options 2,671 3,545
Increase in short-term debt 7,229 6,872
Proceeds from long-term debt 64,915 149,677
Repayment of long-term debt (77,311) (22,467)
--------- ---------
NET CASH (USED)/ PROVIDED BY FINANCING ACTIVITIES (27,899) 113,088
Effect of exchange rate changes on cash and cash equivalents (20,244) 67
--------- ---------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (124,737) 33,144
Cash and cash equivalents at beginning of year 267,149 167,131
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 142,412 $ 200,275
========= =========
Cash paid during period:
-Interest (net of amount capitalized) $ 22,681 $ 23,155
-Income taxes $ 20,161 $ 11,710
</TABLE>
See notes to financial statements.
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<PAGE> 6
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 September 26, 1997, and the
related condensed consolidated statements of earnings for the three and nine
month periods ended September 26, 1997 and September 27, 1996 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 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
27, 1996 filed with the Securities and Exchange Commission March 21, 1997,
which should be read in conjunction with this report.
In conformity with generally accepted accounting principles, management must
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 the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.
2. In the second quarter of 1997 the Corporation recorded a special pretax
charge of $98,500 and $56,400 pretax gain on the sale of a subsidiary. The
net amount of $42,100 ($27,365 after tax or $.67 per share) included the
following:
(a) $60,000 against the Power Systems Group with respect to the Robbins
Resource Recovery facility. A subsidiary of the Corporation, Robbins Resource
Recovery Limited Partnership, operates this facility under a long-term
operating lease. By virtue of this facility qualifying under the Illinois
Retail Rate Law as a qualified solid waste-to-energy facility, it was to
receive electricity revenues projected to be substantially higher than the
utility's "avoided cost." The State has repealed the Retail Rate Law insofar
as it applied to this facility. As the result of the failure of the bill
introduced in the Illinois State Legislature, which would have reinstated the
Retail Rate Law and a recent decision in State court regarding procedural
matters, Management of the Corporation determined that a charge against
current earnings was required. Management considers this charge to be
sufficient to cover the anticipated losses until the end of 1999, reflecting
the time period within which the Corporation expects the Courts to provide
relief from the state government's repeal of the Illinois Retail Rate Law.
This charge includes $23,000 for modifications to the nonboiler systems of
the plant, the associated down time and lack of revenue during the
implementation of the modifications. Approximately 65% of the $60 million is
expected to have a cash flow impact in 1997; the balance will be expended
over the following two years.
(b) $32,000 against the Energy Equipment Group representing the last phase of
the Group's reorganization started in 1995 following the Ahlstrom Pyropower
acquisition. These actions will result in a further reduction in operating
costs with a more efficient product execution capability. This plan includes
$14,500 for the discontinuance of certain product lines including incremental
costs on certain completed contracts. Approximately $9,200 of the charge
relates to the consolidation of the San Diego operations with the Group's
activities in New Jersey. The $9,200 includes approximately $5,200 for
personnel costs including severance and related benefits. The balance
($4,000) represents write-downs of San Diego assets (primarily land and
buildings) in accordance with SFAS No. 121 Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of. These San
Diego long-lived assets are now considered to be for sale and have been
accounted for at their current market value less estimated cost to sell. The
remaining balance of approximately $8,300 is primarily related to the
write-down of a Canadian co-generation plant in accordance with SFAS No. 121.
As a result of the current reorganization this co-generation plant is now
considered to be for sale. The basis of this plant has been adjusted to its
estimated fair market value less cost to sell. Approximately 70% of the
Energy Equipment Groups charges mentioned above will have a cash impact. The
expectation is that 50% of this cost will be paid out by year end and that
the balance will be paid out during 1998.
(c) $6,500 against Corporate and Financial Services Group as the result of
the valuation of a subsidiary. This subsidiary (a manufacturer of Copper
Extrusions) was not part of the Corporation's three core business groups, and
was sold in the third quarter of 1997.
-5-
<PAGE> 7
(d) In addition the Corporation recorded a $56,400 pretax ($36,660 after tax)
gain on the sale of Glitsch International, Inc.'s assets to Koch Engineering
Company. This gain was included in other income in the second quarter. The
Corporation received approximately $195,000 in cash for the majority of the
assets of Glitsch International, Inc. plus approximately $50,000 in net
assets to be realized. The remaining net assets of Glitsch International,
Inc. have been valued at their current estimated realizable value which are
not considered material to the overall operations of the Corporation. For
segment reporting purposes, the earnings of Glitsch International, Inc. up to
the closing date of June 27, 1997 were included in the operating results of
the Corporation within the Energy Equipment Group.
3. 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 or its subsidiaries by customers alleging deficiencies in
either equipment or plant construction. Based on its knowledge of the facts
and circumstances relating to the Corporation's and its subsidiaries'
liabilities, if any, and to their insurance coverage, Management of the
Corporation believes that the disposition of suits will not result in charges
against assets or earnings material in excess of amounts previously provided
in the accounts.
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 December 27, 1996, there were
approximately 92,600 claims pending. Approximately 25,400 new claims were
filed in 1997 and approximately 34,700 claims were either settled or
dismissed without payment (including approximately 22,000 claims dismissed by
a Federal District Court without prejudice which are subject to being
refiled). As a result, on September 26, 1997, there were approximately 83,300
claims pending. Any settlement costs not covered by the Corporation's
insurance carriers were immaterial. The Corporation has agreements with
insurance carriers covering a substantial portion of the potential costs
relating to these exposures. The Corporation has recorded, with respect to
asbestos litigation, an asset relating to 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 1996, the Corporation completed the construction of a recycling and
waste-to-energy project for the Village of Robbins, Illinois. A subsidiary of
the Corporation, Robbins Resource Recovery Limited Partnership (the
"Partnership"), will operate this facility under a long-term operating lease.
By virtue of the facility qualifying under the Illinois Retail Rate Law as a
qualified solid waste-to-energy facility, it was to receive electricity
revenues projected to be substantially higher than the utility's "avoided
cost." Under the Retail Rate Law, the utility was entitled to a tax credit
against a state tax on utility gross receipts and invested capital. The State
was to be reimbursed by the facility for the tax credit beginning after the
20th year following the initial sale of electricity to the utility. The State
has repealed the Retail Rate Law insofar as it applied to this facility. The
Partnership is contesting the Illinois legislature's partial repeal of the
Retail Rate Law in court. In the event this litigation is not successful and
no other means are available to generate revenue from the sale of electric
power above that provided by selling electricity at the "avoided cost," there
may be a significant adverse financial impact on the operating results of the
project.
4. The Corporation maintains two revolving credit agreements with a syndicate of
banks. One is a short-term revolving credit agreement of $100,000 with a
maturity of 364 days and the second is a $300,000 revolving credit agreement
with a maturity of four years (collectively, the "Revolving Credit
Agreements"). These Revolving Credit Agreements were amended on June 25, 1997
and contain two financial covenants. The first covenant is that the
Consolidated Fixed Charges Coverage Ratio (as defined in the Revolving Credit
Agreements) shall be greater than (i) 1.15 for the period from June 25, 1997
to and including December 26, 1997 (ii) 2.00 for the period from and
including December 27, 1997 to and including June 26, 1998 and (iii) 2.50
thereafter. The Consolidated Fixed Charges Coverage Ratio for the period
ending September 26, 1997 was 1.16:1. The second covenant is that the
Consolidated Leverage Ratio (as defined in the Revolving Credit Agreements)
(i) shall not at any time prior to December 26, 1997 exceed 0.60 to 1.00,
(ii) shall not at any time from December 27, 1997 to and including June 26,
1998 exceed 0.55 to 1.00 and (iii) shall not at any time thereafter exceed
0.50 to 1.00. As of September 26, 1997, the ratio was 0.44:1.
5. A total of 2,564,719 shares were reserved for issuance under the stock option
plans; of this total 1,153,416 were not under option.
-6-
<PAGE> 8
6. Foster Wheeler Corporation had a backlog of firm orders as of September 26,
1997 of $7,222,572 as compared to a backlog as of September 27, 1996 of
$6,915,541.
7. (Loss)/earnings per share data have been computed on the weighted average
number of shares of common stock outstanding. Outstanding stock options have
been disregarded because their effect on earnings per share would not be
significant.
8. Interest income and cost for the following periods are:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 26, 1997 September 27, 1996 September 26, 1997 September 27, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income $ 4,038 $ 5,266 $ 15,205 $14,958
======= ======== ======== =======
Interest cost $16,106 $14,335 $ 49,414 $44,684
======= ======= ======== =======
</TABLE>
Included in interest cost is interest capitalized on self-constructed assets,
for the three and nine months ended September 26, 1997 of $2,772 and $7,498,
respectively, compared to $562 and $4,297 for the comparable periods in 1996.
-7-
<PAGE> 9
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
(Unaudited)
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 1996 Annual Report on Form 10-K filed
March 21, 1997.
RESULTS OF OPERATIONS
General Comments
In the third quarter of 1997 the Corporation reported a net loss of $29.3
million or $.72 per share compared with net earnings of $24.0 million or $.59
per share in 1996. The results for the third quarter of 1997 were negatively
impacted by the operating results of several locations. The Engineering and
Construction Group recorded provisions amounting to approximately $24.0 million
($17.4 million after tax) on several projects for which it is seeking recovery
of a significant portion from clients. The ultimate outcome of these claims as
to both timing and amount is uncertain. The Energy Equipment Group recorded
approximately $30.0 million ($19.5 million after tax) in provisions for
increased cost on three projects, which were initially bid and executed out of
the San Diego office. As previously announced in July 1997, this operation has
been closed and the execution of contracts transferred to the New Jersey
headquarters. Earnings of the Power Systems Group were below expectations,
primarily due to increased non-capitalizable development costs. The net loss for
the nine months ended September 26, 1997 of $12.8 million or $.31 per share
included the second quarter special pretax charge of $98.5 million and $56.4
million pretax gain on the sale of a subsidiary. The net amount of $42.1 million
($27.4 million after tax or $.67 per share) included the following:
(a) $60 million against the Power Systems Group with respect to the Robbins
Resource Recovery facility. A subsidiary of the Corporation, Robbins
Resource Recovery Limited Partnership, operates this facility under a
long-term operating lease. By virtue of this facility qualifying under the
Illinois Retail Rate Law as a qualified solid waste-to-energy facility, it
was to receive electricity revenues projected to be substantially higher
than the utility's "avoided cost." The State has repealed the Retail Rate
Law insofar as it applied to this facility. As the result of the failure of
the bill introduced in the Illinois State Legislature, which would have
reinstated the Retail Rate Law and a recent decision in State court
regarding procedural matters, Management of the Corporation determined that
a charge against current earnings was required. Management considers this
charge to be sufficient to cover the anticipated losses until the end of
1999, reflecting the time period within which the Corporation expects the
Courts to provide relief from the state government's repeal of the Illinois
Retail Rate Law. This charge includes $23 million for modifications to the
nonboiler systems of the plant, the associated down time and lack of revenue
during the implementation of the modifications. Approximately 65% of the $60
million is expected to have a cash flow impact in 1997; the balance will be
expended over the following two years.
(b) $32 million against the Energy Equipment Group representing the last
phase of the Group's reorganization started in 1995 following the Ahlstrom
Pyropower acquisition. These actions will result in a further reduction in
operating costs with a more efficient product execution capability. This
plan includes $14.5 million for the discontinuance of certain product lines
including incremental costs on certain completed contracts. Approximately
$9.2 million of the charge relates to the consolidation of the San Diego
operations with the Group's activities in New Jersey. The $9.2 million
includes approximately $5.2 million for personnel costs including severance
and related benefits. The balance ($4 million) represents write-downs of San
Diego assets (primarily land and buildings) in accordance with SFAS No. 121
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of. These San Diego long-lived assets are now considered to
be for sale and have been accounted for at their current market value less
estimated cost to sell. The remaining balance of approximately $8.3 million
is primarily related to the write-down of a Canadian co-generation plant in
accordance with SFAS No.121. As a result of the current reorganization this
co-generation plant is now considered to be for sale. The basis of this
plant has been adjusted to its estimated fair market value less cost to
sell. Approximately 70% of the Energy Equipment Group's charges mentioned
above will have a cash impact. The expectation is that 50% of this cost will
be paid out by year end and that the balance will be paid out during 1998.
-8-
<PAGE> 10
(c) $6.5 million against the Corporate and Financial Services Group as the
result of the valuation of a subsidiary. This subsidiary (a manufacturer of
Copper Extrusions) was not part of the Corporation's three core business
groups, and was sold in the third quarter 1997.
(d) In addition the Corporation recorded a $56.4 million pretax ($36.7
million after tax) gain on the sale of Glitsch International, Inc.'s assets
to Koch Engineering Company. This gain was included in other income in the
second quarter. The Corporation received approximately $195.0 million in
cash for the majority of the assets of Glitsch International, Inc. plus
approximately $50.0 million in net assets to be realized. The remaining net
assets of Glitsch International, Inc. have been valued at their current
estimated realizable value which are not considered material to the overall
operations of the Corporation. For segment reporting purposes, the earnings
of Glitsch International, Inc. up to the closing date of June 27, 1997 were
included in the operating results of the Corporation within the Energy
Equipment Group.
The Corporation is in the process of establishing a new business unit within its
Engineering and Construction Group. The new entity will consolidate Foster
Wheeler Italiana, S.p.A., Foster Wheeler France, S.A. and Foster Wheeler Iberia,
S.A. under common management, headquartered in Milan, Italy.The existing
subsidiary companies will maintain their offices in Milan, Paris and Madrid,
respectively. Placing these three companies under the control of centralized
management will result in greater economies of scale, work distribution and
quality assurance. The Corporation expects the new structure to be in place by
January 1, 1998. On a pro forma basis, this business unit had revenues of
approximately $1.2 billion in 1996. In addition, the Corporation is also in the
process of consolidating its Reading, UK operations into one facility. Currently
the Reading, UK operations are housed in five different locations in the Reading
area. This consolidation will result in lower occupancy costs and improved
operating efficiency. The cost of implementing this reorganization, primarily
severance and lease costs, will be provided upon finalization of the detailed
plan during the fourth quarter of 1997. The Corporation anticipates recording a
pretax charge in the range of $10-$15 million.
Nine months ended September 26, 1997 compared to nine months ended
September 27, 1996
The Corporation's consolidated backlog at September 26, 1997 totaled $7,222.6
million. This represented an increase of $307.0 million or 4% over the amount
reported as of September 27, 1996. The dollar amount of backlog is not
necessarily indicative of the future earnings of the Corporation related to the
performance of such work. 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 has been adjusted to reflect project cancellations,
deferrals, sale of subsidiary and revised project scope and cost. This
adjustment for the nine months ended September 26, 1997 was $377.0 million,
compared with $678.2 million for the nine months ended September 27, 1996.
Furthermore, the Corporation's future award prospects include several large
scale international projects and, because the large size and uncertain timing
can create variability in the Corporation's contract awards, future award trends
are difficult to predict with certainty.
The Engineering and Construction Group ("E & C Group"), had a backlog of
$5,134.3 million at September 26, 1997, which represented a 7% increase from
September 27, 1996 due primarily to orders awarded to the United Kingdom
subsidiary. The Energy Equipment Group had backlog of $1,671.6 million at
September 26, 1997, which represented a 6% decrease from backlog at September
27, 1996 due primarily to the sale of the assets of Glitsch International Inc.
New orders awarded for the nine months ended September 26, 1997 of $3,832.1
million were slightly lower than the level of orders reported for the nine
months ended September 27, 1996 of $3,913.4 million. Approximately 67% of new
orders for the nine months ended September 26, 1997 were for projects awarded to
the Corporation's subsidiaries located outside the United States. Key geographic
regions contributing to new orders awarded for the nine months ended September
26, 1997 were Southeast Asia, Europe, the Middle East and China.
Operating revenues increased in the nine months ended September 26, 1997 by
$250.4 million compared to the nine months ended September 27, 1996 to $3,025.7
million from $2,775.3 million. The E & C Group's operating revenues increased by
$305.9 million due to the increased levels reported by of the United Kingdom
subsidiary ($152.2 million), the subsidiaries in the United States ($124.8
million) and the Spanish subsidiary($30.7 million). The increase in the E & C
Group's operating revenues was partially offset by a decrease in the Energy
Equipment Group of approximately $50.6 million, primarily attributable to the
sale of the assets of Glitsch International Inc.
-9-
<PAGE> 11
Gross earnings, which are equal to operating revenues minus the cost of
operating revenues, declined $109.8 million in the nine months ended September
26, 1997 as compared with the nine months ended September 27, 1996 to $253.0
million from $362.8 million. Approximately 70% of this decrease was related to
the operations of the Energy Equipment Group. The gross earnings were impacted
by the sale of the assets of Glitsch International Inc. and the provisions for
increased costs on three projects, which were initially bid and executed out of
the San Diego office. This operation has been closed and the execution of
contracts transferred to the New Jersey headquarters. In addition the E&C Group
recorded provisions amounting to approximately $24.0 million related to several
projects for which it is seeking recovery of a significant portion from clients.
Selling, general and administrative expenses decreased 3% in the nine months
ended September 26, 1997 as compared with the same period in 1996, from $214.5
million to $207.4 million. Other income in the nine months ended September 26,
1997 as compared with September 27, 1996 increased to $99.7 million from $25.2
million, primarily due to the gain on the sale of Glitsch International, Inc.'s
assets and the profit on the sale of a gas field in connection with the
development of a cogeneration facility in Italy. Other deductions in the nine
months ended September 26, 1997, of $56.5 million, were 4% higher than that
reported in the nine months ended September 27, 1996 primarily due to increased
interest expense.
The effective tax rate exceeds the U.S. statutory rate primarily due to state
taxes and the impact of foreign source earnings and losses.
The net loss for the nine months ended September 26, 1997 was $12.8 million or
$.31 per share, which included the special charge stated above of $27.4 million
after tax ($.67 per share). The net earnings for the nine months ended September
27, 1996 were $72.5 million or $1.79 per share.
Three months ended September 26, 1997 compared to three months ended
September 27, 1996
New orders awarded for the three months ended September 26, 1997 of $1,164.7
million were 7% lower than new orders awarded for the three months ended
September 27, 1996 of $1,257.7 million. This seven percent decrease was
primarily due to a decline in new orders of $228.9 million in the North American
subsidiaries in the Energy Equipment Group offset by increased new orders
awarded of $217.1 million to the United Kingdom subsidiary in the E & C Group.
Approximately 49% of new orders in the three months ended September 26, 1997
were for projects awarded to the Corporation's subsidiaries located outside the
United States.
Operating revenues increased in the three months ended September 26, 1997 by
$69.1 million or 7% compared to the three months ended September 27, 1996 to
$1,030.0 million from $960.9 million. The United Kingdom subsidiary accounted
for the majority of the increase in revenues in the E & C Group. This was offset
by decreased revenues in the Energy Equipment Group primarily due to the sale of
the assets of Glitsch International, Inc.
Gross earnings decreased $108.5 million to $19.5 million from $128.0 million or
85% in the three months ended September 26, 1997 as compared with the three
months ended September 27, 1996. Approximately 55% of this decrease was related
to the operations of the Energy Equipment Group. The gross earnings were
impacted by the sale of the assets of Glitsch International Inc. and the
provisions for increased costs on three projects, which were initially bid and
executed out of the San Diego office. This operation has been closed and the
execution of contracts transferred to the New Jersey headquarters. In addition
the E&C Group recorded provisions amounting to approximately $24.0 million
related to several projects for which it is seeking recovery of a significant
portion from clients.
Selling, general and administrative expenses decreased 15% in the three months
ended September 26, 1997 as compared with the same period in 1996, from $74.8
million to $63.4 million. This reduction was caused by a decline in expenses in
the Energy Equipment Group primarily due to the sale of the assets of Glitsch
International, Inc.
The net loss for the three months ended September 26, 1997 was $29.3 million or
$.72 per share. The net earnings for the three months ended September 27,1996
were $24.0 million or $.59 per share.
-10-
<PAGE> 12
FINANCIAL CONDITION
Stockholders' equity for the nine months ended September 26, 1997 decreased
$63.2 million, due to the fluctuation in the accumulated translation adjustment
resulting from the strengthening U.S. dollar against European currencies,
payment of dividends and the loss of $12.8 million recorded for the nine months.
During the nine months ended September 26, 1997, the Corporation's long-term
investments in land, buildings and equipment were $135.8 million as compared
with $92.3 million for the comparable period in 1996. Approximately $92.9
million was invested by the Power Systems Group in build, own and operate
projects during the first nine months of 1997. During the next few years,
capital expenditures will continue to be directed primarily toward strengthening
and supporting the Corporation's core businesses.
Since December 27, 1996, long-term debt, including current installments, and
bank loans increased by $72.1 million, exclusive of repayments of $77.3 million,
primarily due to borrowings to fund investments in build, own and operate
projects and current working capital requirements.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $142.4 million at September 26, 1997, a
decrease of $124.7 million from fiscal year end 1996; also, short-term
investments decreased by $23.3 million to $113.9 million. During the first nine
months of fiscal 1997, the Corporation paid $25.4 million in dividends to
stockholders and repaid debt of $77.3 million. Cash used by operating activities
amounted to $103.7 million including a $45.0 million initial lease payment on
the Robbins Resource Recovery Facility. New borrowings totaled $72.1 million,
resulting from investments by the Power Systems Group in build, own and operate
projects and requirements to fund current working capital needs. In total, the
Power Systems Group invested approximately $92.9 million in the construction of
cogeneration and other industrial facilities.
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 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 Management of the Corporation
expects its customers' requests for more favorable payment terms under the
Energy Equipment contracts to continue as a result of the competitive markets in
which the Corporation operates. 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 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 December 27, 1996 there were
approximately 92,600 claims pending. Approximately 25,400 new claims were filed
in 1997 and approximately 34,700 were either settled or dismissed without
payment (including approximately 22,000 claims dismissed by a Federal District
Court without prejudice which are subject to being refiled). As a result, on
September 26, 1997, there were approximately 83,300 claims pending. Any
settlement costs not covered by the Corporation's insurance carriers were
immaterial. The Corporation has agreements with insurance carriers covering a
substantial portion of the potential costs relating to these exposures. The
Corporation has recorded, with respect to asbestos litigation, an asset relating
to probable
-11-
<PAGE> 13
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 1996, the Corporation completed the construction of a recycling and
waste-to-energy project for the Village of Robbins, Illinois. A subsidiary of
the Corporation, Robbins Resource Recovery Limited Partnership (the
"Partnership"), will operate this facility under a long-term operating lease. By
virtue of the facility qualifying under the Illinois Retail Rate Law as a
qualified solid waste-to-energy facility, it was to receive electricity revenues
projected to be substantially higher than the utility's "avoided cost." Under
the Retail Rate Law, the utility was entitled to a tax credit against a state
tax on utility gross receipts and invested capital. The State was to be
reimbursed by the facility for the tax credit beginning after the 20th year
following the initial sale of electricity to the utility. The State has repealed
the Retail Rate Law insofar as it applied to this facility. The Partnership is
contesting the Illinois legislature's partial repeal of the Retail Rate Law in
court. In the event this litigation is not successful and no other means are
available to generate revenue from the sale of electric power above that
provided by selling electricity at the "avoided cost," there may be a
significant adverse financial impact on the operating results of the project.
Management of the Corporation believes that cash and cash equivalents of $142.4
million and short-term investments of $113.9 million at September 26, 1997,
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.
OTHER ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 128 "Earnings per Share" was
issued in February 1997. This statement establishes standards for computing and
presenting earnings per share (EPS). This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. The Corporation does not
anticipate a significant impact from the application of this statement. In June
1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130 ("Reporting Comprehensive Income") and No. 131
("Disclosures about Segments of an Enterprise and Related Information"). The
Corporation is currently evaluating their impact on the Corporation's financial
statement disclosure.
SAFE HARBOR STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the 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.
-12-
<PAGE> 14
PART II. - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
12-1 Statement of Computation of Consolidated Ratio of Earnings
to Fixed Charges and Combined Fixed Charges and Preferred
Share Dividend Requirements
27 Financial Data Schedule (For the informational purposes
of the Securities and Exchange
Commission only.)
</TABLE>
b) Reports on Form 8-K
None
-13-
<PAGE> 15
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: November 7, 1997 /S/ Richard J. Swift
---------------- ---------------------------
Richard J. Swift
Chairman, President and
Chief Executive Office
Date: November 7, 1997 /S/ David J. Roberts
---------------- ---------------------------
David J. Roberts
Vice Chairman and
Chief Financial Officer
-14-
<PAGE> 1
EXHIBIT 12-1
FOSTER WHEELER CORPORATION
STATEMENT OF COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES AND COMBINED FIXED CHARGES AND
PREFERRED SHARE DIVIDEND REQUIREMENTS
($000's)
Unaudited
<TABLE>
<CAPTION>
Fiscal Year
9 months ---------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net Earnings/(Loss) $ (12,757) $ 82,240 $ 28,534 $ 65,410 $ 57,704 $ (45,755)
Taxes on Income 1,374 44,626 41,129 41,457 39,114 22,321
Cumulative Effect of Change in
Accounting Principle 91,259
Total Fixed Charges 64,029 74,002 60,920 45,412 43,371 46,365
Capitalized Interest (7,498) (6,362) (1,634) (467) (213) (1,739)
Capitalized Interest Amortized 2,912 2,528 2,273 2,189 2,180 2,111
Equity (Earnings)/Loss of non-consolidated
associated companies accounted for by
the equity method, net of dividends (11,894) (1,474) (1,578) (623) (883) 771
--------- --------- --------- --------- --------- ---------
$ 36,166 $ 195,560 $ 129,644 $ 153,378 $ 141,273 $ 115,333
Fixed Charges:
Interest Expense $ 41,916 $ 54,940 $ 49,011 $ 34,978 $ 33,558 $ 34,159
Capitalized Interest 7,498 6,362 1,634 467 213 1,739
Imputed Interest on non-capitalized
lease payments 14,615 12,700 10,275 9,967 9,600 10,467
--------- --------- --------- --------- --------- ---------
$ 64,029 $ 74,002 $ 60,920 $ 45,412 $ 43,371 $ 46,365
RATIO OF EARNINGS TO FIXED CHARGES 0.56 2.64 2.13 3.38 3.26 2.49
</TABLE>
- ----------
*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.
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE 9 MONTHS
ENDED SEPTEMBER 26, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-26-1997
<CASH> 142,412
<SECURITIES> 113,892
<RECEIVABLES> 860,700
<ALLOWANCES> 0
<INVENTORY> 326,024
<CURRENT-ASSETS> 1,521,483
<PP&E> 1,092,443
<DEPRECIATION> 303,541
<TOTAL-ASSETS> 3,409,378
<CURRENT-LIABILITIES> 1,453,890
<BONDS> 779,941
0
0
<COMMON> 40,743
<OTHER-SE> 585,040
<TOTAL-LIABILITY-AND-EQUITY> 3,409,378
<SALES> 3,025,742
<TOTAL-REVENUES> 3,125,390
<CGS> 2,772,708
<TOTAL-COSTS> 2,980,060
<OTHER-EXPENSES> 156,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,920
<INCOME-PRETAX> (11,383)
<INCOME-TAX> 1,374
<INCOME-CONTINUING> (12,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,757)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
