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.
<PAGE>
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
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
<TABLE>
<CAPTION>
June 25, 1999 December 25,
(UNAUDITED) 1998 *
------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to financial statements.
* Reclassified to conform to 1999 presentation, see Note 1.
2
<PAGE>
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 25, 1999 JUNE 26, 1998 JUNE 25, 1999 JUNE 26, 1998
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
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
==== ==== ==== ====
</TABLE>
See notes to financial statements.
3
<PAGE>
FOSTER WHEELER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 25, 1999 JUNE 26, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
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
</TABLE>
See notes to financial statements.
4
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
9. Changes in equity for the six months ended June 25, 1999 were as
follows:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS SHARES AMOUNT EQUITY
------------ -------- ------- -------- ---------------- ------ ------- ------------
Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
9
<PAGE>
10. Major Business Groups
<TABLE>
<CAPTION>
FOR SIX MONTHS ENGINEERING CORPORATE AND
- -------------- AND ENERGY POWER FINANCIAL
TOTAL CONSTRUCTION EQUIPMENT SYSTEMS SERVICE (1)
----- ------------ --------- ------- -----------
ENDED
- -----
JUNE 25, 1999
- -------------
<S> <C> <C> <C> <C> <C>
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)
========== ========== ========== ========== ==========
<FN>
(1) Includes intersegment eliminations
(2) Includes dividend on trust preferred securities.
</FN>
</TABLE>
10
<PAGE>
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
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
ASSETS FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
========== ======== ========== ============ ==========
</TABLE>
11
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS DATA
For the Six Months Ended June 25, 1999
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
========= ======== ========== ========= ==========
</TABLE>
12
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW DATA
For the Six Months Ended June 25, 1999
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
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
<PAGE>
-- 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 12-1
FOSTER WHEELER CORPORATION
STATEMENT OF COMPUTATION OF CONSOLIDATED RATIO OF
EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES
($000'S)
UNAUDITED
<TABLE>
<CAPTION>
6 months
1999
----
EARNINGS:
<S> <C>
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
========
<FN>
----------------
* 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.
</FN>
</TABLE>
<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 six
months ended June 25, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> JUN-25-1999
<CASH> 171,535
<SECURITIES> 34,094
<RECEIVABLES> 849,724
<ALLOWANCES> 0
<INVENTORY> 458,179
<CURRENT-ASSETS> 1,594,503
<PP&E> 1,042,081
<DEPRECIATION> 351,331
<TOTAL-ASSETS> 3,246,865
<CURRENT-LIABILITIES> 1,429,947
<BONDS> 675,738
175,000
0
<COMMON> 40,748
<OTHER-SE> 507,662
<TOTAL-LIABILITY-AND-EQUITY> 3,246,865
<SALES> 1,853,728
<TOTAL-REVENUES> 1,891,741
<CGS> 1,815,779
<TOTAL-COSTS> 1,815,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,785
<INCOME-PRETAX> 32,479
<INCOME-TAX> 11,691
<INCOME-CONTINUING> 20,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,788
<EPS-BASIC> .51
<EPS-DILUTED> .51
</TABLE>
