10-K 1 d652985d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2013

OR

 

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

For the transition period from                      to                     

Commission file number 001-31305

 

 

FOSTER WHEELER AG

(Exact name of registrant as specified in its charter)

 

 

 

Switzerland   98-0607469

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No).

Shinfield Park

Reading Berkshire RG2 9FW, United Kingdom

  RG2 9FW
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

44 118 913 1234

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Each Class)

 

(Name of each exchange on which registered)

Foster Wheeler AG, Registered Shares, CHF 3.00 par value   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

 

(Title of Each Class)

 

(Name of each exchange on which registered)

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     x  Yes    ¨   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ¨  Yes    x  No

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)     x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     ¨  Yes    x   No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $1,629,000,000 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the NASDAQ Global Select Market reported for such date. Registered shares held as of such date by each officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 99,058,160 of the registrant’s registered shares outstanding as of February 14, 2014.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information by reference from the definitive proxy statement for the Annual General Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2013.

 

 

 


Table of Contents

FOSTER WHEELER AG

INDEX

 

ITEM        Page  
  PART I   
1.  

Business

     1   
1A.  

Risk Factors

     8   
1B.  

Unresolved Staff Comments

     24   
2.  

Properties

     25   
3.  

Legal Proceedings

     26   
4.  

Mine Safety Disclosures

     26   
  PART II   
5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     27   
6.  

Selected Financial Data

     30   
7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   
7A.  

Quantitative and Qualitative Disclosures about Market Risk

     70   
8.  

Financial Statements and Supplementary Data

     71   
9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     139   
9A.  

Controls and Procedures

     139   
9B.  

Other Information

     139   
  PART III   
10.  

Directors, Executive Officers and Corporate Governance

     140   
11.  

Executive Compensation

     140   
12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     141   
13.  

Certain Relationships and Related Transactions, and Director Independence

     141   
14.  

Principal Accountant Fees and Services

     141   
  PART IV   
15.  

Exhibits and Financial Statement Schedules

     142   

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth in this annual report on Form 10-K. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement” for further information.


Table of Contents

PART I

 

ITEM 1. BUSINESS (amounts in thousands of dollars, except for the number of employees)

Pending Exchange Offer and Our Acquisition by AMEC plc

On February 13, 2014, we entered into an Implementation Agreement (the “Implementation Agreement”) with AMEC plc (“AMEC”) relating to the acquisition of all of the issued and to be issued registered shares, par value CHF 3.00 per share, of Foster Wheeler AG (the “FW share” or “FW shares”) by AMEC. On the terms and subject to the conditions of the Implementation Agreement, AMEC will commence an exchange offer (the “Offer”) to acquire all of the FW shares, pursuant to which each validly tendered FW share will be exchanged for a combination (subject to election by each Foster Wheeler shareholder as described in our Current Report on Form 8-K filed on February 13, 2014) of (a) $16.00 in cash plus (b) 0.8998 ordinary shares, par value £0.50 per share, of AMEC (“AMEC shares”) or, at the election of such holder, American Depositary Shares (“ADSs”) representing such number of AMEC Shares, less any taxes required to be withheld.

The closing of the Offer is subject to, among other things, approval by our shareholders of certain amendments to our articles of association to remove certain transfer restrictions and certain voting limitations with respect to the FW shares.

For a fuller description of the Offer, see our Current Report on Form 8-K filed on February 13, 2014.

Proposed Dividend

On February 26, 2014, our Board of Directors approved a proposal to our shareholders for a one-time dividend of $0.40 per share. We intend to ask our shareholders to approve this dividend at our Annual General Meeting on May 7, 2014 and, subject to shareholder approval, this dividend will be paid shortly after our Annual General Meeting. This dividend is not linked to, and not conditional on, the closing of the Offer. The covenants of our senior unsecured credit agreement do not limit our ability to pay this proposed dividend and we expect that there will be no Swiss withholding taxes on the dividend.

General

Foster Wheeler AG is incorporated under the laws of Switzerland and is registered in the commercial register of the Canton of Zug, Switzerland. Except as the context otherwise requires, the terms “Foster Wheeler,” “us” and “we,” as used herein, refer to Foster Wheeler AG and its direct and indirect subsidiaries for the period after February 9, 2009 and Foster Wheeler Ltd., our former parent company, and its direct and indirect subsidiaries for the period prior to February 9, 2009. Please refer to Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Performance Graph” for further information regarding our redomestication to Switzerland.

We operate through two business groups: our Global Engineering and Construction Group, which we refer to as our Global E&C Group, and our Global Power Group.

Our Global E&C Group

Our Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction, or LNG, facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation facilities, distribution facilities, gasification facilities and processing facilities associated with the minerals and metals sector. Our Global E&C Group is also involved in the design of facilities in developing market sectors, including carbon capture and storage, solid fuel-fired integrated gasification combined-cycle power plants, coal-to-liquids, coal-to-chemicals and biofuels.

 

1


Table of Contents

Additionally, our Global E&C Group is involved in the development, engineering, construction, ownership and operation of power generation facilities, from conventional and renewable sources, and of waste-to-energy facilities.

Our Global E&C Group owns one of the leading technologies (SYDECSM delayed coking) used in refinery residue upgrading, in addition to other refinery residue upgrading technologies (solvent deasphalting and visbreaking), and a hydrogen production process used in oil refineries and petrochemical plants. We also own a proprietary sulfur recovery technology which is used to treat gas streams containing hydrogen sulfide for the purpose of reducing the sulfur content of fuel products and to recover a saleable sulfur by-product.

Additionally, our Global E&C Group owns and operates electric power generating wind farms in Italy and also owns a noncontrolling interest in two electric power generation projects, one waste-to-energy project and one wind farm project, all of which are located in Italy, and a noncontrolling interest in a joint venture company that is fully licensed to engineer, procure and construct process facilities in China.

Our Global E&C Group generates revenues from design, engineering, procurement, construction and project management activities pursuant to contracts spanning up to approximately four years in duration and generates equity earnings from returns on its noncontrolling interest investments in various power production facilities.

Our Global E&C Group’s products and services include:

Consulting

Our Global E&C Group provides technical and economic analyses and study reports to owners, investors, developers, operators and governments. These services include concept and feasibility studies, market studies, asset assessments, environmental assessments, energy and emissions management, product demand and supply modeling, and technology evaluations.

Design and Engineering

Our Global E&C Group provides a broad range of engineering and design-related services. Our design and engineering capabilities include process, civil, structural, architectural, mechanical, instrumentation, electrical, and health, safety and environmental management. For each project, we identify the project requirements and then integrate and coordinate the various design elements. Other critical tasks in the design process may include engineering to optimize costs, risk and hazard reviews, and the assessment of construction, maintenance and operational requirements.

Project Management and Project Control

Our Global E&C Group offers a wide range of project management and project control services for overseeing engineering, procurement and construction activities. These services include estimating costs, project planning and project cost control. The provision of these services is an integral part of the planning, design and construction phases of projects that we execute directly for clients. We also provide these services to our clients in the role of project management or program management consultant, where we oversee, on our client’s behalf, the execution by other contractors of all or some of the planning, design and construction phases of a project.

Procurement

Our procurement activities focus on those projects where we also execute the design and engineering work. We manage the procurement of materials, subcontractors and craft labor. Often, we purchase materials, equipment and third-party services on behalf of our client, where the client will pay for the purchased items or services at cost and reimburse us the cost of the associated services plus a margin or fee.

 

2


Table of Contents

Construction/Commissioning and Start-up

Our Global E&C Group provides construction and construction management services on a worldwide basis. Our construction, commissioning and start-up activities focus on those projects where we have performed most of the associated design and engineering work. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm. On some projects, we function as the construction manager, engaged by the customer to oversee another contractor’s compliance with design specifications and contracting terms. In some instances, we have responsibility for commissioning and plant start-up, or, where the client has responsibility for these activities, we provide experts to work as part of our client’s team.

Operations and Maintenance

Our Global E&C Group provides plant operations and maintenance services, such as repair, renovation, predictive and preventative services and other aftermarket services. In some instances, our contracts may require us to operate a plant, which we have designed and built, for an initial period that may vary from a very short period to up to approximately two years.

Fired Heaters

Our Global E&C Group designs and supplies direct-fired furnaces used in a wide range of refining, petrochemical, chemical, oil and gas processes, including fired heaters and waste heat recovery units. In addition, our Global E&C Group also designs and supplies fired heaters which form an integral part of our proprietary delayed coking and hydrogen production technologies.

Our Global Power Group

Our Global Power Group designs, manufactures and installs steam generators and auxiliary equipment for electric power generating stations, district heating and power plants and industrial facilities worldwide. We believe our competitive differentiation in serving these markets is the ability of our products to cleanly and efficiently burn a wide range of fuels, singularly or in combination. Our Global Power Group’s steam generators utilize a broad range of technologies, offering independent power producers, utilities, municipalities and industrial clients solutions for converting a wide range of fuels, such as coal, lignite, petroleum coke, oil, gas, solar, biomass, municipal solid waste and waste flue gases, into steam, which can be used for power generation, district heating or industrial processes. Among these fuel sources, coal is the most widely used, and thus the market drivers and constraints associated with coal strongly affect the steam generator market and our Global Power Group’s business. In particular, our circulating fluidized-bed, which we refer to as CFB, steam generators are able to burn coals of varying quality, as well as numerous other materials.

For both our CFB and pulverized coal, which we refer to as PC, steam generators, we offer supercritical once-through-unit designs to further improve the energy efficiency and, therefore, the environmental performance of these units. Once-through supercritical steam generators operate at a higher pressure of water, as it is converted to steam, than traditional plants, which results in higher efficiencies and lower emissions, including emissions of carbon dioxide, or CO2, which is considered a greenhouse gas.

Our Global Power Group also conducts research and development in the areas of combustion; solid, fluid and gas dynamics; heat transfer; materials; and solid mechanics. In addition, our Global Power Group licenses its technology to a limited number of third parties in select countries or markets.

Additionally, our Global Power Group holds a controlling interest in and operates a combined-cycle gas turbine facility; owns a noncontrolling interest in a petcoke-fired CFB facility for refinery steam and power generation; and operates a university cogeneration power facility for steam/electric generation.

 

3


Table of Contents

Our Global Power Group generates revenues from engineering activities, equipment supply, construction contracts, operating and maintenance agreements, royalties from licensing its technology, and from returns on its investments in various power production facilities.

Our Global Power Group’s products and services include:

Circulating Fluidized-Bed Steam Generators

Our Global Power Group designs, manufactures and supplies steam generators that utilize our proprietary CFB technology to clients worldwide. We believe that CFB combustion is generally recognized as one of the most commercially viable, fuel-flexible and clean burning ways to generate steam on a commercial basis from coal and many other solid fuels and waste products. A CFB steam generator utilizes air nozzles on the floor and lower side walls of its furnace to mix and fluidize the fuel particles as they burn, resulting in a very efficient combustion and heat transfer process. The fuel and other added solid materials, such as limestone, are continuously recycled through the furnace to maximize combustion efficiency and the capture of pollutants, such as the oxides of sulfur, which we refer to as SOx. Due to the efficient mixing of the fuel with the air and other solid materials and the long period of time the fuel remains in the combustion process, the temperature of the process can be greatly reduced below that of a conventional burning process. This has the added benefit of reducing the formation of nitrogen-oxide, which we refer to as NOx, which is another pollutant formed during the combustion process. Due to these benefits, additional SOx and NOx control systems are frequently not needed. Supercritical CFB steam technology dramatically raises the pressure of water as it is converted to steam, allowing the steam to absorb more heat from the combustion process, which results in a substantial improvement of approximately 5-15% in the efficiency of an electric power plant. To meet the requirements of the utility power sector, our Global Power Group offers supercritical CFB steam generators that range from 400 megawatt electrical, or MWe, up to 800 MWe in single unit sizes, in addition to subcritical CFB steam generators which typically range between 30-400 MWe.

We are continuing our development of Flexi-BurnTM CFB technology which we see as a key component in a flexible and practical carbon capture and storage solution for large scale power generation. A power plant utilizing Flexi-BurnTM CFB technology can operate in either conventional or carbon capture mode. In the carbon capture mode, the CFB will produce a CO2-rich flue gas which can then be delivered to a storage location while avoiding the need for large, expensive and energy intensive post-combustion CO2 separation equipment. Together with partners, we have built a Flexi-BurnTM CFB pilot plant (approximately 30 megawatt thermal, equivalent to approximately 10 MWe) that has been successfully capturing CO2 since September 2012. We are currently seeking partners and funding to further develop this technology on a commercial scale level.

Pulverized Coal Steam Generators

Our Global Power Group designs, manufactures and supplies PC steam generators to clients worldwide. PC steam generators are commonly used in large coal-fired power plant applications. The coal is pulverized into fine particles and injected into the steam generator through specially designed low NOx burners. Our PC steam generators control NOx by utilizing advanced low-NOx combustion technology and selective catalytic reduction technology, which we refer to as SCR. PC technology requires flue gas desulfurization, which we refer to as FGD, equipment to be installed to capture SOx. We offer our PC steam generators with either conventional sub-critical steam technology or more efficient supercritical steam technology for electric power plant applications. PC steam generators typically range from 200-800 MWe.

Industrial Steam Generators

Our Global Power Group designs, manufactures and supplies industrial steam generators of various types including: CFB, as described above, grate, fully assembled package, field erected oil and gas, waste heat, and heat recovery steam generators. Depending on the steam generator type and application, our industrial steam

 

4


Table of Contents

generators are designed to burn a wide spectrum of industrial fuels from high quality oil and natural gas to biomass and “waste type” fuels such as tires, municipal solid waste, waste wood and paper. Our industrial steam generators are designed for ruggedness, fuel flexibility and reliability.

Auxiliary Equipment and Aftermarket Services

Our Global Power Group also manufactures and supplies auxiliary and replacement equipment for utility power and industrial facilities, including steam generators for solar thermal power plants, surface condensers, feed water heaters, coal pulverizers, steam generator coils and panels, biomass gasifiers, and replacement parts. Additionally, we offer a full line of new and retrofit NOx reduction systems such as selective non-catalytic and catalytic NOx reduction systems, complete low-NOx combustion systems, and multi-pollutant flue gas cleaning equipment.

To enhance our environmental product portfolio, we acquired an environmental company in Germany in 2011. The company successfully supplies a specialized multi-pollutant scrubbing technology that utilizes CFB technology to economically capture sulfur dioxide, or SO2, acid gases, heavy metals and other harmful emissions, which are becoming increasingly regulated in the U.S. and Europe.

We provide a broad range of site services relating to all of the products mentioned above, including construction and erection services, maintenance, plant upgrading and life extension, engineering and replacement parts, improving plant environmental performance and plant repowering.

Corporate and Finance Group

In addition to our Global E&C Group and Global Power Group, which represent two of our operating segments for financial reporting purposes, we report the financial results associated with the management of entities which are not managed by one of our two business groups, which include corporate center expenses, our captive insurance operation and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, which also represents an operating segment for financial reporting purposes and which we refer to as the C&F Group.

Please refer to Note 14 to the consolidated financial statements in this annual report on Form 10-K for a discussion of our operating segments and geographic financial information relating to our operations.

Industries We Serve

We serve the following industries:

 

•   Oil and gas;

  

•   Environmental;

•   Oil refining;

  

•   Minerals and metals;

•   Chemical/petrochemical;

  

•   Power generation; and

•   Pharmaceutical;

  

•   Power plant operation and maintenance.

Customers and Marketing

We market and sell our services and products through our worldwide staff of sales and marketing professionals, through a network of sales representatives and through partnership or joint venture arrangements. Our businesses are not seasonal and are not dependent on a limited group of clients. During 2013 and 2012, one client of our Global E&C Group accounted for approximately 12% of our consolidated operating revenues (inclusive of flow-through revenues as described in the section entitled “—Unfilled Orders” within this Item 1) in both years; however, the associated flow-through revenues included in this percentage accounted for approximately 11% of

 

5


Table of Contents

our consolidated operating revenues in both years. A second client of our Global E&C Group accounted for approximately 26% of our consolidated operating revenues (inclusive of flow-through revenues) in 2011; however, the associated flow-through revenues included in these percentages accounted for approximately 25% of our consolidated operating revenues in 2011. No other single client accounted for ten percent or more of our consolidated revenues in 2013, 2012 or 2011. Representative clients include state-owned and multinational oil and gas companies; major petrochemical, chemical, minerals and metals, and pharmaceutical companies; national, municipal and independent electric power generation companies, including public utility companies; and government agencies throughout the world. The majority of our revenues and new business originates outside of the United States.

Licenses, Patents and Trademarks

We own and license patents, trademarks and know-how, which are used in each of our business groups. The life cycles of the patents and trademarks are of varying durations. We are not materially dependent on any particular patent or trademark, although we depend on our ability to protect our intellectual property rights to the technologies and know-how used in our proprietary products. As noted above, our Global Power Group has granted licenses to a limited number of companies in select countries to manufacture steam generators and related equipment and certain of our other products. During 2013, our principal licensees were located in India, Japan and South Korea. During the past three years, recurring royalty revenues ranged from approximately $7,000 to $15,000 per year.

Unfilled Orders

We execute our contracts on lump-sum turnkey, fixed-price, target-price with incentives and cost-reimbursable bases. Generally, we believe contracts are awarded on the basis of price, acceptance of certain project-related risks, technical capabilities and availability of qualified personnel, reputation for quality and ability to perform in a timely manner, ability to execute projects in line with client expectations, including the location of engineering activities and the ability to meet local content requirements, and safety record. On certain contracts our clients may make a down payment at the time a contract is executed and continue to make progress payments until the contract is completed and the work has been accepted as satisfying contract requirements. Our products are custom designed and manufactured, and are not produced for inventory. Our Global E&C Group frequently purchases materials, equipment, and third-party services at cost for clients on a cash neutral/reimbursable basis when providing engineering specification or procurement services, referred to as “flow-through” amounts. “Flow-through” amounts are recorded both as revenues, which we refer to as flow-through revenues, and cost of operating revenues with no profit recognized.

We measure our unfilled orders in terms of expected future revenues. Included in future revenues are flow-through revenues, as defined above. We also measure our unfilled orders in terms of Foster Wheeler scope, which excludes flow-through revenues. As such, Foster Wheeler scope measures the component of backlog of unfilled orders with profit potential and represents our services plus fees for reimbursable contracts and total selling price for lump-sum or fixed-price contracts.

Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the changes in unfilled orders, both in terms of expected future revenues and Foster Wheeler scope revenues. See also Item 1A, “Risk Factors—Risks Related to Our Operations – Projects included in our backlog may be delayed or cancelled, which could materially adversely affect our business, financial condition, results of operations and cash flows.”

 

6


Table of Contents

Use of Raw Materials

We source the materials used in our manufacturing and construction operations from several countries. Our procurement of materials, consisting mainly of steel products and manufactured items, is heavily dependent on unrelated third-party sources. These materials are subject to timing of availability and price fluctuations, which we monitor on a regular basis. We have access to numerous global sources and are not dependent on any single source of supply.

Compliance with Government Regulations

We are subject to certain federal, state and local environmental, occupational health and product safety laws arising from the countries where we operate. We also purchase materials and equipment from third-parties, and engage subcontractors, who are also subject to these laws and regulations. We do not anticipate any material capital expenditures or material adverse effects on earnings or cash flows as a result of complying with those laws. Additionally, please refer to Note 16 to the consolidated financial statements in this annual report on Form 10-K for a discussion of our environmental matters.

Employees

The following table indicates the number of full-time, temporary and agency personnel in each of our business groups. We believe that our relationship with our employees is satisfactory.

 

     As of December 31,  
     2013      2012  

Global E&C Group

     10,409         9,876   

Global Power Group

     2,843         2,939   

C&F Group

     59         78   
  

 

 

    

 

 

 

Total

     13,311         12,893   
  

 

 

    

 

 

 

Competition

Many companies compete with us in the engineering and construction business. Neither we nor any other single company has a dominant market share of the total design, engineering and construction business servicing our global businesses previously described. Many companies also compete in the global power generating equipment business and neither we nor any other single competitor has an overall dominant market share over the entire steam generator product portfolio.

The vast majority of the market opportunities that we pursue are subject to a competitive tendering process, and we believe that our target customers consider the price, acceptance of certain project-related risks, technical capabilities and availability of qualified personnel, reputation for quality and ability to perform in a timely manner, ability to execute projects in line with client expectations, including the location of engineering activities and the ability to meet local content requirements, and safety record as the primary factors in determining which qualified contractor is awarded a contract. We believe that we derive our competitive strength from the quality of our services and products, technology, worldwide procurement capability, project management expertise, ability to execute complex projects, professionalism, strong safety record and lengthy experience with a wide range of services and technologies.

Companies that compete with our Global E&C Group include but are not limited to the following: Bechtel Corporation; Chicago Bridge & Iron Company N.V.; Chiyoda Corporation; Fluor Corporation; Jacobs Engineering Group Inc.; JGC Corporation; KBR, Inc.; Saipem S.p.A.; Technip; Técnicas Reunidas, SA; and WorleyParsons Ltd.

 

7


Table of Contents

Companies that compete with our Global Power Group include but are not limited to the following: Alstom Power S.A.; Andritz Group AG; The Babcock & Wilcox Company; Babcock Power Inc.; Dongfang Boiler Works (a subsidiary of Dong Fang Electric Corporation); Doosan-Babcock; Harbin Boiler Co., Ltd.; Hitachi, Ltd.; Metso Corporation; Mitsubishi Heavy Industries Ltd.; and Shanghai Boiler Works Ltd.

Available Information

You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to these documents at our website, www.fwc.com, under the heading “Investors” by selecting the heading “SEC Filings.” We make these documents available on our website as soon as reasonably practicable after we electronically file them with or furnish them to the U.S. Securities and Exchange Commission, which we refer to as the SEC. The information disclosed on our website is not incorporated herein and does not form a part of this annual report on Form 10-K.

You may also read and copy any materials that we file with or furnish to the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our filings on its website at www.sec.gov.

 

ITEM 1A. RISK FACTORS (amounts in thousands of dollars)

Our business is subject to a number of risks and uncertainties, including those described below. If any of these events occur, our business could be harmed and the trading price of our securities could decline. The following discussion of risks relating to our business should be read carefully in connection with evaluating our business and the forward-looking statements contained in this annual report on Form 10-K. For additional information regarding forward-looking statements, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement.”

The categorization of risks set forth below is meant to help you better understand the risks facing our business and is not intended to limit consideration of the possible effects of these risks to the listed categories. Any adverse effects related to the risks discussed below may, and likely will, adversely affect many aspects of our business.

Risks Related to the Proposed Acquisition of Foster Wheeler by AMEC plc

Failure to complete the proposed Offer and subsequent acquisition of Foster Wheeler by AMEC could materially and adversely affect our stock price and our ability to secure new contract awards, which in turn, would affect our future revenues, results of operations and cash flows.

On February 13, 2014, we entered into the Implementation Agreement with AMEC. The Implementation Agreement provides that, subject to its terms and conditions, AMEC will commence the Offer to acquire all of the issued and to be issued registered shares, par value CHF 3.00, of Foster Wheeler AG, and, following completion of the Offer, provided AMEC has directly or indirectly acquired or controls, and is able to exercise voting rights in respect of, at least 90% of the issued Foster Wheeler AG voting rights, AMEC will cause Foster Wheeler AG to be merged into a wholly-owned Swiss subsidiary of AMEC in accordance with Swiss law, whereby the shareholders who have not tendered their FW shares under the Offer will not be offered shares of the wholly-owned Swiss subsidiary of AMEC but other consideration.

Consummation of the Offer is subject to various closing conditions, including antitrust approvals and the tender in the Offer of at least 80% of the total number of outstanding registered shares, of Foster Wheeler AG. We cannot assure you that these conditions will be satisfied or waived, that the necessary approvals will be obtained, or the Offer will be successfully completed as contemplated under the Implementation Agreement or at all.

 

8


Table of Contents

If for any reason the proposed Offer is not consummated:

 

    our investors will not receive cash or equity from AMEC, and our stock price could decline;

 

    under some circumstances, we may have to pay a termination fee to AMEC of £32,500; and

 

    our costs and expenses related to the transaction (including legal, accounting and certain financial advisory fees and expenses) will be required to be paid even if the transaction is not consummated.

In addition, the pending Offer and acquisition could adversely affect our operations because:

 

    the attention of our management and our employees may be diverted from day-to-day operations as they focus on the requirements of the Offer;

 

    our prospective clients may decline or delay entering into new agreements or purchasing our services as a result of the announcement of the Offer, which could cause our future revenues to materially decline or any anticipated increases in revenues to be lower than expected, ultimately impacting our results of operations and cash flows;

 

    our ability to attract new employees and retain our existing employees may be harmed by uncertainties associated with the Offer, and we may be required to incur substantial costs to recruit replacements for lost personnel; and

 

    shareholder lawsuits could be filed against us challenging the Offer. If this occurs, even if the lawsuits are groundless and we ultimately prevail, we may incur substantial legal fees and expenses defending these lawsuits, and the Offer could be prevented or delayed.

The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our share price.

Risks Related to Our Operations

The nature of our contracts subjects us to risks related to each project’s technical design and associated warranty obligations, changes from original projections for costs and schedules which, particularly with our current and future lump-sum or fixed-price contracts and other shared risk contracts, may result in significant losses if costs are greater than anticipated and/or contractual schedules are not met.

We assume each project’s technical risk and associated warranty obligations on all of our contracts and projects, meaning that we must tailor products and systems to satisfy the technical requirements of a project even though, at the time the project is awarded, we may not have previously produced such a product or system. Warranty obligations can range from re-performance of engineering services to modification or replacement of equipment. We also assume the risks related to revenue, cost and gross profit realized on such contracts that can vary, sometimes substantially, from the original projections due to changes in a variety of other factors, including but not limited to:

 

  engineering design changes;

 

  unanticipated technical problems with the equipment being supplied or developed by us, which may require that we spend our own money to remedy the problem;

 

  changes in the costs of components, materials or labor;

 

  difficulties in obtaining required governmental permits or approvals;

 

  changes in local laws and regulations;

 

  changes in local labor conditions;

 

  project modifications creating unanticipated costs and/or delays related to contractual schedules;

 

  delays caused by local weather conditions; and

 

  our project owners’, suppliers’ or subcontractors’ failure to perform.

 

9


Table of Contents

These risks may be exacerbated by the length of time between signing a contract and completing the project because most of the projects that we execute are long-term. The term of our contracts can be as long as approximately four years. In addition, we sometimes bear the risk of delays caused by unexpected conditions or events.

Some of our contracts are fixed-price contracts and other shared-risk contracts, both of which are inherently risky because we agree to the selling price of the project based on estimates at the time we enter into a contract. The selling price is based on estimates of the ultimate cost of the contract and we assume substantially all of the risks associated with completing the project, as well as the post-completion warranty obligations. Certain of these contracts are lump-sum turnkey projects where we are responsible for all aspects of the work from engineering through construction, as well as commissioning, all for a fixed selling price. We may be subject to penalties if portions of the long-term fixed-price projects are not completed in accordance with agreed-upon time limits. Therefore, significant losses can result from performing large, long-term projects on a fixed-price or lump-sum basis. These losses may be material, including in some cases up to or exceeding the full contract value in certain events of non-performance and/or delay, and could negatively impact our business, financial condition, results of operations and cash flows. As of December 31, 2013, our backlog included $29,500 attributable to lump-sum turnkey contracts and $1,066,500 attributable to other fixed-price contracts, which represented 1% and 27%, respectively, of our total backlog. We may increase the size and number of fixed-price or lump-sum turnkey contracts, sometimes in countries where or with clients with whom we have limited previous experience.

We have and may continue to bid for and enter into such contracts through partnerships or joint ventures with third-parties. These arrangements increase our ability and willingness to bid for increased numbers of contracts and/or contracts of increased size. In some cases, applicable law and joint venture or other agreements may provide that each joint venture partner is jointly and severally liable for all liabilities of the venture. Entering into these partnerships or joint ventures exposes us to credit and performance risks of those third-party partners, which could have a negative impact on our business and our results of operations if these parties fail to perform under the arrangements.

Our failure to successfully defend against claims made against us by project owners, suppliers or project subcontractors, or our failure to recover adequately on our claims made against project owners, suppliers or subcontractors, could materially adversely affect our business, financial condition, results of operations and cash flows.

Our projects generally involve complex design and engineering, significant procurement of equipment and supplies and construction management. We may encounter difficulties in the design or engineering, equipment and supply delivery, schedule changes and other factors, some of which are beyond our control, that affect our ability to complete the project in accordance with the original delivery schedule or to meet the contractual performance obligations. In addition, we generally rely on third-party partners, equipment manufacturers and subcontractors to assist us with the completion of our contracts. As such, claims involving project owners, suppliers and subcontractors may be brought against us and by us in connection with our project contracts. Claims brought against us may include back charges for alleged defective or incomplete work, breaches of warranty and/or late completion of the project work and claims for cancelled projects. The claims and back charges can involve actual damages, as well as contractually agreed upon liquidated sums. Claims brought by us against project owners may include claims for additional costs incurred in excess of current contract provisions arising out of project delays and changes in the previously agreed scope of work. Claims between us and our suppliers, subcontractors and vendors may include claims like any of those described above. These project claims, if not resolved through negotiation, are often subject to lengthy and expensive litigation or arbitration proceedings, and it is often difficult to accurately predict when these claims will be fully resolved. Charges associated with claims could materially adversely affect our business, financial condition, results of operations and cash flows. For further information on project claims, please refer to Note 16, “Litigation and Uncertainties,” to the consolidated financial statements included in this annual report on Form 10-K.

 

10


Table of Contents

Projects included in our backlog may be delayed or cancelled, which could materially adversely affect our business, financial condition, results of operations and cash flows. Additionally, due to the above, and since a significant portion of our backlog is denominated in currencies other than the U.S. dollar, our backlog may not be a reliable indicator of the U.S. dollar value of our future operating revenues or earnings.

The U.S. dollar amount of backlog does not necessarily indicate future operating revenues or earnings related to the performance of that work. Backlog refers to expected future revenues under signed contracts and legally binding letters of intent that we have determined are likely to be performed. Backlog represents only business that is considered firm, although cancellations or scope adjustments may and do occur. Because of changes in project scope and schedule, we cannot predict with certainty when or if backlog will be performed or the associated revenue will be recognized. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us. Material delays, cancellations or payment defaults could materially adversely affect our business, financial condition, results of operations and cash flows.

Based on the factors described above, as well as fluctuations in currency exchange rates, the U.S. dollar value of our backlog may from time to time increase or decrease, and as a result, our backlog may not be a reliable indicator of the U.S. dollar value of our future operating revenues or earnings.

Because our operations are concentrated in four particular industries, we may be adversely impacted by economic or other developments in these industries.

We derive a significant amount of revenues from services provided to clients that are concentrated in four industries: oil and gas, oil refining, chemical/petrochemical and power generation. These industries historically have been, and will likely continue to be, cyclical in nature. Consequently, our results of operations have fluctuated, and may continue to fluctuate, depending on the demand for our products and services from clients in these industries.

Unfavorable developments in global or regional economic growth rates or other unfavorable developments in one or more of these industries could adversely affect our clients’ investment plans and could materially adversely affect our business, financial condition, results of operations and cash flows.

Both of our business groups have been impacted by unfavorable economic growth rates in most of their respective global markets in recent years. Additionally, there is potential downside risk to continued unfavorable global economic growth rates driven primarily by continued sovereign debt and bank funding pressures, the speed and effectiveness of the implementation of government macroeconomic policies in a number of key advanced and emerging economies, slower growth than anticipated in emerging economies, most significantly The People’s Republic of China, and civil unrest. If any of these risks materialize, the ability of both of our business groups to book work could be negatively impacted, which could have a material negative impact on our business as a whole.

Global markets in the engineering and construction industry have experienced intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Clients’ bidding and contract award processes continue to be protracted, particularly for projects sponsored by national oil companies. Some clients have been releasing, and we expect will continue to release, tranches of work on a piecemeal basis. These factors may continue in the future and could have a material negative impact on our business.

Our Global Power Group has been impacted by unfavorable economic growth rates in most of its markets during 2013. As a result, the demand for the products and services of our Global Power Group was negatively impacted by an increased level of timing delays related to project award dates. Additionally, a number of other constraining market factors continue to impact the markets in the power generation industry that our Global Power Group serves. Political and environmental sensitivity regarding coal-fired steam generators continues to cause prospective projects utilizing coal as their primary fuel to be postponed or cancelled as clients experience difficulty in obtaining the required environmental permits or decide to wait for additional clarity regarding

 

11


Table of Contents

governmental regulations. The sensitivity has been especially pronounced in the U.S. and Western Europe due to the concern that coal-fired steam generators, relative to alternative fuel sources, contribute more toward global warming through the discharge of greenhouse gas emissions into the atmosphere. The outlook for continued lower natural gas pricing over the next three to five years in North America, driven by increasing supply of natural gas, has increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. These factors may continue in the future.

Our results of operations and cash flows depend on new contract awards, and the selection process and timing for performing these contracts are not entirely within our control.

A substantial portion of our operating revenues are derived from new contract awards of projects. It is difficult to predict whether and when we will receive such awards due to the lengthy and complex bidding and selection process, which is affected by a number of factors, such as market conditions, financing arrangements, governmental approvals and environmental matters. We often compete with other general and specialty contractors, including large multinational contractors and small local contractors in the global markets in which we operate. The strong competition in our markets requires us to maintain skilled personnel and invest in technology, and also puts pressure on our profit margins. Because of this, we could be prevented from obtaining contracts for which we have bid due to price, greater perceived financial strength and resources of our competitors and/or perceived technology advantages. Alternatively, we may have to agree to lower prices and margins for contracts that we win or we may lose a bid or decide not to pursue a contract if the profit margins are below our minimum acceptable margins based on our risk assessment of the project conditions.

Our ability to compete for and receive new contract awards may be further impacted if we are unable to form joint ventures or similar arrangements with other contractors in order to jointly compete for a single contract. Such arrangements can often offer stronger combined qualifications than any firm standing alone and these arrangements can be important to the success of a particular contract bid process or proposal. These arrangements are particularly effective in certain non-U.S. regions where the bidding success can be substantially impacted by the presence and/or qualifications of local partners. The failure to maintain such relationships may impact our ability to receive certain new contract awards.

Our results of operations and cash flows can fluctuate from quarter to quarter depending on the timing of our contract awards. In addition, certain of these contracts are subject to client financing contingencies and environmental permits, and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing and approvals for the project, which could result in a delay or cancellation of the proposed project and thereby reduce our revenues and profits.

In addition, our performance is greatly impacted by our ability to effectively utilize our workforce. We maintain our workforce based on our current and anticipated projects, including expected new contract awards. If we do not receive new contract awards or if awards are delayed, or if our projects experience changes from estimates related to unanticipated scheduling delays or experience modifications regarding the scope of work to be performed, we may incur significant costs if we cannot reallocate staffing in a timely manner or terminate the employment of excess staffing.

Our failure to attract and retain key officers, qualified personnel, joint venture partners, advisors and subcontractors could materially adversely affect our business, financial condition, results of operations and cash flows.

Our ability to attract and retain key officers, qualified engineers and other professional personnel, as well as joint venture partners, advisors and subcontractors, will be an important factor in determining our future success. The market for key officers and qualified personnel is competitive and we may not be successful in efforts to attract and retain these individuals. Failure to attract or retain these key officers, professionals, joint venture partners, advisors and subcontractors could materially adversely affect our business, financial condition, results of operations and cash flows.

 

12


Table of Contents

Our worldwide operations involve risks that may limit or disrupt operations, limit repatriation of cash, increase taxation or otherwise materially adversely affect our business, financial condition, results of operations and cash flows.

We have worldwide operations, including project site locations, that are conducted through our subsidiaries, as well as through agreements with joint venture partners. Our subsidiaries have operations located in Asia, Australia, Europe, the Middle East, North America, South Africa and South America and execute projects from their office locations, as well as at project site locations. Additionally, we purchase materials and equipment on a worldwide basis and are heavily dependent on unrelated third-party sources for these materials and equipment. Our worldwide operations and our execution of projects are subject to risks that could materially adversely affect our business, financial condition, results of operations and cash flows, including:

 

  uncertain political, legal and economic environments;

 

  potential incompatibility with joint venture partners;

 

  foreign currency controls and fluctuations;

 

  energy prices and availability;

 

  war and civil disturbances;

 

  terrorist attacks;

 

  natural disasters and/or adverse weather conditions;

 

  the imposition of additional governmental controls and regulations;

 

  labor problems and safety practices; and

 

  interruptions to shipping lanes or other methods of transit.

Because of these risks, our worldwide operations and our execution of projects may be limited, or disrupted; our contractual rights may not be enforced fully or at all; our taxation may be increased; and/or we may be limited in repatriating earnings. These potential events and liabilities could materially adversely affect our business, financial condition, results of operations and cash flows.

Our projects are located at work sites which are inherently dangerous. Failure to maintain a safe work site could result in harm to employees and others, employee turnover, financial losses and decreased opportunities to participate in future bids.

Our project sites can place our employees and others near large equipment, dangerous processes, highly regulated materials or in challenging environments. Depending on the project, we may have the responsibility for safety on the project site and, accordingly, must implement safety procedures. If we fail to implement such procedures or if the procedures we implement are ineffective, our employees and others may be harmed. Although we maintain functional groups whose primary purpose is to implement effective health, safety and environmental procedures throughout our company, the failure to comply with such procedures can subject us to losses and liability under client contracts or statutory regulations. Unsafe work sites also have the potential to increase employee turnover, increase the cost of a project to our clients and raise our operating costs. Any of the foregoing could result in financial losses, which could have a material adverse impact on our business, financial condition, results of operations and cash flows. Additionally, we may lose future opportunities to participate in contract bids as many of our clients require that we meet certain safety criteria in order to be eligible to bid on contracts.

It can be very difficult or expensive to obtain insurance coverage for our business operations, and we may not be able to secure or maintain sufficient coverage to satisfy our needs.

As part of our business operations, we maintain insurance coverage both as a corporate risk management strategy and in order to satisfy the requirements of many of our contracts. Although we have in the past been able to satisfy our insurance needs, there can be no assurance that we will be able to secure all necessary or appropriate

 

13


Table of Contents

insurance coverage in the future. Our insurance is purchased from a number of the world’s leading providers, often in layered insurance arrangements. We monitor the financial health of the insurance companies from which we hold policies, and review the financial health of an insurer prior to purchasing a policy. If any of our third party insurers fail, refuse to renew or revoke coverage or otherwise cannot satisfy their insurance requirements to us, then our overall risk exposure and operational expenses could be increased and our business operations could be interrupted.

We are subject to anti-bribery laws in the countries in which we operate. Failure to comply with these laws could result in our becoming subject to penalties and the disruption of our business activities.

Many of the countries in which we transact business have laws that restrict the offer or payment of anything of value to government officials or other persons with the intent of gaining business or favorable government action. We are subject to these laws in addition to being governed by the U.S. Foreign Corrupt Practices Act restricting these types of activities. In addition to prohibiting certain bribery-related activity with government officials and other persons, these laws establish recordkeeping obligations. Our policies mandate compliance with these anti-bribery laws and we have procedures and controls in place to monitor internal and external compliance. However, any failure by us, our subcontractors, agents or others who work for us or on our behalf to comply with these legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties. The failure to comply with these legal and regulatory obligations could also disrupt our business activities.

We may be negatively impacted by an increase in our effective tax rate.

Our effective tax rate can fluctuate significantly from period to period as a result of changes in tax laws, treaties or regulations, or their interpretation, of any country in which we operate, the varying mix of income earned in the jurisdictions in which we operate, the realizability of deferred tax assets, including our inability to recognize a tax benefit for losses generated by certain unprofitable operations, cash repatriations decisions, changes in uncertain tax positions and the final outcome of tax audits and related litigation. An increase in our effective tax rate could have a material adverse effect on our financial condition, results of operations and cash flows.

We continue to assess the impact of various legislative proposals, including U.S. federal and state proposals, and modifications to existing tax treaties, that could result in a material increase in our taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing treaties, the consequences could have a materially adverse impact on us, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations and cash flows.

We are subject to various environmental laws and regulations in the countries in which we operate. If we fail to comply with these laws and regulations, we may incur significant costs and penalties that could materially adversely affect our business, financial condition, results of operations and cash flows.

Our operations are subject to laws and regulations governing the generation, management and use of regulated materials, the discharge of materials into the environment, the remediation of environmental contamination, or otherwise relating to environmental protection. Both our Global E&C Group and our Global Power Group make use of and produce as waste or byproducts substances that are considered to be hazardous under these

 

14


Table of Contents

environmental laws and regulations. We may be subject to liabilities for environmental contamination as an owner or operator (or former owner or operator) of a facility or as a generator of hazardous substances without regard to negligence or fault, and we may be subject to additional liabilities if we do not comply with applicable laws regulating such hazardous substances, and, in either case, such liabilities can be substantial. These laws and regulations could expose us to liability arising out of the conduct of current and past operations or conditions, including those associated with formerly owned or operated properties caused by us or others, or for acts by us or others which were in compliance with all applicable laws at the time the acts were performed. In some cases, we have contractual indemnification obligations for environmental liabilities associated with some formerly owned properties. The ongoing costs of complying with existing environmental laws and regulations could be substantial. Additionally, we may be subject to claims alleging personal injury, property damage or natural resource damages as a result of alleged exposure to or contamination by hazardous substances. Changes in the environmental laws and regulations, remediation obligations, enforcement actions, stricter interpretations of existing requirements, future discovery of contamination or claims for damages to persons, property, natural resources or the environment could result in material costs and liabilities that we currently do not anticipate, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

Our business may be materially adversely impacted by regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future.

Greenhouse gases that result from human activities, including burning of fossil fuels, have been the focus of increased scientific and political scrutiny and are being subjected to various legal requirements. International agreements, national laws, state laws and various regulatory schemes that limit or otherwise regulate emissions measuring and control of greenhouse gases are under consideration by different governmental entities. We derive a significant amount of revenues and contract profits from engineering and construction services provided to clients who own and/or operate a wide range of process plants and from the supply of our manufactured equipment to clients who own and/or operate electric power generating plants. Additionally, we own or partially own plants that generate electricity or steam from burning natural gas or various types of solid fuels. These plants emit greenhouse gases as part of the process to generate electricity, refined products or other products. Compliance with future greenhouse gas regulations may prove costly or difficult. It is possible that owners and operators of existing or future process plants and electric generating plants could be subject to new or revised environmental regulations that result in increasing the cost of emitting such gases or requiring emissions allowances. The costs of controlling such emissions or obtaining required emissions allowances could be significant. It also is possible that necessary controls or allowances may not be available. Such regulations could negatively impact client investments in capital projects in our markets, which could negatively impact the market for our manufactured products and certain of our services, and also could negatively affect the operations and profitability of our own electric power plants. Further, the increased cost of producing refined products which meet changing product specifications designed to reduce greenhouse gas and other emissions may also adversely impact client investments in refineries. These factors could materially adversely affect our business, financial condition, results of operations and cash flows.

We may lose future business to our competitors and be unable to operate our business profitably if our patents and other intellectual property rights do not adequately protect our proprietary products.

Our success depends significantly on our ability to protect our intellectual property rights to the technologies and know-how used in our proprietary products, including rights which we license to third parties. We rely on patent protection, as well as a combination of trade secret, unfair competition and similar laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.

We also rely on unpatented proprietary technology. We cannot provide assurance that we can meaningfully protect all of our rights in our unpatented proprietary technology, or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.

 

15


Table of Contents

Additionally, we also hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of our products. The loss of such licenses would prevent us from manufacturing and selling these products, which could harm our business.

We rely on our information and communication systems and data in our operations. Failure in the availability or security of our information and communication systems or in data security could adversely affect our business and results of operations.

The efficient operation of our business is dependent on our information and communication systems and our use of our internal data and our clients’ data, including electronic and hardcopy data formats. Information and communication systems by their nature are susceptible to internal and external security breaches, including computer hacker and cyber terrorist breaches, employee willful breaches and employees succumbing to criminal scamming from external sources, and can fail or become unavailable for a significant period of time. Additionally, if our data security controls fail, we are at risk of intentionally or unintentionally disclosing our or our clients’ data, including trade secrets and intellectual property. This could lead to the violation of client confidentiality agreements and loss of critical data. While we have implemented internal controls for information and communication systems and data security, there can be no assurance that the unavailability of the information and communication systems, the failure of these systems to perform as anticipated for any reason or any significant breach of system or data security may not occur which could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer.

Risks Related to Our Liquidity and Capital Resources

We require cash repatriations from our subsidiaries to meet our cash needs related to our asbestos-related and other liabilities, corporate overhead expenses, potential dividend payments and share repurchases. Our ability to repatriate funds from our subsidiaries is limited by a number of factors.

We are dependent on cash repatriations from our subsidiaries to cover payments and expenses of our parent holding company in Switzerland, to cover cash needs related to our asbestos-related liability and other overhead expenses in the U.S. and, at our discretion, specific liquidity needs, such as funding acquisitions, potential dividend payments and our share repurchase program. There can be no assurance that our forecasted cash repatriations will occur as our subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, to comply with covenants and for other general corporate purposes. The repatriation of funds may also subject those funds to taxation in some jurisdictions. The inability to repatriate cash could negatively impact our business, financial condition, results of operations and cash flows.

Certain of our various debt agreements impose financial covenants, which may prevent us from capitalizing on business opportunities, which could negatively impact our business.

Certain of our debt agreements, including our senior unsecured credit agreement, impose financial covenants on us. These covenants limit our ability to incur indebtedness, pay dividends or make other distributions, make investments and acquisitions, and sell assets. The covenants of our senior unsecured credit agreement do not limit our ability to pay the proposed dividend of $0.40 per share (See Item 1, “Business—Proposed Dividend”). However, these limitations may restrict our ability to pursue business opportunities, which could negatively impact our business.

We may have significant working capital requirements, which if unfunded could negatively impact our business, financial condition and cash flows.

In some cases, we may require significant amounts of working capital to finance the purchase of materials and/or the performance of engineering, construction and other work on certain of our projects before we receive payment from our customers. In some cases, we are contractually obligated to our customers to fund working capital on our

 

16


Table of Contents

projects. Also, failure to obtain timely payment from our customers, as a result of project claims, our clients’ liquidity shortfall and/or our clients’ inability to secure project financing due to the deterioration of their creditworthiness, could result in significant periodic fluctuations in our working capital requirements. Increases in working capital requirements could negatively impact our business, financial condition and cash flows.

Additionally, we could temporarily experience a liquidity shortfall if we are unable to access our cash balances and short-term investments to meet our working capital requirements. Our cash balances and short-term investments are in accounts held by major banks and financial institutions, and some of our deposits exceed available insurance. The banks or financial institutions in which we hold our cash and short-term investments have not gone into bankruptcy or forced receivership, or been seized by their governments. However, there is a risk that this could occur in the future and that we could temporarily experience a liquidity shortfall or fail to recover our deposits in excess of available insurance.

Further significant deterioration of the current global economic and credit market environment could challenge our efforts to maintain our well-diversified asset allocation with creditworthy financial institutions.

In addition, we may invest some of our cash in longer-term investment opportunities, including the acquisition of other entities or operations, the reduction of certain liabilities such as unfunded pension liabilities and/or repurchases of our outstanding registered shares. To the extent we use cash for such other purposes, the amount of cash available for the working capital needs described above would be reduced.

Our new contract awards, current projects and liquidity may be adversely affected by the availability and/or cost of our performance-related standby letters of credit, bank guarantees, surety bonds and other guarantee facilities.

Consistent with industry practice, we are often required to provide performance-related standby letters of credit, bank guarantees, surety bonds or other forms of performance-related guarantees to clients, which we refer to as bonds or bonding. These bonds provide credit support for the client if we fail to perform our obligations under our contract. A restriction, reduction, termination and/or increase in the cost of our bonding facilities may limit our ability to bid on new project awards, delay work on current projects or significantly change the timing of cash flows for current projects, adversely affecting our liquidity.

Additionally, in the event our credit ratings are lowered by independent rating agencies, such as Standard & Poor’s or Moody’s Investors Service, it may be more difficult or costly for us to obtain bonding for new awards or maintain such bonding on current projects. We may also be required to provide or increase cash collateral to obtain these bonds, which would reduce our available cash and could impact our ability to increase availability under our senior unsecured credit agreement or other bonding facilities. We are also subject to the risk that any new or amended bonding facilities might not be on terms as favorable as those we have currently, which could adversely affect our liquidity.

We may invest in longer-term investment opportunities, such as the acquisition of other entities or operations in the engineering and construction industry or power industry. Acquisitions of other entities or operations have risks that could materially adversely affect our business, financial condition, results of operations and cash flows.

We have completed and are exploring possible acquisitions within the engineering and construction industry to strategically complement or expand on our technical capabilities or access to new market segments. We also have completed and may explore possible acquisitions within the power industry to complement our product offerings. The acquisition of companies and assets in the engineering and construction and power industries is subject to substantial risks, including the failure to identify material problems during due diligence, the risk of over-paying for assets and the inability to arrange financing for an acquisition as may be required or desired. Further, the identification, negotiation, integration and consolidation of acquisitions require substantial human,

 

17


Table of Contents

financial and other resources including management time and attention, and ultimately, our acquisitions may not be successfully completed or integrated and/or our resources may be diverted. Also, although we often obtain indemnification rights from the sellers of acquired businesses, such rights may be difficult to enforce should the indemnitors experience a deterioration in their financial condition and no longer have the ability to financially support the indemnity. Additionally, in order to fund targeted acquisitions or other activities, we may issue additional equity securities, which would have the effect of diluting our earnings per share and existing shareholders’ percentage ownership. There can be no assurances that we will consummate any such future acquisitions, that any acquisitions we make will perform as expected or that the returns from such acquisitions will support the investment paid to acquire them or the capital expenditures needed to develop them.

Risks Related to Asbestos Claims

The number and cost of our current and future asbestos claims in the United States could be substantially higher than we have estimated and the timing of payment of claims could be sooner than we have estimated, which could materially adversely affect our business, financial condition, results of operations and cash flows.

Some of our subsidiaries are named as defendants in numerous lawsuits and out-of-court administrative claims pending in the United States in which the plaintiffs claim damages for alleged bodily injury or death arising from exposure to asbestos in connection with work performed, or heat exchange devices assembled, installed and/or sold, by our subsidiaries. We expect these subsidiaries to be named as defendants in similar suits and that new claims will be filed in the future. For purposes of our financial statements, we have estimated the indemnity and defense costs to be incurred in resolving pending and forecasted U.S. claims through 2028. Although we believe our estimates are reasonable, the actual number of future claims brought against us and the cost of resolving these claims could be substantially higher than our estimates. Some of the factors that may result in the costs of asbestos claims being higher than our current estimates include:

 

  an increase in the rate at which new claims are filed;

 

  an increase in the number of new claimants;

 

  changes in the mix of diseases alleged to be suffered by the claimants, such as type of cancer, asbestosis or other illness;

 

  increases in legal fees or other defense costs associated with asbestos claims;

 

  increases in indemnity payments;

 

  decreases in the proportion of claims dismissed with zero indemnity payments;

 

  indemnity payments being required to be made sooner than expected;

 

  bankruptcies of other asbestos defendants, causing a reduction in the number of available solvent defendants and thereby increasing the number of claims and the size of demands against our subsidiaries;

 

  adverse jury verdicts requiring us to pay damages in amounts greater than we expect to pay in settlements;

 

  changes in legislative or judicial standards that make successful defense of claims against our subsidiaries more difficult; or

 

  enactment of federal legislation requiring us to contribute amounts to a national settlement trust in excess of our expected net liability, after insurance, in the tort system.

The total liability recorded on our consolidated balance sheet as of December 31, 2013 is based on estimated indemnity and defense costs expected to be incurred through 2028. We believe that it is likely that there will be new claims filed after 2028, but in light of uncertainties inherent in long-term forecasts, we do not believe that we can reasonably estimate the indemnity and defense costs that might be incurred after 2028. Our forecast contemplates that the number of new claims requiring indemnity will decline from year to year. If future claims fail to decline as we expect, our aggregate liability for asbestos claims will be higher than estimated.

 

18


Table of Contents

We have worked with Analysis, Research Planning Corporation, or ARPC, nationally recognized consultants in the United States with respect to projecting asbestos liabilities, to estimate the amount of asbestos-related indemnity and defense costs at each year-end based on a 15-year forecast. Each year we have recorded our estimated asbestos liability at a level consistent with ARPC’s reasonable best estimate. ARPC reviews our asbestos indemnity payments, defense costs and claims activity and compares them to our 15-year forecast prepared at the previous year-end. Based on its review, ARPC may recommend that the assumptions used to estimate our future asbestos liability be updated, as appropriate.

Our forecast of the number of future claims is based, in part, on an analysis of future disease incidence and, in part, on a regression model, which employs the statistical analysis of our historical claims data to generate a trend line for future claims. Although we believe this forecast method is reasonable, other forecast methods that attempt to estimate the population of living persons who could claim they were exposed to asbestos at worksites where our subsidiaries performed work or sold equipment could also be used and might project higher numbers of future claims than our forecast.

The actual number of future claims, the mix of disease types and the amounts of indemnity and defense costs may compare unfavorably to our current estimates. We update our forecasts at least annually to take into consideration recent claims experience and other developments, such as legislation and litigation outcomes, that may affect our estimates of future asbestos-related costs. The announcement of increases to asbestos liabilities as a result of revised forecasts, adverse jury verdicts or other negative developments involving asbestos litigation or insurance recoveries may cause the value or trading prices of our securities to decrease significantly. These negative developments could also negatively impact our liquidity, cause us to default under covenants in our indebtedness, cause our credit ratings to be downgraded, restrict our access to capital markets or otherwise materially adversely affect our business, financial condition, results of operations and cash flows.

The failure by our U.S. subsidiaries to obtain current and future asbestos-related insurance recoveries could materially adversely affect our business, financial condition, results of operations and cash flows.

The asbestos-related asset recorded on our consolidated balance sheet as of December 31, 2013 represents our best estimate of insurance recoveries from settled and expected future insurance recoveries relating to our U.S. liability for pending and estimated future asbestos claims through 2028.

Over the last several years, certain of our subsidiaries have entered into settlement agreements calling for insurers to make lump-sum payments, as well as payments over time, for use by our subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for portions of out-of-pocket costs previously incurred. Our subsidiaries have reached agreements with certain of their insurers to settle their disputed asbestos-related insurance coverage. As a result of these settlements, we increased our asbestos-related insurance recovery assets and recorded settlement gains. However, certain of the settlements with insurance companies during the past several years were for fixed dollar amounts that do not change as the liability changes. Accordingly, increases in the asbestos-related liabilities would not result in an equal increase in the insurance recovery assets and we would have to fund the difference, which would reduce our cash flows and working capital.

Additionally, our ability to continue to recover under these insurance policies is also dependent upon the financial solvency of our insurers. Our insurance recoveries may be limited by future insolvencies among our insurers. We have not assumed recovery in the estimate of our asbestos-related insurance recovery assets from any of our currently insolvent insurers. Other insurers may become insolvent in the future and our insurers may fail to reimburse amounts owed to us on a timely basis. If we fail to realize expected insurance recoveries, or experience delays in receiving material amounts from our insurers, our business, financial condition, results of operations and cash flows could be materially adversely affected.

 

19


Table of Contents

A number of asbestos-related claims have been received by our subsidiaries in the United Kingdom. To date, these claims have been substantially covered by insurance policies and proceeds from the policies have been paid directly to the plaintiffs. The timing and amount of asbestos claims that may be made in the future, the financial solvency of the insurers and the amounts that may be paid to resolve the claims are uncertain. The insurance carriers’ failure to make payments due under the policies could materially adversely affect our business, financial condition, results of operations and cash flows.

Some of our subsidiaries in the United Kingdom have received claims alleging personal injury arising from exposure to asbestos in connection with work performed, or heat exchange devices assembled, installed and/or sold, by our subsidiaries. We expect these subsidiaries to be named as defendants in additional suits and claims brought in the future. To date, insurance policies have provided coverage for substantially all of the costs incurred in connection with resolving asbestos claims in the United Kingdom. In our consolidated balance sheet as of December 31, 2013, the total of our U.K. asbestos-related insurance recovery assets substantially covers the total of our U.K. asbestos-related liabilities, which are comprised of an estimated liability relating to open (outstanding) claims and an estimated liability relating to future unasserted claims through 2028. Our ability to continue to recover under these insurance policies is dependent upon, among other things, the timing and amount of asbestos claims that may be made in the future, the financial solvency of our insurers and the amounts that may be paid to resolve the claims. These factors could significantly limit our insurance recoveries, which could materially adversely affect our business, financial condition, results of operations and cash flows.

Risks Related to Our Financial Reporting and Corporate Governance

Our use of the percentage-of-completion accounting method could result in a reduction or elimination of previously reported profits.

A substantial portion of our operating revenues, cost of operating revenues and contract profit are recognized using the percentage-of-completion method of accounting. Under this method of accounting, the earnings or losses recognized on individual contracts during a reporting period are based on estimates of the percentage of project completion along with contract revenues, costs and profitability. Revisions to estimated revenues and estimated costs can and do result in changes to previously reported revenues, costs and profits. For further information on our revenue recognition methodology, please refer to Note 1, “Summary of Significant Accounting Policies—Revenue Recognition on Long-Term Contracts,” to the consolidated financial statements included in this annual report on Form 10-K.

An impairment of all or part of our goodwill and/or our intangible assets or an impairment of our equity interest investments could materially adversely impact our results of operations and shareholders’ equity.

As of December 31, 2013, we had goodwill of $169,800, other intangible assets, net of $113,500 and equity interest investments of $180,300 on our consolidated balance sheet. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Presently, goodwill exists in five of our reporting units – one within our Global Power Group business segment and four within our Global E&C Group business segment. In the fourth quarter of each year, we evaluate goodwill at each reporting unit based on assumptions used to estimate the fair value of our reporting units and assess recoverability, and impairments, if any, which are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. Intangible assets with determinable useful lives are amortized over their respective estimated useful lives and reviewed for impairment together with other tangible long-lived assets whenever events or circumstances indicate that an impairment may exist. Additionally, the return on our equity interest investments is dependent on the financial results of these projects. As a result, we could recognize losses or an impairment on our equity interest investments based on the financial results of these projects. An impairment of all or a significant part of our goodwill, intangible assets and/or equity interest investments could materially adversely impact our results of operations and shareholders’ equity.

 

20


Table of Contents

Registered holders who acquired our shares after our redomestication to Switzerland must apply for enrollment in our share register as shareholders with voting rights in order to have voting rights; we may deny such registration under certain circumstances.

To be able to exercise voting rights, registered holders of our shares who acquired our shares after our redomestication to Switzerland in 2009 must apply to us for enrollment in our share register as shareholders with voting rights. Our board of directors may refuse to register holders of shares as shareholders with voting rights based on certain grounds. In particular, under our articles of association, no shareholder will be registered with voting rights for 10% or more of our share capital as recorded in the commercial register unless determined otherwise by our board of directors, subject to exceptions for Cede & Co. and other nominees of clearing organizations. One condition to the Offer is that our shareholders agree to remove this 10% voting limitation (See Item 1, “Business—Pending Exchange Offer and Our Acquisition by AMEC plc”.) Only shareholders that are registered as shareholders with voting rights on the relevant record date are permitted to participate in and vote at a general shareholders’ meeting. Registered holders who received our shares as a result of our redomestication to Switzerland were registered as shareholders with voting rights and shareholders who hold in “street name” will be entitled to participate in and vote at a general shareholders’ meeting through Cede & Co.

There are provisions in our articles of association that may reduce the voting rights of our registered shares.

Our articles of association provide that shareholders have one vote for each registered share held by them and, provided they are registered in our share register, are entitled to vote at all meetings of shareholders. However, our articles of association provide that shareholders whose “controlled shares” (as defined in the articles of association) represent 10% or more of our total voting shares are limited to voting one vote less than 10% of the total voting rights of our share capital as registered with the commercial register. This provision is intended to prevent the possibility of our company becoming a controlled foreign corporation for U.S. federal income tax purposes, which could have certain adverse U.S. federal income tax consequences to U.S. persons who own (directly, indirectly or under applicable constructive ownership rules) 10% or more of our voting shares. It may also have an anti-takeover effect by making it more difficult for a third party to acquire us without the consent of our board of directors. Under our articles of association, our board of directors has the authority to interpret and grant exceptions to this provision. One condition to the Offer is that our shareholders agree to remove this 10% voting limitation (See Item 1, “Business—Pending Exchange Offer and Our Acquisition by AMEC plc”.)

Recent Swiss legislation strengthens shareholders’ rights in a manner that may negatively impact our ability to attract and retain members of our board of directors and executive management.

In March 2013, Swiss voters passed an initiative to amend the Swiss constitution. The constitutional amendment must be implemented by a say-on-pay bill, which must be drafted and passed by the Swiss parliament. Until that time, the Swiss Federal Council has enacted a transitional implementation ordinance, so that the new constitutional principles became effective as of January 1, 2014. Among other things, the initiative strengthened shareholders’ rights and increased shareholder influence on the compensation for members of the board of directors and executive management of Swiss corporations which are listed on Swiss or other stock exchanges, including stock exchanges in the U.S. In particular, the initiative and the implementation ordinance:

 

    require that shareholders of such companies vote annually to approve, with binding effect, the aggregate amount of variable and fixed compensation paid to our directors and members of the executive management and that our articles of association, which must be approved by our shareholders, must contain certain provisions addressing the structure and timing of the shareholders’ annual vote on compensation and particular compensation (including equity and similar awards) of our directors and members of the executive management, and

 

    prohibits certain other payments to our directors and members of the executive management (as described below).

 

21


Table of Contents

The initiative also provides for penal sanctions in case of breach of certain of its principles.

The implementation ordinance provides for certain transitional periods. The implementation ordinance requires our shareholders to annually approve, beginning in 2015, the compensation to our directors and members of our executive management.

Further, our articles of association must also contain, in addition to the provisions noted above, provisions regarding:

 

    the term of employment or other agreements with our directors and members of our executive management;

 

    the maximum number of positions directors or members of our executive management may hold with other companies outside the Foster Wheeler consolidated group; and

 

    performance-related compensation as well as granting of equity awards, options and similar rights to our directors and members of our executive management in order for such compensation or awards to be permissible.

The addition of these provisions to our articles of association, and thus the respective requirements stated in those provisions, will be subject to our shareholders’ approval. Further various types of compensation for our directors and members of executive management will, in certain circumstances subject to a transitional period ending on December 31, 2015, no longer be permissible. This includes in particular termination payments (golden parachutes), compensation paid in advance, and individual payments of premiums for buying or selling companies or parts thereof. Accordingly, employment agreements with members of executive management which are not in line with the foregoing restrictions have to be amended so that they comply with the implementation ordinance as of January 1, 2016 at the latest. Loans, credits, pensions (other than occupational retirement benefits) and performance-related compensation are only permitted if provided for in our articles of association.

The market for experienced and qualified executive talent in our industry is competitive, and our ability to retain such talent is important to our success. The restrictions resulting from the enactment of this Swiss constitutional amendment may—in particular if our shareholders do not approve changes to our articles of association necessary to allow performance-related compensation or the granting of equity awards as described above – negatively impact our ability to compete with non-Swiss companies in order to attract and retain the best people for our board of directors and executive management, which could adversely affect our business, financial condition, results of operations and cash flows.

Our status as a Swiss corporation may limit our flexibility with respect to certain aspects of capital management.

Swiss law allows our shareholders to authorize share capital that can be issued by the board of directors without further shareholder approval. Such authorization is limited to 50 percent of the issued share capital at the time of creation and expires after two years at the latest and must therefore be renewed by our shareholders every two years. Additionally, subject to specified exceptions, including exceptions explicitly described in our articles of association, Swiss law grants preemptive rights to existing shareholders to subscribe for new issuances of shares. Swiss law does not provide as much flexibility in the various terms that can attach to different classes of shares as the laws of some other jurisdictions. In the event we need to raise share capital at a time when the trading price of our shares is below the CHF 3.00 (equivalent to U.S. $3.37, based on a foreign exchange rate of CHF 0.8910 to U.S. $1.00 on December 31, 2013) par value of the shares, we will need to obtain the approval of our shareholders to decrease the par value of our issued shares or issue another class of shares with a lower par value. Any reduction in par value would decrease our par value available for future repayment of share capital not subject to Swiss withholding tax. In addition, we will not be able to issue options under our various compensation and benefit plans with an exercise price below the par value, which could limit the flexibility of our compensation arrangements. Swiss law also reserves for approval by shareholders many corporate actions over which a board of directors would have authority

 

22


Table of Contents

in some other jurisdictions. For example, cancellation of treasury shares and dividends, including the dividend described above under Item 1, “Business— Proposed Dividend”, must be approved by shareholders. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided substantial benefits to our shareholders.

If we elect to declare dividends, we would be required to declare such dividends in Swiss francs and any currency fluctuations between the U.S. dollar and the Swiss franc will affect the dollar value of the dividends we pay.

Under Swiss corporate law, if we elect to declare dividends, including distributions through a reduction in par value, we would be required to declare such dividends in Swiss francs. Dividend payments will be made by our transfer agent in U.S. dollars converted at the applicable exchange rate shortly before the payment date. As a result, shareholders may be exposed to fluctuations in the exchange rate between the date used for purposes of calculating the Swiss franc amount of any proposed dividend or par value reduction and the relevant payment date, which will, in case of dividends distributed by way of a reduction in par value, not be shorter than two months and could be as long as a year. Although we try, to the extent permitted by law, to protect shareholders receiving dividends from such currency fluctuations, we cannot completely limit this risk.

We may not be able to make distributions without subjecting our shareholders to Swiss withholding tax.

If we are not successful in our efforts to make distributions, if any, through a reduction of par value or pay dividends, if any, out of qualifying capital contribution reserves as distributions free of withholding tax, then any dividends paid by us will generally be subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution and paid to the Swiss Federal Tax Administration, however the withholding tax might be reclaimed to a certain extent by the shareholder based on an applicable double tax convention. A U.S. tax resident shareholder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which we refer to as the “U.S.-Swiss Treaty,” may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting stock, or for a full refund in the case of qualified pension funds). Capital distribution payments in the form of a par value reduction or payment of a dividend out of qualifying capital contribution reserves are not subject to Swiss withholding tax. We intend to pay a one-time dividend of $0.40 per share (See Item 1, “Business— Proposed Dividend”) from capital contribution reserves qualifying as distributions free of withholding tax. However, there can be no assurance that our shareholders will approve such dividend out of qualifying capital contribution reserves; that we in the future will be able to meet the other legal requirements for a reduction in par value or a dividend out of qualifying capital contribution reserves; or that Swiss withholding rules or corporate law will not be changed in the future. In addition, over the long term, the amount of par value available for us to use for par value reductions will be limited. If we are unable to make a distribution through a reduction in par value or pay a dividend out of qualifying capital contribution reserves or if we are unable to meet the other legal requirements for dividend payment, we may not be able to make distributions without subjecting our shareholders to Swiss withholding taxes on the dividends paid.

We have anti-takeover provisions in our articles of association that, together with certain provisions under Swiss corporate law, may discourage a change of control.

Our articles of association and Swiss law contain provisions that could make it difficult for a third-party to acquire us without the consent of our board of directors. These provisions provide for:

 

    Limiting the voting rights of shareholders whose “controlled shares” (as defined in the articles of association) represent 10% or more of our total voting shares to one vote less than 10% of the total voting rights of our share capital as registered with the Swiss commercial register (as described above under “Pending Exchange Offer and Our Acquisition by AMEC plc”, the Offer is subject to, among other things, approval by our shareholders of certain amendments to our articles of association to remove these voting limitations, as well as the limitation that no shareholder can be registered as holder of more than 10% of the FW shares).

 

23


Table of Contents
    Under Swiss corporate law, merger and demerger transactions require the affirmative vote of holders of at least 66 2/3% of the shares represented at the applicable shareholders meeting. In addition, under certain circumstances (for example, in the case of so-called “cashout” or “squeezeout” mergers) a merger requires the affirmative vote of the holders of at least 90% of shares.

 

    Any shareholder who wishes to propose any business or to nominate a person or persons for election as a director at any annual meeting may only do so if advance notice is given to our Corporate Secretary.

These provisions could make it difficult for a third-party to acquire us, even if the third-party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.

We are a Swiss company and it may be difficult to enforce judgments against us or our directors and executive officers.

Foster Wheeler AG is a Swiss corporation. As a result, the rights of our shareholders are governed by Swiss law and by our articles of association and organizational regulations. The rights of shareholders under Swiss law may differ from the rights of shareholders of companies of other jurisdictions. A substantial portion of our assets are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against us or our directors based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Switzerland will enforce judgments obtained in other jurisdictions, including in the United States, under the securities laws of those jurisdictions or entertain actions in Switzerland under the securities laws of other jurisdictions.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

24


Table of Contents
ITEM 2. PROPERTIES

Globally, our facilities provide approximately 4.5 million square feet of space for our operations. The following table provides the location and general use of our materially important owned or leased physical properties by business segment as of December 31, 2013. All or part of the listed properties may be leased or subleased to other affiliates. All properties are in good condition and adequate for their intended use.

 

Business Segment and Location

  

Principal Use

   Owned/Leased  

Corporate and Finance Group

     
Zug, Switzerland    Registered office      Leased   
Hampton, New Jersey    Office      Leased   
Reading, United Kingdom    Principal executive offices      Leased   

Global Engineering & Construction Group

     
Alberta, Canada    Office & engineering      Leased   
Avellino, Italy(1)    Wind farm towers      Owned & leased   
Cary, North Carolina    Office & engineering      Leased   
Chennai, India    Office & engineering      Leased   
Glasgow, Scotland(2)    Office & engineering      Owned   
Gurgaon, India    Office & engineering      Leased   
Hampton, New Jersey    Office & engineering      Leased   
Houston, Texas    Office & engineering      Leased   
Hull, England    Office & engineering      Leased   
Istanbul, Turkey    Office & engineering      Leased   
Kolkata, India    Office & engineering      Leased   
Kuala Lumpur, Malaysia    Office & engineering      Leased   
LaPorte, Texas    Office      Leased   
Madrid, Spain    Office & engineering      Leased   
Mexico City, Mexico    Office & engineering      Leased   
Middlesborough, United Kingdom    Office & engineering      Leased   
Midrand, South Africa    Office & engineering      Leased   
Milan, Italy    Office & engineering      Leased   
Monterrey, Mexico    Office & engineering      Leased   
Paris, France    Office, engineering & warehouse      Leased   
Philadelphia, Pennsylvania    Office & engineering      Leased   
Provence, France    Office & engineering      Leased   
Reading, United Kingdom    Office, engineering & warehouse      Leased   
Santiago, Chile    Office & engineering      Leased   
Shanghai, China    Office & engineering      Leased   
Singapore    Office & engineering      Leased   
South Jordan, Utah    Office & engineering      Leased   
Sriracha, Thailand    Office & engineering      Leased   

Global Power Group

     
Espoo, Finland    Office      Leased   
Hampton, New Jersey    Office & engineering      Leased   
Krefeld, Germany    Manufacturing & office      Leased   
Kurikka, Finland    Manufacturing, office & warehouse      Leased   
Martinez, California    Cogeneration plant      Owned   
McGregor, Texas    Manufacturing & office      Owned   
Melbourne, Florida    Office & warehouse      Leased   
Norrkoping, Sweden    Manufacturing & office      Leased   
Rayong, Thailand    Manufacturing & office      Leased   
Shanghai, China    Office & engineering      Leased   
Sosnowiec, Poland    Manufacturing, office & engineering      Leased   
Talcahuano, Chile    Cogeneration plant-facility site      Leased   
Tarragona, Spain    Manufacturing & office      Owned   
Varkaus, Finland(3)    Manufacturing & office      Owned & leased   
Xinhui, Guangdong, China(4)    Manufacturing, office & warehouse      Owned & leased   

 

(1)  The two towers are owned and the land for two towers is leased.
(2)  Portion of the facility is leased to third parties.
(3)  The manufacturing facility is owned and office facility is leased.
(4)  The manufacturing and office facilities are owned with additional leased warehouse facilities.

 

25


Table of Contents
ITEM 3. LEGAL PROCEEDINGS

For information on asbestos claims and other material litigation affecting us, see Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Estimates” and Note 16, “Litigation and Uncertainties,” to our consolidated financial statements included in this annual report on Form 10-K.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

26


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following chart lists the quarterly high and low sales prices of our shares on the NASDAQ Global Select Market during 2013 and 2012.

 

     Quarters Ended  
     March 31,      June 30,      September 30,      December 31,  

2013 Share prices:

           

High

   $ 27.13       $ 24.89       $ 26.79       $ 33.08   

Low

   $ 19.35       $ 19.29       $ 20.20       $ 25.59   

2012 Share prices:

           

High

   $ 26.08       $ 24.49       $ 24.73       $ 25.32   

Low

   $ 18.97       $ 15.80       $ 15.26       $ 20.88   

We had 2,259 shareholders of record, as defined under Regulation S-K Item 201, and 99,058,160 registered shares outstanding as of February 14, 2014.

We have not declared or paid a cash dividend since July 2001.

On February 26, 2014, our Board of Directors proposed a dividend, to be paid from dividend reserves originating from capital contribution reserves, of $0.40 per outstanding share to be paid to the shareholders of record on May 7, 2014, the day of our 2014 Annual General Meeting. The covenants of our senior unsecured credit agreement do not limit our ability to pay this proposed dividend, though the release of certain qualifying capital contributions reserves, the allocation of such amounts to dividend reserves and the dividend payment are subject to shareholder approval at our 2014 Annual General Meeting.

Performance Graph

On February 9, 2009, as a result of our redomestication to Switzerland, Foster Wheeler AG became the parent company of our group of companies and its registered shares were listed on the NASDAQ Global Select Market under the symbol “FWLT,” the same symbol under which the common shares of the former parent company of our group of companies, Foster Wheeler Ltd., were previously listed. The performance information below relates to sales prices of Foster Wheeler Ltd. common shares for periods prior to February 9, 2009.

The stock performance graph below shows how an initial investment of $100 in our shares would have compared over a five-year period with an equal investment in (1) the S&P 500 Index and (2) an industry peer group index that consists of several peer companies (referred to as the “Peer Group” and the “Old Peer Group”) as defined below. We changed our industry peer group index to remove one company that was included in the Old Peer Group. Accordingly, for the year ended December 31, 2013, we are replacing the Old Peer Group with the Peer Group. The companies included in each of the Old Peer Group and the Peer Group are stated below.

 

 

27


Table of Contents

LOGO

In the preparation of the line graph, we used the following assumptions: (i) $100 was invested in each of our shares, the S&P 500 Index, the Peer Group and the Old Peer Group on December 26, 2008, (ii) dividends, if any, were reinvested, and (iii) the investments in the individual companies within the two peer groups were weighted on the basis of market capitalization.

 

     December 26,      December 31,      December 31,      December 31,      December 31,      December 31,  
     2008      2009      2010      2011      2012      2013  

Foster Wheeler AG

   $ 100.00       $ 125.60       $ 147.27       $ 81.66       $ 103.75       $ 140.79   

S&P 500 Index

     100.00         130.88         150.59         153.77         178.38         236.15   

Peer Group (1)

     100.00         124.95         187.59         153.84         172.21         235.52   

Old Peer Group (2)

     100.00         127.10         186.90         152.72         177.25         236.08   

 

(1) The following companies comprise the Peer Group: Chicago Bridge & Iron Company N.V., Fluor Corporation, Jacobs Engineering Group Inc., KBR, Inc. and McDermott International, Inc. The Peer Group consists of companies that were chosen by us for benchmarking the performance of our registered shares.
(2) The following companies comprise the Old Peer Group: Chicago Bridge & Iron Company N.V., Fluor Corporation, Jacobs Engineering Group Inc., KBR, Inc., McDermott International, Inc. and Shaw Group, Inc. (acquired by Chicago Bridge & Iron Company N.V. on February 13, 2013). The Old Peer Group consists of companies that were chosen by us for benchmarking the performance of our registered shares. Shaw Group, Inc. is not included in the Old Peer Group for the year ended December 31, 2013 as Shaw Group, Inc. was acquired by another company on February 13, 2013. The Old Peer Group consists of companies that were compiled by us in 2007 for benchmarking the performance of our common shares; we have used this peer index since 2007 until adopting the Peer Group noted above.

Issuer Purchases of Equity Securities (amounts in thousands of dollars, except share data and per share amounts)

On September 12, 2008, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $750,000 of our outstanding shares and the designation of the repurchased shares for cancellation. On November 4, 2010, our Board of Directors proposed an increase to our share repurchase program of $335,000, which was approved by our shareholders at an extraordinary general meeting on February 24, 2011. On February 22, 2012, our Board of Directors proposed an additional increase to our share

 

28


Table of Contents

repurchase program of approximately $419,398, which was approved by our shareholders at our 2012 annual general meeting on May 1, 2012. Under Swiss law, the repurchase of shares in excess of 10% of the company’s share capital must be approved in advance by the company’s shareholders.

For further information related to our share repurchase program and the cancellation of shares under Swiss law, please refer to Note 1 to the consolidated financial statements included in this annual report on Form 10-K.

The following table provides information with respect to purchases under our share repurchase program during the fourth quarter of 2013.

 

Fiscal Month

   Total Number
of Shares
Purchased (1)
     Average
Price
Paid per
Share
     Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)
     Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs
 

October 1, 2013 through October 31, 2013

     —         $ —           —         $ —     

November 1, 2013 through November 30, 2013

     —           —           —           —     

December 1, 2013 through December 31, 2013

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

Total

     —         $ —           —         $ 270,054   
  

 

 

    

 

 

    

 

 

    

 

(1) No shares were repurchased pursuant to our share repurchase program during the fourth quarter of 2013. As of December 31, 2013, we were authorized to spend up to an additional $270,054 to repurchase our outstanding shares. The repurchase program has no expiration date and may be suspended for periods or discontinued at any time. We did not repurchase any shares other than through our publicly announced repurchase program.
(2) As of December 31, 2013, an aggregate of 50,502,778 shares were repurchased for a total of $1,234,344 since the inception of the repurchase program announced on September 12, 2008.

 

29


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

FOSTER WHEELER AG

COMPARATIVE FINANCIAL STATISTICS

(amounts in thousands of dollars, except share data and per share amounts)

 

    2013     2012     2011     2010     2009  

Statement of Operations Data:

         

Operating revenues

  $ 3,306,450      $ 3,391,394      $ 4,458,108      $ 4,047,242      $ 5,034,033   

Income from continuing operations before income taxes(1)

    153,008        225,356        233,913        280,397        442,293   

Provision for income taxes

    52,166        62,267        58,514        65,836        89,272   

Income from continuing operations

    100,842        163,089        175,399        214,561        353,021   

Net income attributable to noncontrolling interests

    3,940        13,874        14,345        15,302        11,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to Foster Wheeler AG

  $ 96,902      $ 149,215      $ 161,054      $ 199,259      $ 341,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share from continuing operations:

         

Basic

  $ 0.97      $ 1.39      $ 1.34      $ 1.58      $ 2.70   

Diluted

  $ 0.96      $ 1.39      $ 1.34      $ 1.57      $ 2.69   

Shares outstanding:

         

Basic weighted-average number of shares outstanding

    100,301,834        107,054,284        120,085,704        126,032,130        126,541,962   

Effect of dilutive securities

    1,084,839        259,255        418,779        544,725        632,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average number of shares outstanding

    101,386,673        107,313,539        120,504,483        126,576,855        127,174,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31,
2013
    December 31,
2012
    December 31,
2011
    December 31,
2010
    December 31,
2009
 

Balance Sheet Data:

         

Current assets

  $ 1,583,741      $ 1,613,542      $ 1,523,187      $ 1,994,500      $ 1,941,555   

Current liabilities

    1,207,958        1,176,187        1,090,984        1,210,674        1,282,004   

Working capital

    375,783        437,355        432,203        783,826        659,551   

Land, buildings and equipment, net

    279,981        285,402        277,421        294,477        325,749   

Total assets

    2,740,272        2,733,924        2,613,880        3,060,477        3,187,738   

Long-term debt (including current installments)

    126,232        137,706        149,111        164,570        190,574   

Total temporary equity

    15,664        8,594        4,993        4,935        2,570   

Total Foster Wheeler AG shareholders’ equity

    750,099        713,990        687,747        967,693        831,517   

Other Data:

         

Backlog, measured in terms of future revenues, end of year(2)

  $ 4,004,600      $ 3,648,000      $ 3,626,100      $ 3,979,500      $ 4,112,800   

New orders, measured in terms of future revenues(2)

    3,855,500        3,449,500        4,285,800        4,105,800        3,481,700   

 

(1)  Income from continuing operations before income taxes includes the following:

 

30


Table of Contents
     2013      2012      2011      2010      2009  

Net asbestos-related provision

   $ 30,200       $ 30,500       $ 9,900       $ 5,400       $ 26,400   

Curtailment gain on closure of the U.K. pension plan

     —           —           —           20,100         —     

Charges for severance-related postemployment benefits

     22,300         6,200         2,700         10,800         12,400   

Charge for equity interest investment impairment in our Global E&C Group(3)

     22,400         —           —           —           —     

 

(2)  The backlog and new orders include amounts for discontinued operations for periods prior to 2013, which were insignificant based on our consolidated balances.
(3)  Impairment charge related to our equity interest investment in a waste-to-energy project in Italy. Please refer to Note 5 to the consolidated financial statements included in this annual report on Form 10-K for further information.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(amounts in thousands of dollars, except share data and per share amounts)

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition and results of operations for the periods indicated below. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included in this annual report on Form 10-K.

Safe Harbor Statement

This management’s discussion and analysis of financial condition and results of operations, other sections of this annual report on Form 10-K and other reports and oral statements made by our representatives from time to time may contain forward-looking statements that are based on our assumptions, expectations and projections about Foster Wheeler AG and the various industries within which we operate. These include statements regarding our expectations about revenues (including as expressed by our backlog), our liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of related insurance recoveries. Such forward-looking statements by their nature involve a degree of risk and uncertainty. We caution that a variety of factors, including but not limited to the factors described in Item 1A, “Risk Factors” and the following, could cause business conditions and our results to differ materially from what is contained in forward-looking statements:

 

  the timing and success of the proposed offer and acquisition of us by AMEC plc,

 

  the risk that our business will be adversely impacted during the pending proposed offer and acquisition of us by AMEC plc,

 

  benefits, effects or results of our redomestication to Switzerland;

 

  deterioration in global economic conditions;

 

  changes in investment by the oil and gas, oil refining, chemical/petrochemical and power generation industries;

 

  changes in the financial condition of our customers;

 

  changes in regulatory environments;

 

  changes in project design or schedules;

 

  contract cancellations;

 

  changes in our estimates of costs to complete projects;

 

  changes in trade, monetary and fiscal policies worldwide;

 

  compliance with laws and regulations relating to our global operations;

 

31


Table of Contents
  currency fluctuations;

 

  war, terrorist attacks, natural disasters and/or adverse weather conditions affecting facilities either owned by us or where equipment or services are or may be provided by us;

 

  interruptions to shipping lanes or other methods of transit;

 

  outcomes of pending and future litigation, including litigation regarding our liability for damages and insurance coverage for asbestos exposure;

 

  protection and validity of our patents and other intellectual property rights;

 

  increasing global competition;

 

  compliance with our debt covenants;

 

  recoverability of claims against our customers and others by us and claims by third parties against us; and

 

  changes in estimates used in our critical accounting policies.

Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us.

In addition, this management’s discussion and analysis of financial condition and results of operations contains several statements regarding current and future general global economic conditions. These statements are based on our compilation of economic data and analyses from a variety of external sources. While we believe these statements to be reasonably accurate, global economic conditions are difficult to analyze and predict and are subject to significant uncertainty and as a result, these statements may prove to be wrong. The challenges and drivers for each of our business segments are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments,” within this Item 7.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed or furnished with the Securities and Exchange Commission, or SEC.

Overview

We operate through two business groups – the Global Engineering & Construction Group, which we refer to as our Global E&C Group, and our Global Power Group. In addition to these two business groups, we also report corporate center expenses, our captive insurance operation and expenses related to certain legacy liabilities, such as asbestos and other expenses, in the Corporate and Finance Group, which we refer to as our C&F Group.

We have been exploring, and intend to continue to explore, acquisitions within the engineering and construction industry to strategically complement or expand on our Global E&C Group’s technical capabilities or access to new market segments. During the second quarter of 2013, we acquired an upstream consultancy business located in the United Kingdom that specializes in field development and project decision support, focused on the evaluation and implementation of oil and gas field developments covering greenfield and brownfield assets. Also during the second quarter of 2013, we acquired an engineering and project management business located in Mexico with experience in both offshore and onshore upstream oil and gas, downstream oil and gas and power projects. Additionally, during the first quarter of 2013, we acquired a U.S.-based business that specializes in the management of construction and commissioning of pharmaceutical and biotech facilities and which also has the capabilities to manage the engineering, procurement and construction of such facilities. In addition, in the fourth quarter of 2012, we acquired all of the outstanding shares of a privately held multi-discipline full service engineering, procurement, and construction management business located in North America. The results of

 

32


Table of Contents

operations of these acquired businesses have been included in our Global E&C Group. We are also exploring acquisitions within the power generation industry to complement the products which our Global Power Group offers. There is no assurance that we will consummate any acquisitions in the future. Please refer to Note 2 to the consolidated financial statements in this annual report on Form 10-K for further information regarding our acquisition activities in 2013, 2012 and 2011.

The above acquisitions have been included in our consolidated financial results as of their respective acquisition dates. Throughout this Item 7, where period-to-period financial results have been impacted by these acquisitions, particularly our acquisitions in the fourth quarter of 2012 and the first quarter of 2013, we have referred to these acquisitions as “businesses acquired subsequent to the beginning of 2012.”

On April 17, 2013, our Board of Directors approved a plan to sell our waste-to-energy facility in Camden, New Jersey and we completed the sale of the facility in August 2013. The presentation of the financial results and cash flows for all periods presented, and the asset and liability balances of this business for the periods prior to the completion of the sale, have been reclassified on our consolidated statement of operations, consolidated balance sheet and consolidated statement of cash flows under the respective captions related to discontinued operations. These reclassifications have also been made in the notes to our consolidated financial statements and in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section. Our Camden facility was formerly included in our Global Power Group business segment.

We completed the sale of our Camden facility in August 2013. Based on the proceeds received and costs of disposal, we recognized a gain of $300 within income/(loss) from discontinued operations before income taxes on the consolidated statement of operations during 2013. Please refer to Note 18 to the consolidated financial statements in this annual report on Form 10-K for further information regarding our discontinued operations.

On February 13, 2014, we entered into an Implementation Agreement (the “Implementation Agreement”) with AMEC plc (“AMEC”) relating to the acquisition of all of the issued and to be issued registered shares, par value CHF 3.00 per share, of Foster Wheeler AG (the “FW shares”) by AMEC. On the terms and subject to the conditions of the Implementation Agreement, AMEC will commence an exchange offer (the “Offer”) to acquire all of the FW shares. Please refer to Note 19 to the consolidated financial statements in this annual report on Form 10-K for further information regarding the AMEC Offer.

On February 26, 2014, our Board of Directors approved a proposal to our shareholders for a one-time dividend of $0.40 per share. Please refer to Note 19 to the consolidated financial statements in this annual report on Form 10-K for further information regarding our proposed dividend.

Summary Financial Results

Continuing Operations

Our summary financial results for 2013, 2012 and 2011 from continuing operations are as follows:

 

    2013     2012     2011  

Operating revenues(1)

  $ 3,306,450      $ 3,391,394      $ 4,458,108   

Contract profit(1)

    559,049        590,043        539,668   

Selling, general and administrative expenses(1)

    357,682        334,075        309,380   

Income attributable to Foster Wheeler AG

  $ 96,902      $ 149,215      $ 161,054   

Earnings per share:

     

Basic

  $ 0.97      $ 1.39      $ 1.34   

Diluted

  $ 0.96      $ 1.39      $ 1.34   

Cash and cash equivalents (at period end)(2)

  $ 556,190      $ 582,322      $ 718,049   

Net cash provided by operating activities(2)

  $ 192,405      $ 92,369      $ 183,946   

 

(1)  Please refer to the section entitled “—Results of Operations-Continuing Operations” within this Item 7 for further discussion.
(2)  Please refer to the section entitled “—Liquidity and Capital Resources” within this Item 7 for further discussion.

 

33


Table of Contents

EBITDA, as discussed and defined within the section entitled “—Results of Operations–Continuing Operations-EBITDA” within this Item 7, is used to measure the operating performance of our operating groups and is referred to below in our discussion of income from continuing operations attributable to Foster Wheeler AG.

2013 vs. 2012

Income from continuing operations attributable to Foster Wheeler AG decreased in 2013, compared to 2012. This decrease was primarily the result of the unfavorable pre-tax impact of decreased EBITDA. Our Global Power Group experienced a decrease in EBITDA of $57,500 and our Global E&C Group experienced a decrease in EBITDA of $8,300 in 2013, compared to 2012. The decrease in EBITDA was net of a favorable change in EBITDA from our C&F Group of $10,200, which was mainly driven by decreased SG&A expenses.

2012 vs. 2011

Income from continuing operations attributable to Foster Wheeler AG decreased in 2012, compared to 2011. Our Global Power Group experienced an increase in EBITDA of $26,500 during 2012, compared to 2011, whereas our Global E&C Group experienced a decrease in EBITDA of $18,300 when comparing the same two years. The net increase in EBITDA from our two business groups was offset by a decrease in EBITDA in our C&F Group of $9,700, which included the unfavorable impact of an increased asbestos-related provision of $20,600 in 2012, compared to 2011. Additionally, our results in 2012 were unfavorably impacted by a higher effective tax rate of 29.3%, compared to an effective tax rate of 24.9% in 2011.

Please refer to the section entitled “—Results of Operations-Continuing Operations-Business Segments,” within this Item 7, for further discussion related to EBITDA results for both of our operating groups.

Discontinued Operations

Income from discontinued operations attributable to Foster Wheeler AG was $300 in 2013, an increase of $13,500 compared to 2012. The increase was primarily the net result of the favorable impact resulting from an impairment charge of $11,500 recognized in 2012 and decreased depreciation of $4,800 in 2013, partially offset by an additional impairment charge of $3,900 recognized in 2013. The decrease in depreciation expense was the result of not recognizing depreciation expense on our Camden facility once the business met the accounting criteria as a business held for sale for the period prior to its sale in 2013, as discussed above.

Please refer to Note 18 to the consolidated financial statements in this annual report on Form 10-K for further information regarding our discontinued operations.

New Orders and Backlog of Unfilled Orders

The tables below summarize our new orders and backlog of unfilled orders by period. These tables include amounts from discontinued operations for new orders in all three years and for backlog as of December 31, 2012. The discontinued operations new orders and backlog amounts were insignificant based on our consolidated and business group balances.

 

     2013      2012      2011  

New orders, measured in future revenues:

        

Global E&C Group*

   $ 3,162,700       $ 2,860,400       $ 3,024,900   

Global Power Group

     692,800         589,100         1,260,900   
  

 

 

    

 

 

    

 

 

 

Total*

   $ 3,855,500       $ 3,449,500       $ 4,285,800   
  

 

 

    

 

 

    

 

 

 

 

* Amounts for the Global E&C Group include flow-through revenues, as defined in the section entitled —“Results of Operations-Continuing Operations-Operating Revenues” within this Item 7, of $417,200, $462,800, and $1,577,700 for 2013, 2012 and 2011, respectively.

 

34


Table of Contents
     As of December 31,  
     2013      2012  

Backlog of unfilled orders, measured in future revenues

   $ 4,004,600       $ 3,648,000   

Backlog, measured in Foster Wheeler scope*

   $ 3,578,400       $ 2,950,200   

Global E&C Group man-hours in backlog (in thousands)

     21,400         17,000   

 

* As defined in the section entitled “--Backlog and New Orders” within this Item 7.

Please refer to the section entitled “—Backlog and New Orders” within this Item 7 for further detail.

Challenges and Drivers

Our primary operating focus continues to be booking quality new business and effectively and efficiently executing our contracts. The global markets in which we operate are largely dependent on overall economic conditions and global or regional economic growth rates and the resultant demand for oil and gas, electric power, petrochemicals, refined products and minerals and metals. Both of our business groups have been impacted by unfavorable economic growth rates in most of their respective global markets in recent years. Additionally, there is potential downside risk to continued unfavorable global economic growth rates driven primarily by continued sovereign debt and bank funding pressures, the speed and effectiveness of the implementation of government macroeconomic policies in a number of key advanced and emerging economies, slower growth than anticipated in emerging economies, most significantly The People’s Republic of China, or China, and civil unrest. If any of these risks materialize, the ability of both of our business groups to book work could be negatively impacted, which could have a material negative impact on our business.

In the engineering and construction industry, we expect long-term demand to be strong for the end products produced by our clients, and we believe that this long-term demand will continue to stimulate investment by our clients in new, expanded and upgraded facilities. Our clients plan their investments based on long-term time horizons. We believe that global demand for energy, chemicals, minerals and pharmaceuticals will continue to grow over the long-term and that clients will continue to invest in new and upgraded capacity to meet that demand. Global markets in the engineering and construction industry are experiencing intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Clients’ bidding and contract award processes continue to be protracted and some clients have been releasing, and we expect will continue to release, tranches of work on a piecemeal basis. However, we are seeing clients continuing to develop new projects and, after making final investment decisions, moving forward with previously planned projects. This includes a stronger pipeline of projects in North America both in chemicals and natural gas liquefaction, or LNG, due to the availability of cheap gas supply from shale gas. The challenges and drivers for our Global E&C Group are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments-Global E&C Group-Overview of Segment,” within this Item 7.

Global gross domestic product, or GDP, growth is a key driver of demand for power. The slow economic growth in recent years has negatively impacted the demand for our products and services. However, we believe that a gradual upturn in global economic growth will begin as we progress through 2014, which we further believe will improve demand for the products and services of our Global Power Group, compared to recent years. However, a number of constraining market factors continue to impact the markets that we serve. These factors include political and environmental sensitivity regarding coal-fired steam generators in certain geographies and the outlook for continued lower natural gas pricing over the next three to five years in North America, driven by an increasing supply of natural gas, has increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. In addition, the constraints on the global credit market may continue to impact some of our clients’ investment plans as these clients are affected by the availability and cost of financing, as well as their own financial strategies, which could include cash conservation. These factors may continue in the future and

 

35


Table of Contents

could have a material negative impact on our business. The challenges and drivers for our Global Power Group are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments-Global Power Group-Overview of Segment,” within this Item 7.

Results of Operations—Continuing Operations

The following sections provide a discussion of our results of operations from our continuing operations.

Operating Revenues

 

                   2013 vs. 2012           2012 vs. 2011  
     2013      2012      $ Change     % Change     2011     $ Change     % Change  

Global E&C Group

   $ 2,512,587       $ 2,419,327       $ 93,260        3.9   $ 3,443,079      $ (1,023,752     (29.7 )% 

Global Power Group

     793,863         972,067         (178,204     (18.3 )%      1,015,029        (42,962     (4.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,306,450       $ 3,391,394       $ (84,944     (2.5 )%    $ 4,458,108      $ (1,066,714     (23.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We operate through two business groups: our Global E&C Group and our Global Power Group. Please refer to the section entitled “—Business Segments,” within this Item 7, for a discussion of the products and services of our business segments.

The composition of our operating revenues varies from period to period based on the portfolio of contracts in execution during any given period. Our operating revenues are further dependent upon the strength of the various geographic markets and industries we serve and our ability to address those markets and industries.

Our operating revenues by geographic region, based upon where our projects are being executed, for 2013, 2012 and 2011, were as follows:

 

                   2013 vs. 2012            2012 vs. 2011  
     2013      2012      $ Change     % Change     2011      $ Change     % Change  

Africa

   $ 70,008       $ 83,723       $ (13,715     (16.4 )%    $ 158,599       $ (74,876     (47.2 )% 

Asia Pacific

     839,632         1,060,157         (220,525     (20.8 )%      2,011,021         (950,864     (47.3 )% 

Europe

     782,788         859,843         (77,055     (9.0 )%      918,197         (58,354     (6.4 )% 

Middle East

     345,080         249,447         95,633        38.3     270,934         (21,487     (7.9 )% 

North America

     922,247         772,688         149,559        19.4     747,280         25,408        3.4

South America

     346,695         365,536         (18,841     (5.2 )%      352,077         13,459        3.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 3,306,450       $ 3,391,394       $ (84,944     (2.5 )%    $ 4,458,108       $ (1,066,714     (23.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

2013 vs. 2012

Our operating revenues decreased in 2013, compared to 2012, primarily as a result of decreased flow-through revenues of $130,000, as described below. Excluding the impact of the change in flow-through revenues and currency impacts, our operating revenues increased 1% in 2013, compared to 2012. The increase in operating revenues, excluding flow-through revenues and currency fluctuations, during 2013 was the result of increased operating revenues in our Global E&C Group, substantially offset by decreased operating revenues in our Global Power Group. The operating revenues increase in our Global E&C Group included the favorable impact in 2013 related to the businesses acquired subsequent to the beginning of 2012.

Flow-through revenues and costs result when we purchase materials, equipment or third-party services on behalf of our customers on a reimbursable basis with no profit on the materials, equipment or third-party services and where we have the overall responsibility as the contractor for the engineering specifications and procurement or procurement services for the materials, equipment or third-party services included in flow-through costs. Flow-through revenues and costs do not impact contract profit or net earnings.

 

36


Table of Contents

2012 vs. 2011

Our operating revenues decreased in 2012, compared to 2011, primarily as a result of decreased flow-through revenues of $1,014,600, as described below. Excluding the impact of the change in flow-through revenues and currency fluctuations, our operating revenues increased 1% in 2012, compared to 2011. The increase in operating revenues, excluding flow-through revenues and currency fluctuations, during 2012 was the result of increased operating revenues in our Global E&C Group, partially offset by decreased operating revenues in our Global Power Group.

Please refer to the section entitled “—Business Segments,” within this Item 7, for further discussion related to operating revenues and our view of the market outlook for both of our operating groups.

Contract Profit

 

     2013     2012     2011  

Amount

   $ 559,049      $ 590,043      $ 539,668   

$ Change

     (30,994     50,375     

% Change

     (5.3 )%      9.3  

Contract profit is computed as operating revenues less cost of operating revenues. Flow-through amounts are recorded both as operating revenues and cost of operating revenues with no contract profit. Contract profit margins are computed as contract profit divided by operating revenues. Flow-through revenues reduce the contract profit margin as they are included in operating revenues without any corresponding impact on contract profit. As a result, we analyze our contract profit margins excluding the impact of flow-through revenues as we believe that this is a more accurate measure of our operating performance.

2013 vs. 2012

Contract profit decreased during 2013, compared to 2012. The decrease was the net result of decreased contract profit by our Global Power Group, partially offset by increased contract profit by our Global E&C Group. The contract profit increase in our Global E&C Group included the favorable impact in 2013 related to the businesses acquired subsequent to the beginning of 2012.

2012 vs. 2011

Contract profit increased during 2012, compared to 2011. The increase was the result of increased contract profit by both our Global E&C Group and our Global Power Group.

Please refer to the section entitled “—Business Segments,” within this Item 7, for further information related to contract profit and contract profit margins for both of our operating groups.

Selling, General and Administrative (SG&A) Expenses

 

     2013     2012     2011  

Amount

   $ 357,682      $ 334,075      $ 309,380   

$ Change

     23,607        24,695     

% Change

     7.1     8.0  

SG&A expenses include the costs associated with general management, sales pursuit, including proposal expenses, and research and development costs.

 

37


Table of Contents

2013 vs. 2012

SG&A expenses increased in 2013, compared to 2012, primarily as a result of the aggregate impact of the businesses acquired subsequent to the beginning of 2012. The impact of the acquired businesses increased our SG&A expenses by $13,100, much of which was attributable to compensation expense recognized under earnout provisions associated with the acquisitions. The increase in SG&A expenses also included an increase in our charge for severance-related postemployment benefits of $7,300 recognized in 2013 and increased sales pursuit costs of $4,800, partially offset by a charge of $1,900 incurred in 2012 related to our former executive offices in Geneva, Switzerland, as described below. During 2013, our SG&A expenses included severance-related postemployment benefits charges of $5,300 in our Global Power Group, $1,600 in our Global E&C Group and $400 in our C&F Group.

2012 vs. 2011

SG&A expenses increased in 2012, compared to 2011, primarily as a result of increased sales pursuit costs of $18,500, increased general overhead costs of $3,800 and a charge of $1,900 incurred in 2012 to recognize accelerated depreciation expense on our executive offices in Geneva, Switzerland in connection with the decision to relocate our principal executive offices to one of our existing facilities in Reading, United Kingdom.

Other Income, net

 

     2013     2012     2011  

Amount

   $ 23,424      $ 37,490      $ 51,457   

$ Change

     (14,066     (13,967  

% Change

     (37.5 )%      (27.1 )%   

2013

Other income, net in 2013 consisted primarily of equity earnings of $15,400 generated from our investments, primarily from our ownership interests in build, own and operate projects in Chile and Italy. Our 2013 equity earnings from our Global Power Group’s project in Chile were $27,500, whereas our Global E&C Group’s projects in Italy experienced an equity loss of $12,500, inclusive of the impact of an impairment charge of $22,400 on one of our projects. Please refer to the section entitled “—Business Segments-Global E&C Group,” within this Item 7, for further information related to our equity interest investment impairment charge. Additionally, we recognized governmental economic subsidies and other non-income-based tax credits of $2,800.

Other income, net decreased in 2013, compared to 2012, primarily driven by decreased equity earnings in our Global E&C Group’s projects in Italy of $15,200, inclusive of the impact of an impairment charge of $22,400 on one of our projects as noted above, and the unfavorable impact of the inclusion of a gain recognized during 2012 related to the favorable settlement of our claim with a client on a legacy project of $2,000, partially offset by increased equity earnings in our Global Power Group’s project in Chile of $7,200.

2012

Other income, net in 2012 consisted primarily of equity earnings of $23,000 generated from our investments, primarily from our ownership interests in build, own and operate projects in Chile and Italy. Our 2012 equity earnings from our Global Power Group’s project in Chile and our Global E&C Group’s projects in Italy were $20,300 and $2,700, respectively. Additionally, we recognized governmental economic subsidies and other non-income-based tax credits of $5,200.

Other income, net decreased in 2012, compared to 2011, primarily driven by decreased equity earnings in our Global Power Group’s project in Chile of $10,600, decreased equity earnings in our Global E&C Group’s projects in Italy of $7,000 and the unfavorable impact of the inclusion of a $4,000 gain in 2011 related to the revaluation of a contingent consideration liability, partially offset by increased governmental economic subsidies and other non-income-based tax credits of $3,700 and the impact related to the favorable settlement of our claim with a client on a legacy project of $2,000.

 

38


Table of Contents

2011

Other income, net in 2011 consisted primarily of equity earnings of $40,100 generated from our investments, primarily from our ownership interests in build, own and operate projects in Chile and Italy. Our 2011 equity earnings from our Global Power Group’s project in Chile and our Global E&C Group’s projects in Italy were $30,900 and $9,700, respectively. Additionally, we recognized a $4,000 gain in 2011 related to the revaluation of a contingent consideration liability.

For further information related to our equity earnings, please refer to the sections within this Item 7 entitled “—Business Segments-Global Power Group” for our Global Power Group’s project in Chile and “—Business Segments-Global E&C Group” for our Global E&C Group’s projects in Italy, as well as Note 5 to the consolidated financial statements included in this annual report on Form 10-K.

Other Deductions, net

 

     2013     2012     2011  

Amount

   $ 34,615      $ 34,601      $ 43,968   

$ Change

     14        (9,367  

% Change

     0.0     (21.3 )%   

Other deductions, net includes various items, such as legal fees, consulting fees, bank fees, net penalties on unrecognized tax benefits and the impact of net foreign exchange transactions within the period. Net foreign exchange transactions include the net amount of transaction losses and gains that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of our subsidiaries.

2013

Other deductions, net in 2013 consisted primarily of legal fees of $22,700, bank fees of $4,200, net penalties on unrecognized tax benefits of $1,300, which were net of previously accrued tax penalties that were ultimately not assessed, a provision for environmental remediation costs of $1,400 and consulting fees of $1,100.

2012

Other deductions, net in 2012 consisted primarily of legal fees of $16,100, bank fees of $4,800, net penalties on unrecognized tax benefits of $3,700, which were net of previously accrued tax penalties that were ultimately not assessed, a provision for environmental remediation costs of $2,200 and consulting fees of $1,000.

2011

Other deductions, net in 2011 consisted primarily of legal fees of $17,800, consulting fees of $12,000, net penalties on unrecognized tax benefits of $4,000, which were net of previously accrued tax penalties that were ultimately not assessed, and bank fees of $3,500, partially offset by a net foreign exchange transaction gain of $1,100. The net foreign exchange transaction gain during 2011 was primarily driven by exchange rate fluctuations on cash balances held by certain of our subsidiaries that were denominated in a currency other than the functional currency of those subsidiaries.

Interest Income

 

     2013     2012     2011  

Amount

   $ 6,272      $ 10,801      $ 18,913   

$ Change

     (4,529     (8,112  

% Change

     (41.9 )%      (42.9 )%   

 

39


Table of Contents

2013 vs. 2012

The decrease in interest income in 2013, compared to 2012, was primarily a result of lower average cash and cash equivalents balances and, to a lesser extent, lower investment yields on cash and cash equivalents balances.

2012 vs. 2011

The decrease in interest income in 2012, compared to 2011, was primarily a result of lower average cash and cash equivalents balances and, to a lesser extent, lower investment yields on cash and cash equivalents balances and unfavorable foreign currency fluctuations.

Interest Expense

 

     2013     2012     2011  

Amount

   $ 13,227      $ 13,797      $ 12,876   

$ Change

     (570     921     

% Change

     (4.1 )%      7.2  

2013 vs. 2012

The decrease in interest expense in 2013, compared to 2012, was primarily the net result of the favorable impact from decreased average borrowings, excluding foreign currency translation effects, and decreased interest expense on unrecognized tax benefits of $1,000, net of previously accrued interest which was ultimately not assessed, partially offset by increased interest expense on value added tax and payroll liabilities of $1,300 in 2013.

2012 vs. 2011

The increase in interest expense in 2012, compared to 2011, was primarily the net result of increased interest expense on unrecognized tax benefits of $2,900, net of previously accrued interest which was ultimately not assessed, partially offset by the favorable impact from decreased average borrowings, excluding foreign currency translation effects.

Net Asbestos-Related Provision

 

     2013     2012     2011  

Amount

   $ 30,213      $ 30,505      $ 9,901   

$ Change

     (292     20,604     

% Change

     (1.0 )%      208.1  

2013 vs. 2012

Net asbestos-related provision in 2013 experienced a minimal change, compared to 2012. This was the net result of the favorable impact of the inclusion of an insurance recovery gain recognized in 2013 upon collection of an insurance receivable of approximately $15,800 related to an insolvent insurance carrier, which we had previously written-off, and the favorable impact of the inclusion of a charge recognized in 2012 related to the revaluation of our U.K. asbestos-related asset of $2,400, partially offset by the unfavorable impact of an increase in our U.S. net asbestos-related provision of $17,900. The increase in our U.S. net asbestos-related provision resulted from the impact of an increase in our estimate of new claim filings and a decrease in our estimate of claim filings which result in no monetary payments, which we refer to as our zero-pay rate.

 

40


Table of Contents

2012 vs. 2011

Net asbestos-related provision increased in 2012, compared to 2011, which was the result of the unfavorable impact of an increase in our U.S. net asbestos-related provision of $12,100 related to the revaluation of our asbestos liability for increased asbestos defense costs projected over our 15-year estimate, the unfavorable impact of the inclusion of a gain on the settlement of coverage litigation with certain U.S. insurance carriers of $6,100 recognized during 2011 and the unfavorable impact related to the revaluation of our U.K. asbestos-related asset of $2,400.

Please refer to Note 16 to the consolidated financial statements included in this annual report on Form 10-K for more information.

Provision for Income Taxes

 

     2013     2012     2011  

Amount

   $ 52,166      $ 62,267      $ 58,514   

$ Change

     (10,101     3,753     

% Change

     (16.2 )%      6.4  

Effective Tax Rate

     34.1     27.6     25.0

Although we are a Swiss corporation, our shares are listed on a U.S. exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate meaningful comparison with peer companies in the U.S. capital markets. Our effective tax rate can fluctuate significantly from period to period and may differ considerably from the U.S. federal statutory rate as a result of (i) income taxed in various non-U.S. jurisdictions with rates different from the U.S. statutory rate, (ii) our inability to recognize a tax benefit for losses generated by certain unprofitable operations and (iii) the varying mix of income earned in the jurisdictions in which we operate. In addition, our deferred tax assets are reduced by a valuation allowance when, based upon available evidence, it is more likely than not that the tax benefit of loss carryforwards (or other deferred tax assets) will not be realized in the future. In periods when operating units subject to a valuation allowance generate pretax earnings, the corresponding reduction in the valuation allowance favorably impacts our effective tax rate. Conversely, in periods when operating units subject to a valuation allowance generate pretax losses, the corresponding increase in the valuation allowance has an unfavorable impact on our effective tax rate.

Effective Tax Rate for 2013

Our effective tax rate for 2013 was lower than the U.S. statutory rate of 35% due principally to the net impact of the following:

 

  Income earned in non-U.S. tax jurisdictions which contributed to an approximate five-percentage point reduction in our effective tax rate, primarily because of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax exempts, incentives and credits, and other items; and

 

  A valuation allowance increase because we are unable to recognize a tax benefit for losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.), partially offset by valuation allowance releases in certain non-U.S. jurisdictions, which contributed to an approximate four-percentage point increase in our effective tax rate.

Effective Tax Rate for 2012

Our effective tax rate for 2012 was lower than the U.S. statutory rate of 35% due principally to the net impact of the following:

 

  Income earned in non-U.S. tax jurisdictions which contributed to an approximate 10-percentage point reduction in our effective tax rate, primarily because of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax incentives and credits, and other items;

 

41


Table of Contents
  A valuation allowance increase because we are unable to recognize a tax benefit for losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.), which contributed to an approximate five-percentage point increase in our effective tax rate; and

 

  A valuation allowance decrease in a jurisdiction previously subject to a full valuation allowance due to improved expectations about future operating performance as result of business acquisition and organic growth prospects, which contributed to an approximate three-percentage point reduction in our effective tax rate.

Effective Tax Rate for 2011

Our effective tax rate for 2011 was lower than the U.S. statutory rate of 35% due principally to the net impact of the following:

 

  Income earned in non-U.S. tax jurisdictions which contributed to an approximate 16-percentage point reduction in our effective tax rate, primarily because of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax incentives and credits, and other items; and

 

  A valuation allowance increase because we are unable to recognize a tax benefit for losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.), which contributed to an approximate six-percentage point increase in our effective tax rate.

We monitor the jurisdictions for which valuation allowances against deferred tax assets were established in previous years, and we evaluate, on a quarterly basis, the need for the valuation allowances against deferred tax assets in those jurisdictions. Such evaluation includes a review of all available evidence, both positive and negative, in determining whether a valuation allowance is necessary.

For statutory purposes, the majority of the U.S. federal tax benefits, against which valuation allowances have been established, do not expire until 2025 and beyond, based on current tax laws.

Net Income Attributable to Noncontrolling Interests

 

     2013     2012     2011  

Amount

   $ 3,940      $ 13,874      $ 14,345   

$ Change

     (9,934     (471  

% Change

     (71.6 )%      (3.3 )%   

Net income attributable to noncontrolling interests represents third-party ownership interests in the net income of our Global Power Group’s Martinez, California gas-fired cogeneration subsidiary and our manufacturing subsidiaries in Poland and the People’s Republic of China, as well as our Global E&C Group’s subsidiaries in Malaysia and South Africa. The change in net income attributable to noncontrolling interests is based upon changes in the net income of these subsidiaries and/or changes in the noncontrolling interests’ ownership interest in the subsidiaries.

2013 vs. 2012

Net income attributable to noncontrolling interests decreased in 2013, compared to 2012, which was primarily the net result of decreased net income from our subsidiaries in Malaysia, which experienced a net loss in 2013, Martinez, California and Poland, partially offset by increased net income from our subsidiary in China.

2012 vs. 2011

Net income attributable to noncontrolling interests was relatively unchanged in 2012, compared to 2011, which was primarily the net result of decreased net income from our subsidiary in South Africa, partially offset by increased net income from our subsidiaries in China and Poland.

 

42


Table of Contents

EBITDA

EBITDA, as discussed and defined below, is the primary measure of operating performance used by our chief operating decision maker.

In addition to our two business groups, which also represent operating segments for financial reporting purposes, we report the financial results associated with the management of entities which are not managed by one of our two business groups, which include corporate center expenses, our captive insurance operation and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, or C&F Group, which also represents an operating segment for financial reporting purposes.

 

     2013     2012     2011  

Amount

   $ 219,869      $ 275,513      $ 276,995   

$ Change

     (55,644     (1,482  

% Change

     (20.2 )%      (0.5 )%   

2013 vs. 2012

EBITDA decreased in 2013, compared to 2012. Our Global Power Group experienced a decrease in EBITDA of $57,500 and our Global E&C Group experienced a decrease in EBITDA of $8,300 in 2013, compared to 2012. The decrease in EBITDA from our two business groups was partially offset by an increase in EBITDA in our C&F Group of $10,200, which was mainly driven by decreased SG&A expenses.

2012 vs. 2011

EBITDA was relatively unchanged in 2012, compared to 2011. Our Global Power Group experienced an increase in EBITDA of $26,500 during 2012, compared to 2011, whereas our Global E&C Group experienced a decrease in EBITDA of $18,300 when comparing the same two years. The net increase in EBITDA from our two business groups was offset by a decrease in EBITDA in our C&F Group of $9,700, which included the unfavorable impact of an increased asbestos-related provision of $20,600 in 2012, compared to 2011.

Please refer to the preceding discussion of each of these items within this “—Results of Operations-Continuing Operations” section and the individual segment explanations below for additional details.

EBITDA is a supplemental financial measure not defined in generally accepted accounting principles, or GAAP. We define EBITDA as income attributable to Foster Wheeler AG before interest expense, income taxes, depreciation and amortization. We have presented EBITDA because we believe it is an important supplemental measure of operating performance. Certain covenants under our senior unsecured credit agreement use an adjusted form of EBITDA such that in the covenant calculations the EBITDA as presented herein is adjusted for certain unusual and infrequent items specifically excluded in the terms of our senior unsecured credit agreement. We believe that the line item on the consolidated statement of operations entitled “net income attributable to Foster Wheeler AG” is the most directly comparable GAAP financial measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net income attributable to Foster Wheeler AG as an indicator of operating performance or any other GAAP financial measure. EBITDA, as calculated by us, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information that is included in net income attributable to Foster Wheeler AG, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:

 

  It does not include interest expense. Because we have borrowed money to finance some of our operations, interest is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations;

 

  It does not include taxes. Because the payment of taxes is a necessary and ongoing part of our operations, any measure that excludes taxes has material limitations; and

 

43


Table of Contents
  It does not include depreciation and amortization. Because we must utilize property, plant and equipment and intangible assets in order to generate revenues in our operations, depreciation and amortization are necessary and ongoing costs of our operations. Therefore, any measure that excludes depreciation and amortization has material limitations.

A reconciliation of EBITDA from continuing operations to net income attributable to Foster Wheeler AG is shown below:

 

     2013     2012     2011  

EBITDA from continuing operations:

      

Global E&C Group

   $ 183,911      $ 192,208      $ 210,541   

Global Power Group

     147,227        204,758        178,233   

C&F Group*

     (111,269     (121,453     (111,779
  

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations

     219,869        275,513        276,995   
  

 

 

   

 

 

   

 

 

 

Less: Interest expense

     13,227        13,797        12,876   

Less: Depreciation and amortization

     57,574        50,234        44,551   

Less: Provision for income taxes

     52,166        62,267        58,514   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to Foster Wheeler AG

     96,902        149,215        161,054   

Income/(loss) from discontinued operations attributable to Foster Wheeler AG

     265        (13,193     1,329   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 97,167      $ 136,022      $ 162,383   
  

 

 

   

 

 

   

 

 

 

 

* Includes general corporate income and expense, our captive insurance operation and the elimination of transactions and balances related to intercompany interest.

EBITDA in the above table includes the following:

 

    2013     2012     2011  

Net increase in contract profit from the regular revaluation of final estimated contract profit revisions:(1)

     

Global E&C Group(2)

  $ 47,000      $ 7,700      $ 13,200   

Global Power Group(2)

    51,900        58,300        22,000   
 

 

 

   

 

 

   

 

 

 

Total(2)

  $ 98,900      $ 66,000      $ 35,200   
 

 

 

   

 

 

   

 

 

 

Net asbestos-related provisions:(3)

     

Global E&C Group

  $ —        $ 2,400      $ —     

C&F Group

    30,200        28,100        9,900   
 

 

 

   

 

 

   

 

 

 

Total

  $ 30,200      $ 30,500      $ 9,900   
 

 

 

   

 

 

   

 

 

 

Charges for severance-related postemployment benefits:

     

Global E&C Group

  $ 4,900      $ 2,300      $ 2,200   

Global Power Group

    17,000        3,700        —     

C&F Group

    400        200        500   
 

 

 

   

 

 

   

 

 

 

Total

  $ 22,300      $ 6,200      $ 2,700   
 

 

 

   

 

 

   

 

 

 

Charge for equity interest investment impairment in our Global E&C Group(4)

  $ 22,400      $ —        $ —     

Charges for facility shutdown costs in our Global Power Group(5)

  $ 2,100      $ —        $ —     

 

(1)  Please refer to “Revenue Recognition on Long-Term Contracts” in Note 1 to the consolidated financial statements included in this annual report on Form 10-K for further information regarding changes in our final estimated contract profit.

 

44


Table of Contents
(2)  The changes in final estimated contract profit revisions for our Global Power Group were increased during 2012 for a favorable claim settlement with a legacy project subcontractor of approximately $6,900 recognized in the first quarter of 2012. The changes in final estimated contract profit revisions during 2011 included the impact of two out-of-period corrections for reductions of final estimated profit totaling $7,800, which included final estimated profit reductions in our Global E&C Group and our Global Power Group of $3,200 and $4,600, respectively. The corrections were recorded in 2011 as they were not material to previously issued financial statements, nor were they material to the 2011 financial statements.
(3)  Please refer to Note 16 to the consolidated financial statements included in this annual report on Form 10-K for further information regarding the revaluation of our asbestos liability and related asset.
(4)  Impairment charge related to our equity interest investment in a waste-to-energy project in Italy. Please refer to Note 5 to the consolidated financial statements included in this annual report on Form 10-K for further information.
(5)  Charges for facility shutdown costs included facility exit, lease termination and other costs for facilities in our Global Power Group. Please refer to Note 14 to the consolidated financial statements included in this annual report on Form 10-K for further information.

The accounting policies of our business segments are the same as those described in our summary of significant accounting policies. The only significant intersegment transactions relate to interest on intercompany balances. We account for interest on those arrangements as if they were third-party transactions (i.e., at current market rates) and we include the elimination of that activity in the results of the C&F Group.

Business Segments

Global E&C Group

 

                   2013 vs. 2012            2012 vs. 2011  
     2013      2012      $ Change     % Change     2011      $ Change     % Change  

Operating Revenues

   $ 2,512,587       $ 2,419,327       $ 93,260        3.9   $ 3,443,079       $ (1,023,752     (29.7 )% 

EBITDA

   $ 183,911       $ 192,208       $ (8,297     (4.3 )%    $ 210,541       $ (18,333     (8.7 )% 

Results

Our Global E&C Group’s operating revenues by geographic region, based upon where our projects are being executed, for 2013, 2012, and 2011, were as follows:

 

                   2013 vs. 2012            2012 vs. 2011  
     2013      2012      $ Change     % Change     2011      $ Change     % Change  

Africa

   $ 69,921       $ 81,222       $ (11,301     (13.9 )%    $ 155,207       $ (73,985     (47.7 )% 

Asia Pacific

     481,345         658,481         (177,136     (26.9 )%      1,725,467         (1,066,986     (61.8 )% 

Europe

     560,609         559,051         1,558        0.3     474,116         84,935        17.9

Middle East

     340,184         235,509         104,675        44.4     235,977         (468     (0.2 )% 

North America

     744,208         552,311         191,897        34.7     528,923         23,388        4.4

South America

     316,320         332,753         (16,433     (4.9 )%      323,389         9,364        2.9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 2,512,587       $ 2,419,327       $ 93,260        3.9   $ 3,443,079       $ (1,023,752     (29.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Please refer to the section entitled, “—Overview of Segment” below for our view of the market outlook for our Global E&C Group.

2013 vs. 2012

Our Global E&C Group experienced an increase in operating revenues of 4% in 2013, compared to 2012. The increase was net of decreased flow-through revenues of $129,300. Excluding flow-through revenues and foreign currency fluctuations, our Global E&C Group’s operating revenues increased 15% in 2013, compared to 2012.

 

45


Table of Contents

Our Global E&C Group’s EBITDA decreased in 2013, compared to 2012. This decrease included the impact of decreased equity earnings from our projects in Italy of $15,200, inclusive of the impact of an impairment charge of $22,400 on one of our projects discussed below. The decrease in EBITDA also included the unfavorable impact of additional SG&A expenses related to the businesses acquired subsequent to the beginning of 2012 of $13,100, much of which was attributable to compensation expense recognized under earnout provisions associated with the acquisitions. Our Global E&C Group’s EBITDA in 2013 was also unfavorably impacted by a charge for severance-related postemployment benefits of $4,900, comprised of amounts recognized in contract profit and SG&A of $3,300 and $1,600, respectively. Our Global E&C Group’s decrease in EBITDA was partially offset by increased contract profit of $12,800, which included the favorable impact of the businesses acquired subsequent to the beginning of 2012 and was inclusive of a charge for severance-related postemployment benefits as discussed above. The decrease in EBITDA was also net of the favorable impact resulting from the inclusion of a charge recognized in 2012 related to the revaluation of our U.K. asbestos-related asset of $2,400 and the favorable impact of the inclusion of a $1,500 charge recognized in 2012 related to the write-off of capitalized costs for a wind farm development project discussed below.

The increase in contract profit primarily resulted from increased volume of operating revenues, excluding flow-through revenues, partially offset by decreased contract profit margins. During 2013, our equity earnings were favorably impacted by two items which occurred in 2013: a governmental authority mandated rate change for energy generated prior to 2013, that favorably impacted three of our projects by an aggregate amount of $4,900, and a governmental return on investment credit received by one of our projects, that was deemed a critical energy producing facility, that favorably impacted that project by $2,200. Additionally, the increase in our equity earnings from our projects in Italy were favorably impacted by the inclusion of two items recognized in 2012: a charge to establish a reserve against its receivable for emission rights and the impact of an extended facility maintenance shutdown during 2012, also described below.

Equity Interest Investment Impairment Charge

Our equity earnings in 2013 included the impact of an impairment charge of $22,400 on our equity interest investment in a waste-to-energy project in Italy. The reduction in fair value of our investment resulted from changed market conditions with respect to waste tariffs and type of waste delivered to the plant, coupled with the reduced operating performance of the plant compared to projected performance. We and our partner in the investment have concluded that we will continue to operate the plant and may consider future capital investments to improve its operating performance including a potential increase to the overall waste treatment and electric production compared to current levels. This impairment was recorded at the investee level. As a result of the foregoing, the carrying value of our investment approximated fair value at December 31, 2013.

2012 vs. 2011

Our Global E&C Group experienced a decrease in operating revenues of 30% in 2012, compared to 2011. The decrease was primarily driven by decreased flow-through revenues of $1,015,000. Excluding flow-through revenues and foreign currency fluctuations, our Global E&C Group’s operating revenues increased 2% in 2012, compared to 2011.

Our Global E&C Group’s EBITDA decreased in 2012, compared to 2011, primarily driven by the unfavorable impact of increased sales pursuit costs of $14,200, resulting from increased new proposal activity, decreased equity earnings from our Global E&C Group’s projects in Italy of $7,000, the unfavorable impact of increased general overhead costs of $6,100, the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized during 2011, a charge recognized in 2012 related to the revaluation of our U.K. asbestos-related asset of $2,400 and the unfavorable impact of the inclusion of a $1,500 charge during 2012 related to the write-off of capitalized costs for a wind farm development project that, due to legislation introduced in 2012, was no longer an economically viable project. These unfavorable impacts were partially offset by increased contract profit of $16,900. The increase in contract profit primarily

 

46


Table of Contents

resulted from increased contract profit margins and, to a lesser extent, increased volume of operating revenues, excluding flow-through revenues. Our equity earnings during 2012, compared to 2011, were unfavorably impacted by the results of one of our projects in Italy that recorded a charge to establish a reserve against its receivable balance for emission rights earned prior to 2012 and decreased earnings as a result of an extended facility maintenance shutdown during 2012.

Overview of Segment

Our Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, LNG facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation facilities, distribution facilities, gasification facilities and processing facilities associated with the minerals and metals sector. Our Global E&C Group is also involved in the design of facilities in developing market sectors, including carbon capture and storage, solid fuel-fired integrated gasification combined-cycle power plants, coal-to-liquids, coal-to-chemicals and biofuels. Additionally, our Global E&C Group is involved in the development, engineering, construction, ownership and operation of power generation facilities, from conventional and renewable sources, and of waste-to-energy facilities.

Our Global E&C Group provides the following services:

 

    Design, engineering, project management, construction and construction management services, including the procurement of equipment, materials and services from third-party suppliers and contractors;

 

    Environmental remediation services, together with related technical, engineering, design and regulatory services; and

 

    Design and supply of direct-fired furnaces, including fired heaters and waste heat recovery generators, used in a range of refinery, chemical, petrochemical, oil and gas processes, including furnaces used in our proprietary delayed coking and hydrogen production technologies.

Our Global E&C Group owns one of the leading technologies (SYDECSM delayed coking) used in refinery residue upgrading, in addition to other refinery residue upgrading technologies (solvent deasphalting and visbreaking), and a hydrogen production process used in oil refineries and petrochemical plants. We also own a proprietary sulfur recovery technology which is used to treat gas streams containing hydrogen sulfide for the purpose of reducing the sulfur content of fuel products and to recover a saleable sulfur by-product.

Additionally, our Global E&C Group owns and operates electric power generating wind farms in Italy and also owns a noncontrolling interest in two electric power generation projects, one waste-to-energy project and one wind farm project, all of which are located in Italy, and a noncontrolling interest in a joint venture company that is fully licensed to engineer, procure and construct processing facilities in China.

Our Global E&C Group generates revenues from design, engineering, procurement, construction and project management activities pursuant to contracts spanning up to approximately four years in duration and generates equity earnings from returns on its noncontrolling interest investments in various power production facilities.

In the engineering and construction industry, we expect long-term demand to be strong for the end products produced by our clients, and we believe that this long-term demand will continue to stimulate investment by our clients in new, expanded and upgraded facilities. Our clients plan their investments based on long-term time horizons. We believe that global demand for energy, chemicals, minerals and pharmaceuticals will continue to grow over the long-term and that our clients will continue to invest in new and upgraded capacity to meet that demand.

Global markets in the engineering and construction industry are still experiencing intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Clients’ bidding and contract award processes continue to be protracted, particularly for projects sponsored by national oil companies.

 

47


Table of Contents

Additionally, some clients have been releasing, and we expect will continue to release, tranches of work on a piecemeal basis. The engineering and construction industry may be further impacted by potential downside risk to global economic growth driven primarily by continued sovereign debt and bank funding pressures, the speed and effectiveness of the implementation of government macroeconomic policies in a number of key advanced and emerging economies, slower growth than anticipated in emerging economies, most significantly China, and civil unrest. If any of these risks materialize, our Global E&C Group could be impacted. However, we are seeing clients continuing to develop new projects and, after making final investment decisions, moving forward with previously planned projects. This includes a much stronger pipeline of projects in North America both in chemicals and LNG due to the availability of cheap gas supply from shale gas.

We continue to be successful in booking contracts of varying types and sizes in our key end markets, including an engineering and procurement contract for a clean fuels project in Latin America, front-end engineering design, or FEED, and engineering, procurement and construction management, or EPCM, for an onshore gas facilities in Asia, the main release for an EPCM project for a chemical facility expansion in North America, an EPCM award for a chemicals facility in Asia, additional work on an EPCM refinery expansion project in Africa, additional work on an EPCM contract for a refinery upgrade in Europe, FEED for a grassroots gas processing facility in Eurasia, project management services for an offshore wellhead platform in Asia, engineering and material supply for a steam methane reformer for a new refinery in Asia, an engineering, procurement and construction award for coker slide valves at two refineries in Latin America, engineering and material supply for a crude heater at a refinery in Latin America and pre-FEED for a grassroots LNG facility in Russia.

We believe our success in this regard is a reflection of our technical expertise, our project execution performance, our long-term relationships with clients, our safety performance, and our selective approach in pursuit of new prospects where we believe we have significant differentiators.

Global Power Group

 

                   2013 vs. 2012            2012 vs. 2011  
     2013      2012      $ Change     % Change     2011      $ Change     % Change  

Operating Revenues

   $ 793,863       $ 972,067       $ (178,204     (18.3 )%    $ 1,015,029       $ (42,962     (4.2 )% 

EBITDA

   $ 147,227       $ 204,758       $ (57,531     (28.1 )%    $ 178,233       $ 26,525        14.9

Results

Our Global Power Group’s operating revenues by geographic region, based upon where our projects are being executed, for 2013, 2012, and 2011, were as follows:

 

                   2013 vs. 2012            2012 vs. 2011  
     2013      2012      $Change     % Change     2011      $ Change     % Change  

Africa

   $ 87       $ 2,501       $ (2,414     (96.5 )%    $ 3,392       $ (891     (26.3 )% 

Asia Pacific

     358,287         401,676         (43,389     (10.8 )%      285,554         116,122        40.7

Europe

     222,179         300,792         (78,613     (26.1 )%      444,081         (143,289     (32.3 )% 

Middle East

     4,896         13,938         (9,042     (64.9 )%      34,957         (21,019     (60.1 )% 

North America

     178,039         220,377         (42,338     (19.2 )%      218,357         2,020        0.9

South America

     30,375         32,783         (2,408     (7.3 )%      28,688         4,095        14.3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 793,863       $ 972,067       $ (178,204     (18.3 )%    $ 1,015,029       $ (42,962     (4.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Please refer to the section entitled, “—Overview of Segment” below for our view of the market outlook for our Global Power Group.

 

48


Table of Contents

2013 vs. 2012

Our Global Power Group experienced a decrease in operating revenues in 2013, compared to 2012, of 18%. The decrease was primarily driven by decreased volume of business. Excluding foreign currency fluctuations, our Global Power Group’s operating revenues decreased 20% in 2013, compared to 2012.

Our Global Power Group’s EBITDA decreased in 2013, compared to 2012, primarily driven by decreased contract profit of $44,100, inclusive of a charge for severance-related postemployment benefits. During 2013, our Global Power Group incurred charges for severance-related postemployment benefits of $17,000, comprised of amounts recognized in contract profit and SG&A of $11,700 and $5,300, respectively. Our Global Power Group’s decrease in EBITDA also included charges during 2013 for facility shutdown costs which totaled $2,100, the unfavorable impact of the inclusion of a gain recognized during 2012 related to the favorable settlement of our claim with a client on a legacy project of $2,000 and decreased governmental economic subsidies and other non-income tax credits of $900. The year-over-year impact of the above items which decreased EBITDA was partially offset by increased equity earnings in 2013 from our Global Power Group’s project in Chile of $7,200.

The decrease in contract profit primarily resulted from decreased volume of operating revenues, partially offset by increased contract profit margins. Additionally, the decrease in contract profit included the unfavorable impact of a settlement with a subcontractor of approximately $6,900 during 2012, which was discussed in the preceding section within this Item 7 entitled “—Results of Operations-Continuing Operations-EBITDA”. Please see below for further discussion regarding our Global Power Group’s project in Chile.

2012 vs. 2011

Our Global Power Group experienced a decrease in operating revenues in 2012, compared to 2011, of 4%. The decrease was primarily driven by decreased volume of business and the unfavorable impact of foreign currency fluctuations. Excluding foreign currency fluctuations, our Global Power Group’s operating revenues decreased 1% in 2012, compared to 2011.

Our Global Power Group’s EBITDA increased in 2012, compared to 2011, primarily driven by increased contract profit of $45,200. The increase in contract profit primarily resulted from increased contract profit margins, partially offset by decreased volume of operating revenues. Additionally, the increase in contract profit included the favorable impact of a settlement with a subcontractor of approximately $6,900 during 2012 and the favorable impact of the inclusion of an out-of-period correction recorded in 2011 for a reduction of final estimated profit of approximately $4,600, both of which are discussed in the preceding section within this Item 7 entitled “—Results of Operations-Continuing Operations-EBITDA”. The increase in EBITDA also included the unfavorable impact of decreased equity earnings from our Global Power Group’s project in Chile of $10,600 and the favorable impact related to decreased legal fees of $5,200. Please see below for further discussion regarding our Global Power Group’s project in Chile.

Equity Interest Investment in Chile

Our equity earnings from our project in Chile were $27,500, $20,300 and $30,900 in 2013, 2012 and 2011, respectively. The increase in equity earnings in 2013, compared to 2012, was primarily driven by the net impact of two items: a $3,200 increase in our share of the project’s 2012 earnings recognized as a result of a revised earnings allocation for 2012 that was approved in connection with the approval by the project’s governing board of the 2012 earnings distribution during 2013, and a $3,000 increase from the reversal of an insurance-related contingency during 2013. The decrease in equity earnings in 2012, compared to 2011, was primarily driven by the impact of lower marginal rates for electrical power generation and the impact of a higher statutory tax rate in Chile, partially offset by an increase in the project’s volume of electricity produced in 2012.

On February 27, 2010, an earthquake occurred off the coast of Chile that caused significant damage to our Global Power Group’s project in Chile. As a result of the damage, the project’s facility suspended normal operating activities on that date. The project included an estimated recovery for lost profits under its business interruption

 

49


Table of Contents

insurance policy in its financial statements, which covered through the period while the facility suspended normal operating activities. The facility began operating at less than normal utilization during the second quarter of 2011 and achieved normal operating activities in the third quarter of 2011. Proceeds from the business interruption insurance were based on market rates for electricity during the period when the facility suspended normal operating activities.

Overview of Segment

Our Global Power Group designs, manufactures and installs steam generators and auxiliary equipment for electric power generating stations, district heating and power plants and industrial facilities worldwide. We believe our competitive differentiation in serving these markets is the ability of our products to cleanly and efficiently burn a wide range of fuels, singularly or in combination. Our Global Power Group’s steam generators utilize a broad range of technologies, offering independent power producers, utilities, municipalities and industrial clients solutions for converting a wide range of fuels, such as coal, lignite, petroleum coke, oil, gas, solar, biomass, municipal solid waste and waste flue gases, into steam, which can be used for power generation, district heating or industrial processes. Among these fuel sources, coal is the most widely used, and thus the market drivers and constraints associated with coal strongly affect the steam generator market and our Global Power Group’s business. In particular, our circulating fluidized-bed, which we refer to as CFB, steam generators are able to burn coals of varying quality, as well as numerous other materials.

Additionally, our Global Power Group holds a controlling interest in and operates a combined-cycle gas turbine facility; owns a noncontrolling interest in a petcoke-fired CFB facility for refinery steam and power generation; and operates a university cogeneration power facility for steam/electric generation.

Our Global Power Group offers a number of other products and services related to steam generators, including:

 

    Design, manufacture and installation of auxiliary and replacement equipment for utility power and industrial facilities, including surface condensers, feedwater heaters, coal pulverizers, steam generator coils and panels, biomass gasifiers, and replacement parts for steam generators.

 

    Design, supply and installation of nitrogen-oxide, or NOx, reduction systems and components for pulverized coal steam generators such as selective catalytic reduction systems, low NOx combustion systems, low NOx burners, primary combustion and overfire air systems and components, fuel and combustion air measuring and control systems and components.

 

    Design, supply and installation of flue gas desulfurization equipment for all types of steam generators and industrial equipment.

 

    A broad range of site services including construction and erection services, plant maintenance, steam generator upgrading and life extension, engineering and replacement parts, improving plant environmental performance and plant repowering.

 

    Research and development in the areas of combustion, fluid and gas dynamics, heat transfer, materials and solid mechanics.

 

    Technology licenses to other steam generator suppliers in select countries.

Our Global Power Group has been impacted by unfavorable economic growth rates in most of its markets during 2013. As a result, the demand for the products and services of our Global Power Group was negatively impacted by an increased level of timing delays related to project award dates. However, we believe opportunities will continue in Asia, the Middle East and South America driven by growing electricity demand as a result of the economic growth rates in those regions. A number of other constraining market factors continue to impact the markets that we serve. Political and environmental sensitivity regarding coal-fired steam generators continues to cause prospective projects utilizing coal as their primary fuel to be postponed or cancelled as clients experience difficulty in obtaining the required environmental permits or decide to wait for additional clarity regarding governmental regulations. The sensitivity has been especially pronounced in the U.S. and Western Europe due to

 

50


Table of Contents

the concern that coal-fired steam generators, relative to alternative fuel sources, contribute more toward global warming through the discharge of greenhouse gas emissions into the atmosphere. The outlook for continued lower natural gas pricing over the next three to five years in North America, driven by increasing supply of natural gas, has increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. In addition, the constraints on the global credit market may continue to impact some of our clients’ investment plans as these clients are affected by the availability and cost of financing, as well as their own financial strategies, which could include cash conservation. These factors could negatively impact investment in the power sector, which in turn could negatively impact our Global Power Group’s business.

There is potential downside risk to continued unfavorable global economic growth rates driven primarily by continued sovereign debt and bank funding pressures, the speed and effectiveness of the implementation of government macroeconomic policies in a number of key advanced and emerging economies, slower growth than anticipated in emerging economies, most significantly China, and civil unrest. If these risks materialize, our Global Power Group could be impacted.

Longer-term, we believe that global demand for electrical energy will continue to grow. We believe that the majority of the growth will be driven by emerging economies and that solid-fuel-fired steam generators will continue to fill a significant portion of the incremental growth in new generating capacity in the emerging economies.

Globally, we see a growing need to repower older coal plants with new, more efficient and cleaner burning plants, including both coal and other fuels, in order to meet environmental, financial and reliability goals set by policy makers in many countries. The fuel flexibility of our CFB steam generators enables them to burn a wide variety of fuels other than coal and to produce carbon-neutral electricity when fired by biomass. In addition, our utility steam generators can be designed to incorporate supercritical steam technology, which we believe significantly improves power plant efficiency and reduces power plant emissions.

We are currently executing a project for four 550 megawatt electrical, or MWe, supercritical CFB steam generators for a power project in South Korea. We believe this project shows a growing acceptance of CFB technology in the large utility boiler market sector, which provides a growing market opportunity for our CFB technology. Further, this project will allow us to demonstrate our most advanced CFB design featuring vertical-tube, once-through ultra-supercritical steam technology. Commercial operation of the units is scheduled for 2015.

We completed an engineering and supply project for a pilot-scale (approximately 30 megawatt thermal, equivalent to approximately 10 MWe) CFB steam generator, which incorporates our carbon-capturing Flexi-BurnTM technology. The pilot plant began successfully capturing CO2 in September 2012.

Recently we were awarded a contract to design and supply a 250 MWe CFB steam generator in South Korea, which will include a selective catalytic reduction technology system. We also were awarded a contract at a Canadian refinery to design and supply three package steam generating systems.

Liquidity and Capital Resources

Cash Flows Activities

Our cash and cash equivalents and restricted cash balances were:

 

     As of December 31,               
     2013      2012      $ Change     % Change  

Cash and cash equivalents

   $ 556,190       $ 582,322       $ (26,132     (4.5 )% 

Restricted cash

     82,867         62,189         20,678        33.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 639,057       $ 644,511       $ (5,454     (0.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

51


Table of Contents

Total cash and cash equivalents and restricted cash held by our non-U.S. entities as of December 31, 2013 and 2012 were $493,000 and $522,300, respectively. Please refer to Note 1 to the consolidated financial statements included in this annual report on Form 10-K for additional details on cash and cash equivalents and restricted cash balances.

During 2013, we experienced a decrease in cash and cash equivalents of $26,100, primarily as a result of cash used to repurchase our shares and to pay related commissions under our share repurchase program of $150,100, cash used for payments related to business acquisitions of $52,100, cash used for capital expenditures of $27,700, an increase in restricted cash, excluding foreign currency translation effects, of $17,400 and the repayment of debt and capital lease obligations of $14,900. The above uses of cash were partially offset by cash provided by operating activities of $192,000 and proceeds received from the disposition of a business of $48,600.

Cash Flows from Operating Activities

 

     2013      2012     2011  

Net cash provided by operating activities—continuing operations

   $ 192,405       $ 92,369      $ 183,946   

$ Change

     100,036         (91,577  

Net cash provided by operating activities in 2013 primarily resulted from cash provided by net income of $257,800, which included a gain and related cash receipts of $15,800 for an insurance receivable related to an insolvent insurance carrier, which we had previously written-off, and excluded non-cash charges of $156,700, partially offset by cash used to fund working capital of $24,600, mandatory contributions to our pension plans of $21,400 and cash used for our U.S. net asbestos-related payments of $18,200, which excluded the above collection of an insurance receivable of $15,800 as the gain was recognized in net income (please refer to Note 16 to the consolidated financial statements included in this annual report on Form 10-K for further information on net asbestos-related payments).

The increase in net cash provided by operating activities of $100,000 in 2013, compared to 2012, resulted primarily from a decrease in cash used to fund working capital that resulted in an increase in cash of $118,400, partially offset by increased asbestos-related payments of $9,200.

The decrease in net cash provided by operating activities of $91,600 in 2012, compared to 2011, resulted primarily from an increase in cash used to fund working capital that resulted in a decrease in cash of $144,400, partially offset by decreased contributions to our pension plans of $49,300, which was driven by lower discretionary contributions of $51,300.

Working capital varies from period to period depending on the mix, stage of completion and commercial terms and conditions of our contracts and the timing of the related cash receipts. During 2013, we used cash to fund working capital as cash used for services rendered and purchases of materials and equipment exceeded cash receipts from client billings. During 2012, we used cash to fund working capital as cash used for services rendered and purchases of materials and equipment exceeded cash receipts from client billings, which included the impact of delayed project payments and contributed to our increase in receivables balance during 2012. We generated cash from the conversion of working capital during 2011, as cash receipts from client billings exceeded cash used for services rendered and purchases of materials and equipment.

Project payments can be delayed, particularly on contracts involving national oil companies, due to those customers’ internal processes for approval of invoices and release of funds. Our accounts receivable at December 31, 2013 and 2012 included a greater concentration of receivables from national oil companies, relative to December 31, 2011. In particular, we had $54,400 and $46,900, as of December 31, 2013 and 2012, respectively, of accounts receivable due from the national oil company in Venezuela. Although the payment history of this client is good, payments continue to be significantly delayed. Additionally, there were a number of large projects in our

 

52


Table of Contents

Global Power Group during 2012 that were in the final phases of execution and commissioning where virtually all of the cash had been collected in advance. In general, a delay in payment by our customers is not indicative of customer credit risk. In other cases where payments are delayed due to disagreements between us and our clients regarding the level of or quality of work performed or regarding billing terms, we assess our contractual right to invoice the client and, if we believe there is a probable commercial risk to collection of contract revenues, we provide an allowance against the valuation of contract work in progress at the individual contract level.

As more fully described below in “–Outlook,” we believe our existing cash balances and forecasted net cash provided from operating activities will be sufficient to fund our operations throughout the next 12 months. Our ability to maintain or increase our cash flows from operating activities in future periods will depend in large part on the demand for our products and services and our operating performance in the future. Please refer to the sections entitled “–Global E&C Group-Overview of Segment” and “–Global Power Group-Overview of Segment” above for our view of the outlook for each of our business segments.

Cash Flows from Investing Activities

 

     2013     2012     2011  

Net cash used in investing activities – continuing operations

   $ (59,020   $ (116,460   $ (73,689

$ Change

     57,440        (42,771  

The net cash used in investing activities in 2013 was attributable primarily to payments related to business acquisitions, net of cash acquired, of $52,100, capital expenditures of $27,700 and net cash used as a result of an increase in restricted cash, excluding foreign currency translation effects, of $17,400, which was primarily driven by increased client dedicated funds, partially offset by proceeds received from the disposition of a business of $48,600.

The net cash used in investing activities in 2012 was attributable primarily to payments related to business acquisitions, net of cash acquired, of $69,700. Other investing activities included capital expenditures of $34,700 and net cash used as a result of an increase in restricted cash, excluding foreign currency translation effects, of $18,100, partially offset by cash provided by a return of investment from unconsolidated affiliates of $6,200. The increase in restricted cash was primarily attributable to increased cash received for client dedicated accounts for project-related purchases.

The net cash used in investing activities in 2011 was attributable primarily to payments related to business acquisitions of $29,400, capital expenditures of $26,200 and net cash used as a result of an increase in restricted cash of $18,700.

The capital expenditures in 2013, 2012 and 2011 related primarily to project construction, leasehold improvements, information technology equipment and office equipment. For further information on capital expenditures by segment, please see Note 14 to the consolidated financial statements included in this annual report on Form 10-K.

Cash Flows from Financing Activities

 

     2013     2012     2011  

Net cash used in financing activities

   $ (158,582   $ (125,578   $ (421,302

$ Change

     (33,004     295,724     

The net cash used in financing activities in 2013 was attributable primarily to the cash used to repurchase shares and to pay related commissions under our share repurchase program of $150,100. Other financing activities included cash used for the repayment of debt and capital lease obligations of $14,900 and distributions to noncontrolling interests of $12,600, partially offset by cash provided from the exercise of stock options of $19,200.

 

53


Table of Contents

The net cash used in financing activities in 2012 was attributable primarily to the cash used to repurchase shares and to pay related commissions under our share repurchase program of $91,000. Other financing activities included cash used for distributions to noncontrolling interests of $18,300 and the repayment of debt and capital lease obligations of $13,000.

The net cash used in financing activities in 2011 was attributable primarily to the cash used to repurchase shares and to pay related commissions under our share repurchase program of $409,400. Other financing activities included cash used for repayment of debt and capital lease obligations of $12,500 and distributions to noncontrolling interests of $11,400, partially offset by cash provided from the exercise of stock options of $11,900.

Outlook

Our liquidity forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations, changes in working capital activities, unused credit line availability and claim recoveries and proceeds from asset sales, if any. These forecasts extend over a rolling twelve-month period. Based on these forecasts, we believe our existing cash balances and forecasted net cash provided by operating activities will be sufficient to fund our operations throughout the next twelve months. Based on these forecasts, our primary cash needs will be working capital, our proposed dividend payment, as described below, capital expenditures, pension contributions and net asbestos-related payments. We may also use cash at our discretion for acquisitions, discretionary pension plan contributions or to repurchase our shares under the share repurchase program, as described further below. The majority of our cash balances are invested in short-term interest bearing accounts with maturities of less than three months at creditworthy financial institutions around the world. Further significant deterioration of the current global economic and credit market environment could challenge our efforts to maintain our well-diversified asset allocation with creditworthy financial institutions and/or unfavorably impact our liquidity and financial statements. We will continue to monitor the global economic environment, particularly in those countries where we have operations or assets. We continue to consider investing some of our cash in longer-term investment opportunities, including the acquisition of other entities or operations in the engineering and construction industry or power industry and/or the reduction of certain liabilities, such as unfunded pension liabilities.

It is customary in the industries in which we operate to provide standby letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. We believe that we will have sufficient letter of credit capacity from existing facilities throughout the next twelve months.

We are dependent on cash repatriations from our subsidiaries to cover payments and expenses of our parent holding company in Switzerland, to cover cash needs related to our asbestos-related liability and other overhead expenses in the U.S. and, at our discretion, specific liquidity needs, such as funding acquisitions and our share repurchase program, as described further below. Consequently, we require cash repatriations to Switzerland and the U.S. from our entities located in other countries in the normal course of our operations to meet our Swiss and U.S. cash needs and have successfully repatriated cash for many years. We believe that we can repatriate the required amount of cash to Switzerland and the U.S. Additionally, we continue to have access to the revolving credit portion of our senior unsecured credit facility, if needed. During 2013, 2012 and 2011, we repatriated cash to the U.S. from our U.S. owned non-U.S. subsidiaries and branches for certain specific liquidity needs totaling approximately $40,000, $18,600, and $45,100, respectively. These repatriations were made from our non-U.S. subsidiaries where we had previously provided for any potential incremental deferred taxes on the eventual repatriation of the earnings, and, accordingly, there was no incremental U.S. tax consequence in the period of the repatriation. Please refer to Note 1 to the consolidated financial statements included in this annual report on Form 10-K for further information related to unremitted earnings, our determination as to whether such earnings are indefinitely reinvested and related deferred tax implications.

Our net asbestos-related payments are predominately related to our U.S. subsidiaries and include indemnity and defense costs, net of insurance proceeds. During 2013, our U.S. net asbestos-related cash outflows were approximately $2,400, which was net of cash proceeds received during 2013 related to the collection of a

 

54


Table of Contents

receivable from an insolvent insurance carrier, which had been previously written-off. In 2014, we expect our U.S. net cash outflows to be approximately $32,000. This estimate assumes no additional settlements with insurance companies or elections by us to fund additional payments. As we continue to collect cash from insurance settlements and assuming no increase in our asbestos-related insurance or any future insurance settlements, the asbestos-related insurance receivable recorded on our balance sheet will continue to decrease.

On August 3, 2012, we entered into a new five-year senior unsecured credit agreement, which replaced our amended and restated senior unsecured credit agreement from July 2010. Our new senior credit agreement provides for a facility of $750,000 and contains an increase option permitting us, subject to certain requirements, to arrange with existing lenders and/or new lenders to provide up to an aggregate of $300,000 in additional commitments. During the term of this senior credit agreement, we may request, subject to certain requirements, up to two one-year extensions of the contractual termination date.

We can issue up to $750,000 under the letter of credit portion of the facility. Letters of credit issued under our new senior credit agreement have performance pricing that is decreased (or increased) as a result of improvements (or reductions) in our corporate credit ratings, as defined in the senior credit agreement. Based on our current credit ratings, letter of credit fees for performance and non-performance letters of credit issued under our new senior credit agreement are 0.75% and 1.50% per annum of the outstanding amount, respectively, excluding a nominal fronting fee. We also have the option to use up to $250,000 of the $750,000 for revolving borrowings at a rate equal to adjusted LIBOR, as defined in the senior credit agreement, plus 1.50%, subject also to the performance pricing noted above.

We had approximately $253,900 and $225,600 of letters of credit outstanding under our senior credit agreements in effect as of December 31, 2013 and 2012, respectively. There were no funded borrowings under our senior credit agreements in effect as of December 31, 2013 and 2012. Based on our current operating plans and cash forecasts, we do not intend to borrow under our senior credit agreement to meet our non-discretionary liquidity needs during 2014. Please refer to Note 7 to the consolidated financial statements included in this annual report on Form 10-K for further information regarding our debt obligations.

We are not required to make any mandatory contributions to our U.S. pension plans in 2014 based on the minimum statutory funding requirements. Based on the minimum statutory funding requirements for 2014, we expect to make mandatory contributions totaling approximately $22,900 to our non-U.S. pension plans in 2014. Additionally, we may elect to make discretionary contributions to our U.S. and/or non-U.S. pension plans during 2014.

On September 12, 2008, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $750,000 of our outstanding shares and the designation of the repurchased shares for cancellation. On November 4, 2010, our Board of Directors proposed an increase to our share repurchase program of $335,000, which was approved by our shareholders at an extraordinary general meeting on February 24, 2011. On February 22, 2012, our Board of Directors proposed an additional increase to our share repurchase program of approximately $419,398, which was approved by our shareholders at our 2012 annual general meeting on May 1, 2012.

Based on the aggregate share repurchases under our program through December 31, 2013, we were authorized to repurchase up to an additional $270,054 of our outstanding shares as of such date. Any repurchases will be made at our discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and will depend on a variety of factors, including market conditions, share price and other factors. The program does not obligate us to acquire any particular number of shares. The program has no expiration date and may be suspended or discontinued at any time. Any repurchases made pursuant to the share repurchase program will be funded using our cash on hand. Through December 31, 2013, we have repurchased 50,502,778 shares for an aggregate cost of approximately $1,234,344 since the inception of the repurchase program announced on September 12, 2008. We have executed the repurchases in accordance with 10b5-1 repurchase plans as well as other privately negotiated transactions pursuant to our share repurchase

 

55


Table of Contents

program. The 10b5-1 repurchase plans allow us to purchase shares at times when we may not otherwise do so due to regulatory or internal restrictions. Purchases under the 10b5-1 repurchase plans are based on parameters set forth in the plans. For further information, please refer to Part II, Item 5 of this annual report on Form 10-K.

On February 26, 2014, our Board of Directors approved a proposal to our shareholders for a one-time dividend of $0.40 per share. We intend to ask our shareholders to approve this dividend at our Annual General Meeting on May 7, 2014 and, subject to shareholder approval, this dividend will be paid shortly after our Annual General Meeting. This dividend is not linked to, and not conditional on, the closing of the Offer. The covenants of our senior unsecured credit agreement do not limit our ability to pay this proposed dividend and we expect that there will be no Swiss withholding taxes on the dividend.

Off-Balance Sheet Arrangements

We own noncontrolling equity interests in power projects in Chile and Italy. Certain of the projects have third-party debt that is not consolidated in our balance sheet. We have also issued certain guarantees for the Chile-based project. Please refer to Note 5 to the consolidated financial statements in this annual report on Form 10-K for further information related to these projects.

Contractual Obligations

We have contractual obligations comprised of long-term debt, non-cancelable operating lease commitments, purchase commitments, capital lease obligations and pension and other postretirement benefit funding requirements. Our expected cash flows related to contractual obligations outstanding as of December 31, 2013 are as follows:

 

            Less than                    More than  
     Total      1 Year      1-3 Years      3-5 Years      5 Years  

Long-term debt:

              

Principal

   $ 71,800       $ 9,500       $ 21,600       $ 15,000       $ 25,700   

Interest

     8,600         1,700         2,500         2,100         2,300   

Interest rate swaps(1)

     8,100         2,300         3,400         1,600         800   

Capital lease obligations:

              

Principal

     54,400         3,000         7,200         9,900         34,300   

Interest

     31,600         5,200         9,400         7,700         9,300   

Non-cancelable operating lease obligations

     352,700         59,800         95,500         63,700         133,700   

Purchase commitments

     745,900         712,900         23,400         9,600         —     

Funding requirements:

              

Pension—U.S.(2)

     —           —           —           —           —     

Pension—non-U.S.(2)

     100,400         22,900         40,000         37,500         —     

Other postretirement benefits

     44,800         5,100         9,900         9,200         20,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,418,300       $ 822,400       $ 212,900       $ 156,300       $ 226,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In determining the payments under our interest rate swap agreements, we used the difference between a weighted-average fixed interest rate of 4.48%, based on the terms of our interest rate swap agreements, and the variable rates of the underlying debt facilities based upon an estimated 6-month Euribor plus a spread varying from 0.9% to 1.0% throughout the life of the debt facilities. Payments related to the underlying variable rate debt facilities are included on the interest line in the above table. Please refer to Note 7 to the consolidated financial statements included in this annual report on Form 10-K for further discussion of our interest rate swap agreements.
(2) Funding requirements are expected to extend beyond five years; however, data for contribution requirements beyond five years are not yet available and depend on the performance of our investment portfolio and actuarial experience. These projections assume no discretionary contributions.

 

56


Table of Contents

The table above does not include payments of our asbestos-related liabilities as we cannot reasonably predict the timing of the net cash outflows associated with this liability beyond 2013. We expect to fund $32,000 of our asbestos liability indemnity and defense costs from our cash flows in 2014 net of the cash expected to be received from existing insurance settlements. Please refer to Note 16 to the consolidated financial statements included in this annual report on Form 10-K for more information.

The table above does not include payments relating to our uncertain tax positions as we cannot reasonably predict the timing of the net cash outflows associated with the settlement of these obligations. Our total liability (including accrued interest and penalties) is approximately $112,900 as of December 31, 2013. Please refer to Note 13 to the consolidated financial statements included in this annual report on Form 10-K for more information.

We are contingently liable under standby letters of credit, bank guarantees and surety bonds, primarily for guarantees of our performance on projects currently in execution or under warranty. These balances include the standby letters of credit issued under the senior unsecured credit agreement and from other facilities worldwide. For further discussion please refer to the section entitled “—Liquidity and Capital Resources-Outlook” within this Item 7. As of December 31, 2013, such commitments and their period of expiration are as follows:

 

            Less than                    More
than
 
     Total      1 Year      1-3 Years      3-5 Years      5 years  

Bank issued letters of credit and guarantees

   $ 707,800       $ 422,800       $ 165,100       $ 22,500       $ 97,400   

Surety bonds

     252,700         87,600         100,600         64,500         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments

   $ 960,500       $ 510,400       $ 265,700       $ 87,000       $ 97,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Please refer to Note 9 to the consolidated financial statements included in this annual report on Form 10-K for a discussion of guarantees.

Backlog and New Orders

New orders are recorded and added to the backlog of unfilled orders based on signed contracts as well as agreed letters of intent, which we have determined are legally binding and likely to proceed. Backlog can fluctuate from one reporting period to the next due to the timing of new awards and when the contract revenue is recognized in our consolidated financial statements. The timing and duration of backlog execution is dependent upon the scope and type (or nature) of the work being executed. We expect to earn approximately 56% of our revenues in backlog at December 31, 2013 from contract performance during 2014, although we cannot predict with certainty the portion of backlog to be earned in a given year. The elapsed time from the award of a contract to completion of performance can be as short as several quarters and may be up to approximately four years. At any point in time, our backlog contains a portfolio of contracts at various stages of completion that will be executed at varying rates over varying durations.

Although backlog represents only business that is considered likely to be performed, cancellations or scope adjustments may and do occur. The dollar amount of backlog is not necessarily indicative of our future earnings related to the performance of such work due to factors outside our control, such as changes in project schedules, scope adjustments or project cancellations. Backlog is adjusted quarterly to reflect new orders, project cancellations, deferrals, revised project scope and cost and sales of subsidiaries, if any.

Backlog measured in Foster Wheeler scope reflects the dollar value of backlog excluding third-party costs incurred by us on a reimbursable basis as agent or principal, which we refer to as flow-through costs. Foster Wheeler scope measures the component of backlog with profit potential and corresponds to our services plus fees for reimbursable contracts and total selling price for fixed-price or lump-sum contracts.

 

57


Table of Contents

The tables below detail our new orders and backlog of unfilled orders by period and include amounts for discontinued operations for periods prior to 2013, which were insignificant based on our consolidated and business group balances:

New Orders, Measured in Terms of Future Revenues

 

    2013     2012     2011  
    Global     Global           Global     Global           Global     Global        
    E&C     Power           E&C     Power           E&C     Power        
    Group     Group     Total     Group     Group     Total     Group     Group     Total  

By Project Location:

                 

Africa

  $ 54,800      $ 100      $ 54,900      $ 48,800      $ 100      $ 48,900      $ 119,300      $ 6,000      $ 125,300   

Asia Pacific

    488,200        282,500        770,700        750,600        115,800        866,400        1,238,200        801,100        2,039,300   

Europe

    541,900        171,600        713,500        468,200        199,700        667,900        751,200        128,900        880,100   

Middle East

    325,400        2,100        327,500        765,800        3,500        769,300        245,100        14,200        259,300   

North America

    1,582,900        207,400        1,790,300        288,800        234,400        523,200        403,700        286,000        689,700   

South America

    169,500        29,100        198,600        538,200        35,600        573,800        267,400        24,700        292,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,162,700      $ 692,800      $ 3,855,500      $ 2,860,400      $ 589,100      $ 3,449,500      $ 3,024,900      $ 1,260,900      $ 4,285,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

By Industry:

                 

Power generation

  $ 48,700      $ 621,200      $ 669,900      $ 59,500      $ 474,300      $ 533,800      $ 323,500      $ 1,143,400      $ 1,466,900   

Oil refining

    1,271,400        —          1,271,400        1,634,100        —          1,634,100        1,300,500        —          1,300,500   

Pharmaceutical

    76,800        —          76,800        56,700        —          56,700        43,800        —          43,800   

Oil and gas

    404,700        —          404,700        382,000        —          382,000        801,900        —          801,900   

Chemical /petrochemical

    1,223,300        —          1,223,300        663,300        —          663,300        475,000        —          475,000   

Power plant design, operation and maintenance

    47,800        71,600        119,400        20,500        114,800        135,300        17,800        117,500        135,300   

Environmental

    8,400        —          8,400        8,500        —          8,500        6,500        —          6,500   

Other, net of eliminations

    81,600        —          81,600        35,800        —          35,800        55,900        —          55,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,162,700      $ 692,800      $ 3,855,500      $ 2,860,400      $ 589,100      $ 3,449,500      $ 3,024,900      $ 1,260,900      $ 4,285,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

58


Table of Contents

Backlog, Measured in Terms of Future Revenues

 

     December 31, 2013      December 31, 2012  
     Global      Global             Global      Global         
     E&C      Power             E&C      Power         
     Group      Group      Total      Group      Group      Total  

By Contract Type:

                 

Lump-sum turnkey

   $ 22,300       $ 7,200       $ 29,500       $ 3,200       $ 67,500       $ 70,700   

Other fixed-price

     484,600         581,900         1,066,500         662,500         665,200         1,327,700   

Reimbursable

     2,889,600         19,000         2,908,600         2,219,000         30,600         2,249,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,396,500       $ 608,100       $ 4,004,600       $ 2,884,700       $ 763,300       $ 3,648,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Project Location:

                 

Africa

   $ 36,700       $ 100       $ 36,800       $ 58,200       $ —         $ 58,200   

Asia Pacific

     579,700         342,800         922,500         616,300         435,400         1,051,700   

Europe

     462,300         114,000         576,300         508,500         150,700         659,200   

Middle East

     837,500         1,700         839,200         850,700         4,600         855,300   

North America

     1,177,100         124,300         1,301,400         295,100         142,800         437,900   

South America

     303,200         25,200         328,400         555,900         29,800         585,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,396,500       $ 608,100       $ 4,004,600       $ 2,884,700       $ 763,300       $ 3,648,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Industry:

                 

Power generation

   $ 27,800       $ 572,000       $ 599,800       $ 269,000       $ 699,500       $ 968,500   

Oil refining

     1,562,100         —           1,562,100         1,676,000         —           1,676,000   

Pharmaceutical

     44,500         —           44,500         26,600         —           26,600   

Oil and gas

     302,800         —           302,800         269,600         —           269,600   

Chemical/petrochemical

     1,247,400         —           1,247,400         630,000         —           630,000   

Power plant design, operationand maintenance

     152,000         36,100         188,100         100         63,800         63,900   

Environmental

     5,400         —           5,400         3,200         —           3,200   

Other, net of eliminations

     54,500         —           54,500         10,200         —           10,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,396,500       $ 608,100       $ 4,004,600       $ 2,884,700       $ 763,300       $ 3,648,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Backlog, measured in terms of Foster Wheeler Scope

   $ 2,973,200       $ 605,200       $ 3,578,400       $ 2,196,700       $ 753,500       $ 2,950,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Global E&C Group Man-hours in Backlog (in thousands)

     21,400            21,400         17,000            17,000   
  

 

 

       

 

 

    

 

 

       

 

 

 

The foreign currency translation impact on backlog and Foster Wheeler scope backlog resulted in decreases of $8,300 and $12,300, respectively, as of December 31, 2013 as compared to December 31, 2012.

Inflation

The effect of inflation on our financial results is minimal. Although a majority of our revenues are realized under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to complete the projects in these future periods. In addition, many of our projects are reimbursable at actual cost plus a fee, while some of the fixed-price contracts provide for price adjustments through escalation clauses.

Application of Critical Accounting Estimates

Our consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. Management and the Audit Committee of our Board of Directors approve the critical accounting policies.

 

59


Table of Contents

Highlighted below are the accounting policies that we consider significant to the understanding and operations of our business as well as key estimates that are used in implementing the policies.

Revenue Recognition

Revenues and profits on long-term contracts are recorded under the percentage-of-completion method.

Progress towards completion on fixed-price contracts is measured based on physical completion of individual tasks for all contracts with a value of $5,000 or greater. For contracts with a value less than $5,000, progress toward completion is measured based on the ratio of costs incurred to total estimated contract costs (the cost-to-cost method).

Progress towards completion on cost-reimbursable contracts is measured based on the ratio of quantities expended to total forecasted quantities, typically man-hours. Incentives are also recognized on a percentage-of-completion basis when the realization of an incentive is assessed as probable. We include flow-through costs consisting of materials, equipment or subcontractor services as both operating revenues and cost of operating revenues on cost-reimbursable contracts when we have overall responsibility as the contractor for the engineering specifications and procurement or procurement services for such costs. There is no contract profit impact of flow-through costs as they are included in both operating revenues and cost of operating revenues.

Contracts in process are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. A full provision for loss contracts is made at the time the loss becomes probable regardless of the stage of completion.

At any time, we have numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total contract costs and estimates of progress toward completion to determine the extent of revenue and profit recognition. We rely extensively on estimates to forecast quantities of labor (man-hours), materials and equipment, the costs for those quantities (including exchange rates), and the schedule to execute the scope of work including allowances for weather, labor and civil unrest. Many of these estimates cannot be based on historical data, as most contracts are for unique, specifically designed facilities. In determining the revenues, we must estimate the percentage-of-completion, the likelihood that the client will pay for the work performed, and the cash to be received net of any taxes ultimately due or withheld in the country where the work is performed. Projects are reviewed on an individual basis and the estimates used are tailored to the specific circumstances. In establishing these estimates, we exercise significant judgment, and all possible risks cannot be specifically quantified.

The percentage-of-completion method requires that adjustments or re-evaluations to estimated project revenues and costs, including estimated claim recoveries, be recognized on a project-to-date cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made as additional information becomes available or as specific project circumstances change, including information that becomes available subsequent to the date of the consolidated financial statements up through the date such consolidated financial statements are filed with the SEC. If the final estimated profit to complete a long-term contract indicates a loss, provision is made immediately for the total loss anticipated. Profits are accrued throughout the life of the project based on the percentage-of-completion. The project life cycle, including project-specific warranty commitments, can be up to approximately six years in duration.

The actual project results can be significantly different from the estimated results. When adjustments are identified near or at the end of a project, the full impact of the change in estimate is recognized as a change in the profit on the contract in that period. This can result in a material impact on our results for a single reporting period. We review all of our material contracts on a monthly basis and revise our estimates as appropriate for developments such as earning project incentive bonuses, incurring or expecting to incur contractual liquidated damages for performance or schedule issues, providing services and purchasing third-party materials and

 

60


Table of Contents

equipment at costs differing from those previously estimated and testing completed facilities, which, in turn, eliminates or confirms completion and warranty-related costs. Project incentives are recognized when it is probable they will be earned. Project incentives are frequently tied to cost, schedule and/or safety targets and, therefore, tend to be earned late in a project’s life cycle.

Changes in estimated final contract revenues and costs can either increase or decrease the final estimated contract profit. In the period in which a change in estimate is recognized, the cumulative impact of that change is recorded based on progress achieved through the period of change. There were 36, 33 and 43 separate projects that experienced final estimated contract profit revisions with an impact on contract profit in excess of $1,000 in 2013, 2012 and 2011, respectively. The changes in final estimated contract profit resulted in a net increase of $98,900, $66,000 and $35,200 to reported contract profit for 2013, 2012 and 2011, respectively, relating to the revaluation of work performed on contracts in prior periods. The changes in final estimated contract profit revisions during 2012 for our Global Power Group were increased for a favorable settlement with a subcontractor of approximately $6,900. The changes in final estimated contract profit revisions during 2011 included the impact of two out-of-period corrections for reductions of final estimated profit totaling approximately $7,800, which included final estimated profit reductions in our Global E&C Group and our Global Power Group of approximately $3,200 and $4,600, respectively. The corrections were recorded in 2011 as they were not material to previously issued financial statements, nor were they material to the 2011 financial statements. The impact on contract profit is measured as of the beginning of each year and represents the incremental contract profit or loss that would have been recorded in prior periods had we been able to recognize in those periods the impact of the current period changes in final estimated profits.

Asbestos

Some of our U.S. and U.K. subsidiaries are defendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States and the United Kingdom. Plaintiffs claim damages for personal injury alleged to have arisen from exposure to or use of asbestos in connection with work allegedly performed by our subsidiaries during the 1970s and earlier. The calculation of asbestos-related liabilities and assets involves the use of estimates as discussed below.

We believe the most critical assumptions within our asbestos liability estimate are the number of future mesothelioma claims to be filed against us, the number of mesothelioma claims that ultimately will require payment from us or our insurers, and the indemnity payments required to resolve those mesothelioma claims.

United States

As of December 31, 2013, we had recorded total liabilities of $278,200 comprised of an estimated liability of $46,800 relating to open (outstanding) claims and an estimated liability of $231,400 relating to future unasserted claims through December 31, 2028.

Since 2004, we have worked with Analysis Research Planning Corporation, or ARPC, nationally recognized consultants in the United States with respect to projecting asbestos liabilities, to estimate the amount of asbestos-related indemnity and defense costs at year-end for the next 15 years. Since that time, we have recorded our estimated asbestos liability at a level consistent with ARPC’s reasonable best estimate.

Based on its review of the 2013 activity, ARPC recommended that certain assumptions used to estimate our future asbestos liability be updated as of December 31, 2013. Accordingly, we developed a revised estimate of our aggregate indemnity and defense costs through December 31, 2028 considering the advice of ARPC. In 2013, we revalued our liability for asbestos indemnity and defense costs through December 31, 2028 to $278,200, which brought our liability to a level consistent with ARPC’s reasonable best estimate. In connection with updating our estimated asbestos liability and related asset, we recorded a net charge of $46,000 in 2013.

 

61


Table of Contents

Our net asbestos-related provision was the net result of our revaluation of our asbestos liability and related asset resulting from:

 

    a charge related to the impact of an increase in our estimate of new claim filings,

 

    a decrease in our estimate of claim filings which result in no monetary payments, which we refer to as our zero-pay rate, over our 15-year estimate, and partially offset by

 

    the favorable impact of the inclusion of a gain recognized in 2013 upon collection of an insurance receivable of approximately $15,800 related to an insolvent insurance carrier, which had been previously written-off, as discussed below.

Our net asbestos-related provision was also impacted, to a lesser extent, by:

 

    an adjustment for actual claim settlement experience during the year, and

 

    an accrual of another year of estimated claims under our rolling 15-year asbestos-related liability estimate.

We believe the increase in our estimate of new claim filings and decrease in the zero-pay rate are short-term in nature and that the longer-term trend will revert to our previous forecast. We will continue to monitor these parameters and adjust our forecasts if actual results differ from our assumptions.

The total asbestos-related liabilities are comprised of our estimates for our liability relating to open (outstanding) claims being valued and our liability for future unasserted claims through December 31, 2028. Our liability estimate is based upon the following information and/or assumptions: number of open claims, forecasted number of future claims broken down by disease type – mesothelioma, lung cancer, and non-malignancies, and estimated average cost per claim by disease type – mesothelioma, lung cancer and non-malignancies, zero pay rate, as well as other factors. The total estimated liability, which has not been discounted for the time value of money, includes both the estimate of forecasted indemnity amounts and forecasted defense costs. Total defense costs and indemnity liability payments are estimated to be incurred through December 31, 2028, during which period the incidence of new claims is forecasted to decrease each year. We believe that it is likely that there will be new claims filed after December 31, 2028, but in light of uncertainties inherent in long-term forecasts, we do not believe that we can reasonably estimate the indemnity and defense costs that might be incurred after December 31, 2028. Through December 31, 2013, total cumulative indemnity costs paid, prior to insurance recoveries, were approximately $825,900 and total cumulative defense costs paid were approximately $409,700, or approximately 33% of total defense and indemnity costs.

As of December 31, 2013, we had recorded assets of $111,500, which represents our best estimate of settled and probable insurance recoveries relating to our liability for pending and estimated future asbestos claims through December 31, 2028. Asbestos-related assets under executed settlement agreements with insurers due in the next 12 months are recorded within accounts and notes receivable-other and amounts due beyond 12 months are recorded within asbestos-related insurance recovery receivable. Our asbestos-related insurance recovery receivable also includes our best estimate of settled and probable insurance recoveries relating to our liability for pending and estimated future asbestos claims through December 31, 2028. Our asbestos-related assets have not been discounted for the time value of money.

Our insurance recoveries may be limited by future insolvencies among our insurers. Other than receivables related to bankruptcy court-approved settlements during liquidation proceedings, we have not assumed recovery in the estimate of our asbestos-related insurance asset from any of our currently insolvent insurers. We have considered the financial viability and legal obligations of our subsidiaries’ insurance carriers and believe that the insurers or their guarantors will continue to reimburse a significant portion of claims and defense costs relating to asbestos litigation. As of December 31, 2013 and 2012, we have not recorded an allowance for uncollectible balances against our asbestos-related insurance assets. We write off receivables from insurers that have become

 

62


Table of Contents

insolvent; there have been no such write-offs during 2013, 2012 or 2011. During 2013, we recognized a gain of approximately $15,800 upon collection of an insurance receivable related to an insolvent insurance carrier, which we had previously written-off. During 2011, we reached an agreement with an insurer that was under bankruptcy liquidation and for which we had written off our receivable prior to 2010. The asset awarded under the bankruptcy liquidation for this insurer was $4,500 and was included in our asbestos-related assets as of December 31, 2011. This receivable was subsequently collected during 2012. Other insurers may become insolvent in the future and our insurers may fail to reimburse amounts owed to us on a timely basis. If we fail to realize the expected insurance recoveries, or experience delays in receiving material amounts from our insurers, our business, financial condition, results of operations and cash flows could be materially adversely affected.

We plan to update our forecasts periodically to take into consideration our experience and to update our estimate of future costs and expected insurance recoveries. The estimate of the liabilities and assets related to asbestos claims and recoveries is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number and type of claims filed, the amount of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed or costs to resolve those claims could cause us to increase further the estimates of the costs associated with asbestos claims and could have a material adverse effect on our financial condition, results of operations and cash flows.

The following chart reflects the sensitivities in the December 31, 2013 consolidated financial statements associated with a change in certain estimates used in relation to the U.S. asbestos-related liabilities.

 

     Approximate Change  
     in Liability  

Changes (Increase or Decrease) in Assumption:

  

One-percentage point change in the inflation rate related to the indemnity and defense costs

   $ 17,200   

Twenty-five percent change in average indemnity settlement amount

     40,300   

Twenty-five percent change in forecasted number of new claims

     57,900   

Based on the December 31, 2013 liability estimate, an increase of 25% in the average per claim indemnity settlement amount would increase the liability by $40,300 as described above and the impact on expense would be dependent upon available additional insurance recoveries. Assuming no change to the assumptions currently used to estimate our insurance asset, this increase would result in a charge in the statement of operations of approximately 85% of the increase in the liability. Long-term cash flows would ultimately change by the same amount. Should there be an increase in the estimated liability in excess of 25%, the percentage of that increase that would be expected to be funded by additional insurance recoveries would decline.

Our subsidiaries have been effective in managing the asbestos litigation, in part, because our subsidiaries: (1) have access to historical project documents and other business records going back more than 50 years, allowing them to defend themselves by determining if the claimants were present at the location of the alleged asbestos exposure and, if so, the timing and extent of their presence; (2) maintain good records on insurance policies and have identified and validated policies issued since 1952; and (3) have consistently and vigorously defended these claims which has resulted in dismissal of claims that are without merit or settlement of meritorious claims at amounts that are considered reasonable.

United Kingdom

As of December 31, 2013, we had recorded total liabilities of $33,100 comprised of an estimated liability relating to open (outstanding) claims of $8,500 and an estimated liability relating to future unasserted claims through December 31, 2028 of $24,600. An asset in substantially an equal amount was recorded for the expected U.K.

 

63


Table of Contents

asbestos-related insurance recoveries. The liability estimates are based on a U.K. House of Lords judgment that pleural plaque claims do not amount to a compensable injury and accordingly, we have reduced our liability assessment. If this ruling is reversed by legislation, the total asbestos liability recorded in the U.K. would increase to approximately $52,400, with a corresponding increase in the asbestos-related asset.

Defined Benefit Pension and Other Postretirement Benefit Plans

We have defined benefit pension plans in the U.S., the U.K., Canada, Finland, France, India and South Africa and we have other postretirement benefit plans, or OPEB plans, for health care and life insurance benefits in the U.S. and Canada.

Our defined benefit pension plans, or pension plans, cover certain full-time employees. Under the pension plans, retirement benefits are primarily a function of both years of service and level of compensation. The U.S. pension plans, which are closed to new entrants and additional benefit accruals, and the Canada, Finland, France and India pension plans are non-contributory. The U.K. pension plan, which is closed to new entrants and additional benefit accruals, and the South Africa pension plan are both contributory plans.

Certain employees in the U.S. and Canada may become eligible for health care and life insurance benefits, or other postretirement benefits, if they qualify for and commence receipt of normal or early retirement pension benefits as defined in the U.S. and Canada pension plans while working for us. Additionally, one of our subsidiaries in the U.S. also has a benefit plan which provides coverage for an employee’s beneficiary upon the death of the employee. This plan has been closed to new entrants since 1988.

Our defined benefit pension and OPEB plans are accounted for in accordance with current accounting guidance, which requires us to recognize the funded status of each of our defined benefit pension and OPEB plans on the consolidated balance sheet. The guidance also requires us to recognize any gains or losses, which are not recognized as a component of annual service cost, as a component of comprehensive income, net of tax. Please refer to Note 8 of the consolidated financial statements in this annual report on Form 10-K for more information.

The calculations of defined benefit pension and OPEB plan liabilities, annual service cost and cash contributions required rely heavily on estimates about future events often extending decades into the future. We are responsible for establishing the assumptions used for the estimates, which include:

 

    The discount rate used to calculate the present value of future obligations;

 

    The expected long-term rate of return on plan assets;

 

    The expected rate of annual salary increases;

 

    The selection of the actuarial mortality tables;

 

    The annual healthcare cost trend rate (only for the OPEB plans); and

 

    The annual inflation rate.

We utilize our business judgment in establishing the estimates used in the calculations of our pension and OPEB plan liabilities, annual service cost and cash contributions. These estimates are updated on an annual basis or more frequently upon the occurrence of significant events. The estimates can vary significantly from the actual results and we cannot provide any assurance that the estimates used to calculate the pension and/or OPEB plan liabilities included herein will approximate actual results. The volatility between the assumptions and actual results can be significant.

 

64


Table of Contents

The following table summarizes the estimates used for our defined benefit pension and OPEB plans for 2013, 2012 and 2011:

 

     Pension Plans     OPEB Plans  
     United States     United Kingdom     Other    
     2013     2012     2011     2013     2012     2011     2013     2012     2011     2013     2012     2011  

Net periodic benefit cost:

                        

Discount rate

     3.52     4.03     5.11     4.50     4.80     5.40     5.02     5.38     5.40     2.46     3.44     3.31

Long-term rate of return

     7.13     7.45     7.74     5.30     5.30     6.40     6.98     7.02     6.96     N/A        N/A        N/A   

Salary growth *

     N/A        N/A        N/A        N/A        N/A        N/A        3.19     2.26     3.59     N/A        N/A        N/A   

Projected benefit obligations:

                        

Discount rate

     4.41     3.52     4.03     4.45     4.50     4.80     5.51     4.47     5.18     4.16     3.28     3.85

Salary growth *

     N/A        N/A        N/A        N/A        N/A        N/A        2.55     2.21     4.21     N/A        N/A        N/A   

 

* Salary growth is not applicable for frozen pension plans as future salary levels do not affect benefits payable.

N/A – Not applicable.

The discount rate is developed using a market-based approach that matches our projected benefit payments to a spot yield curve of high-quality corporate bonds. Changes in the discount rate from period-to-period were generally due to changes in long-term interest rates.

The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. We annually review and adjust, as required, the long-term rate of return for our pension plans. The weighted-average expected long-term rate of return on plan assets has ranged from 5.8% to 6.8% over the past three years.

The following tables reflect the sensitivities in the consolidated financial statements associated with a change in certain estimates used in relation to the U.S. and the U.K. defined benefit pension plans. Each of the sensitivities below reflects an evaluation of the change based solely on a change in that particular estimate.

 

    Approximate Increase/ (Decrease)
Impact on
 
    Pension Liability     2013 Benefit Cost  

U.S. Pension Plan:

   

One-tenth of a percentage point increase in the discount rate

  $ (3,865   $ 35   

One-tenth of a percentage point decrease in the discount rate

    3,933        (39

One-tenth of a percentage point increase in the expected return on plan assets

    —          (337

One-tenth of a percentage point decrease in the expected return on plan assets

    —          337   
    Approximate Increase/ (Decrease)
Impact on
 
    Pension Asset     2013 Benefit Cost  

U.K. Pension Plan:

   

One-tenth of a percentage point increase in the discount rate

  $ 12,858      $ (324

One-tenth of a percentage point decrease in the discount rate

    (13,147     320   

One-tenth of a percentage point increase in the expected return on plan assets

    —          (831

One-tenth of a percentage point decrease in the expected return on plan assets

    —          843   

 

65


Table of Contents

Accumulated net actuarial losses and prior service credits from our pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year are $16,900 and $2,300, respectively. Estimated amortization of net transition obligation over the next year is inconsequential. Net actuarial losses reflect differences between expected and actual plan experience, including returns on plan assets, and changes in actuarial assumptions, all of which occurred over time. These net actuarial losses, to the extent not offset by future actuarial gains, will result in increases in our future pension costs depending on several factors, including whether such losses exceed the corridor in which losses are not amortized. The net actuarial losses outside the corridor are amortized over the expected remaining service periods of active participants (approximately 12, 24 and 19 years for the Canadian, South African and Finnish plans, respectively) and average remaining life expectancy of participants for our closed plans (approximately 22 and 29 years for the U.S. and U.K. plans, respectively) since benefits are closed.

A one-tenth of a percentage point decrease or increase in the funding rates, used for calculating future funding requirements to the U.S. plan through 2018, would not have an impact on aggregate contributions over the next five years.

A one-tenth of a percentage point decrease in the funding rates, used for calculating future funding requirements to the U.K. plan through 2018, would increase aggregate contributions over the next five years by approximately $4,500, while an increase by one-tenth of a percentage point would decrease aggregate contributions by approximately $4,500.

Accumulated net actuarial gains and prior service credits that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit cost in connection with our OPEB plans over the next year are $100 and $3,500, respectively. The net actuarial losses outside the corridor are amortized over the average life expectancy of inactive participants (approximately 15 years) because benefits are closed. The prior service credits are amortized over schedules established at the date of each plan change (approximately 7 years).

Please refer to Note 8 to the consolidated financial statements included in this annual report on Form 10-K for further discussion of our defined benefit pension and OPEB plans.

Share-Based Compensation Plans

Our share-based compensation plans include awards for stock options and restricted awards. Restricted awards consist of restricted stock units and performance-based restricted stock units, or performance RSUs. We measure these awards at fair value on their grant date and recognize compensation cost in the consolidated statements of operations over their vesting period.

The following table summarizes our share-based compensation expense and related income tax benefit:

 

     2013      2012      2011  

Share-based compensation

   $ 18,853       $ 21,623       $ 21,849   

Related income tax benefit

     819         527         413   

As of December 31, 2013, the breakdown of our unrecognized compensation cost and related weighted-average period for the cost to be recognized were as follows:

 

      December 31, 
2013
     Weighted-Average
Period for Cost
to be Recognized
 

Unrecognized compensation cost:

  

Stock options

   $ 2,761         1year   

Performance RSUs

     7,390         2years   

Restricted share units

     13,363         2years   
  

 

 

    

Total unrecognized compensation cost

   $ 23,514         2years   
  

 

 

    

 

66


Table of Contents

We did not grant any stock options during 2013. During 2012 and 2011, we estimated the fair value of each option award on the date of grant using the Black-Scholes option valuation model. We then recognize the grant date fair value of each option as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions for the stock options granted during 2012 and 2011:

 

    Expected volatility—we estimated the volatility of our share price at the grant date using a “look-back” period which coincides with the expected term, defined below. We believe using a “look-back” period which coincides with the expected term is the most appropriate measure for determining expected volatility.

 

    Expected term—we estimated the expected term using the “simplified” method, as outlined in Staff Accounting Bulletin No. 107, “Share-Based Payment.”

 

    Risk-free interest rate—we estimated the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant.

 

    Dividends—we used an expected dividend yield of zero because we had not declared or paid a cash dividend since July 2001, nor had we planned to at the time of grant.

We estimate the fair value of restricted share unit awards using the market price of our shares on the date of grant. We then recognize the fair value of each restricted share unit award as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period).

Under our performance RSU awards, the number of restricted share units that ultimately vest depend on our share price performance against specified performance goals, which are defined in our performance-based award agreements. We estimate the grant date fair value of each performance RSU award using a Monte Carlo valuation model. We then recognize the fair value of each performance RSU award as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period).

We estimate pre-vesting forfeitures at the time of grant using a combination of historical data and demographic characteristics, and we revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We record share-based compensation expense only for those awards that are expected to vest.

If factors change and we employ different assumptions in the application of current accounting guidance, the compensation expense that we record for awards in future periods may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved in selecting the option pricing model assumptions used to estimate share-based compensation expense. Consequently, there is a risk that our estimates of the fair value of our share-based compensation awards on the grant dates may bear little resemblance to the actual value realized upon the exercise/vesting, expiration or forfeiture of those share-based payments in the future. Stock options and performance RSUs may expire worthless or otherwise result in zero intrinsic value compared to the fair value originally estimated on the grant date and the expense reported in the consolidated financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair value originally estimated on the grant date and the expense reported in the consolidated financial statements.

There are significant differences among valuation models. This may result in a lack of comparability with other companies that use different models, methods and assumptions. There is also a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and may materially affect the fair value estimate of share-based payments.

Please refer to Note 11 to the consolidated financial statements included in this annual report on Form 10-K for further discussion of our share-based compensation plans.

Goodwill and Intangible Assets

At least annually, we evaluate goodwill for potential impairment. We test goodwill for impairment at the reporting unit level, which we have determined to be the components one level below our operating segments, as

 

67


Table of Contents

these components constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. Presently, goodwill exists in five of our reporting units—one within our Global Power Group business segment and four within our Global E&C Group business segment.

We first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amount; if so, no further assessments are performed. For reporting units where that is not the case, we perform a goodwill impairment test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step compares the implied fair value of the reporting unit’s goodwill, based on a hypothetical purchase price allocation, with the carrying amount of that goodwill. In the fourth quarter of each year, we evaluate goodwill at each reporting unit based on assumptions used to estimate the fair value of our reporting units and assess recoverability, and impairments, if any, which are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill.

Intangible assets with determinable useful lives are amortized over their respective estimated useful lives and reviewed for impairment together with other tangible long-lived assets whenever events or circumstances indicate that an impairment may exist.

We determined that both the income and market valuation approaches would be considered by market participants. Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. The models also assume a 3% growth rate in the terminal year. Actual results could differ from our projections.

Under the market valuation approach, we employ the guideline publicly traded company method, which indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. After identifying and selecting guideline companies, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units.

During our 2013 annual evaluation, we noted that the indicated fair value was above the carrying value for each of our reporting units.

Income Taxes

Deferred tax assets and liabilities are established for tax attributes (credits or loss carryforwards) and temporary differences between the book and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates based on the date of enactment. Within each jurisdiction and taxpaying component, current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities are combined and presented as a net amount.

Deferred tax assets are reduced by a valuation allowance when, based upon available evidence, it is more likely than not that the tax benefit of loss carryforwards (or other deferred tax assets) will not be realized in the future. In evaluating our ability to realize our deferred tax assets within the various tax jurisdictions in which they arise, we consider all available positive and negative evidence, including scheduled reversals of taxable temporary differences, projected future taxable income, tax planning strategies and recent financial performance. Projecting future taxable income requires significant assumptions about future operating results, as well as the timing and

 

68


Table of Contents

character of taxable income in numerous jurisdictions. We have a valuation allowance of approximately $420,100 recorded as of December 31, 2013 (primarily in the U.S.). The majority of the U.S. federal tax benefits, against which valuation allowances have been established, do not expire until 2025 and beyond, based on current tax laws.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

Our subsidiaries file income tax returns in many tax jurisdictions, including the United States, several U.S. states and numerous non-U.S. jurisdictions around the world. Tax returns are also filed in jurisdictions where our subsidiaries execute project-related work. The statute of limitations varies by jurisdiction. Because of the number of jurisdictions in which we file tax returns, in any given year the statute of limitations in a number of jurisdictions may expire within 12 months from the balance sheet date. As a result, we expect recurring changes in unrecognized tax benefits due to the expiration of the statute of limitations, none of which are expected to be individually significant. With few exceptions, we are no longer subject to U.S. (including federal, state and local) or non-U.S. income tax examinations by tax authorities for years before 2009.

During the fourth quarter of 2013, we recorded a tax provision of approximately $10,700 related to a tax audit in a non-U.S. jurisdiction. A number of tax years are under audit by the relevant tax authorities in various jurisdictions, including several states within the U.S. We anticipate that several of these audits may be concluded in the foreseeable future, including in 2013. Based on the status of these audits, it is reasonably possible that the conclusion of the audits may result in a reduction of unrecognized tax benefits. However, it is not possible to estimate the magnitude of any such reduction at this time.

As of December 31, 2013, we had $68,300 of unrecognized tax benefits, all of which would, if recognized, affect our effective tax rate.

We recognize interest accrued on the unrecognized tax benefits in interest expense and penalties on the unrecognized tax benefits in other deductions, net on our consolidated statement of operations. Previously accrued interest and/or penalties that are ultimately not assessed reduce current year expense.

Please refer to Note 13 to the consolidated financial statements included in this annual report on Form 10-K for further discussion of our income taxes.

 

69


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(amounts in thousands of dollars)

Interest Rate Risk—We are exposed to changes in interest rates should we need to borrow under our senior unsecured credit agreement (there were no such borrowings as of December 31, 2013 and, based on our current operating plans and cash flow forecasts, none are expected in 2014) and, to a limited extent, under our variable rate special-purpose limited recourse project debt for any portion of the debt for which we have not entered into a fixed rate swap agreement. If average market rates are 100-basis points higher in the next 12 months, our interest expense for such period of time would increase, and our income before income taxes would decrease, by approximately $100. This amount has been determined by considering the impact of the hypothetical interest rates on our variable rate borrowings as of December 31, 2013 and does not reflect the impact of interest rate changes on outstanding debt held by certain of our equity interests since such debt is not consolidated on our balance sheet.

Foreign Currency Risk—We operate on a worldwide basis with operations that subject us to foreign currency exchange rate risk mainly relative to the British pound, Chinese Yuan, Euro and U.S. dollar as of December 31, 2013. Under our risk management policies, we do not hedge translation risk exposure.

All activities of our affiliates are recorded in their functional currency, which is typically the local currency in the country of domicile of the affiliate. In the ordinary course of business, our affiliates enter into transactions in currencies other than their respective functional currencies. We seek to minimize the resulting foreign currency transaction risk by contracting for the procurement of goods and services in the same currency as the sales value of the related long-term contract.

We further mitigate the risk through the use of foreign currency forward contracts to hedge the foreign currency exposure, such as anticipated foreign currency purchases or revenues, back to their functional currency. We utilize all such financial instruments solely for hedging, and our company policy prohibits the speculative use of such instruments. However, for financial reporting purposes, these contracts are generally not accounted for as hedges.

The notional amount of our foreign currency forward contracts provides one measure of our transaction volume outstanding as of the balance sheet date. As of December 31, 2013, we had a total gross notional amount, measured in U.S. dollar equivalent, of approximately $399,800 related to foreign currency forward contracts and the primary currencies hedged were the British pound, Chinese yuan, Euro and U.S. dollar. Amounts ultimately realized upon final settlement of these financial instruments, along with the gains and losses on the underlying exposures within our long-term contracts, will depend on actual market exchange rates during the remaining life of the instruments. The contract maturity dates range from 2014 through 2016.

We are exposed to credit loss in the event of non-performance by the counterparties. These counterparties are commercial banks that are primarily rated “BBB+” or better by S&P (or the equivalent by other recognized credit rating agencies). Further significant deterioration of the current global economic and credit market environment could challenge our efforts to maintain our well-diversified asset allocation with creditworthy financial institutions.

Please refer to Note 10 to the consolidated financial statements included in this annual report on Form 10-K for further information on our primary foreign currency forward exchange contracts.

 

70


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

 

     Page  

Report of Independent Registered Public Accounting Firm

     72   

Consolidated Statement of Operations

     73   

Consolidated Statement of Comprehensive Income

     74   

Consolidated Balance Sheet

     75   

Consolidated Statement of Changes in Equity

     77   

Consolidated Statement of Cash Flows

     79   

Notes to Consolidated Financial Statements

     81   

Schedule II – Valuation and Qualifying Accounts

     139   

 

71


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler AG:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Foster Wheeler AG and its subsidiaries (“the Company”) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of the Company’s Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

February 27, 2014

 

72


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands of dollars, except per share amounts)

 

     2013     2012     2011  

Operating revenues

   $ 3,306,450      $ 3,391,394      $ 4,458,108   

Cost of operating revenues

     2,747,401        2,801,351        3,918,440   
  

 

 

   

 

 

   

 

 

 

Contract profit

     559,049        590,043        539,668   

Selling, general and administrative expenses

     357,682        334,075        309,380   

Other income, net

     (23,424     (37,490     (51,457

Other deductions, net

     34,615        34,601        43,968   

Interest income

     (6,272     (10,801     (18,913

Interest expense

     13,227        13,797        12,876   

Net asbestos-related provision

     30,213        30,505        9,901   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     153,008        225,356        233,913   

Provision for income taxes

     52,166        62,267        58,514   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     100,842        163,089        175,399   
  

 

 

   

 

 

   

 

 

 

Discontinued operations:

      

Income/(loss) from discontinued operations before income taxes

     265        (13,193     1,329   

Provision for income taxes from discontinued operations

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Income/(loss) from discontinued operations

     265        (13,193     1,329   
  

 

 

   

 

 

   

 

 

 

Net income

     101,107        149,896        176,728   
  

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     3,940        13,874        14,345   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 97,167      $ 136,022      $ 162,383   
  

 

 

   

 

 

   

 

 

 

Amounts attributable to Foster Wheeler AG:

      

Income from continuing operations

   $ 96,902      $ 149,215      $ 161,054   

Income/(loss) from discontinued operations

     265        (13,193     1,329   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 97,167      $ 136,022      $ 162,383   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to Foster Wheeler AG:

      

Income from continuing operations (see Note 1)

   $ 0.97      $ 1.39      $ 1.34   

Income/(loss) from discontinued operations

     —          (0.12     0.01   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 0.97      $ 1.27      $ 1.35   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to Foster Wheeler AG:

      

Income from continuing operations (see Note 1)

   $ 0.96      $ 1.39      $ 1.34   

Income/(loss) from discontinued operations

     —          (0.12     0.01   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 0.96      $ 1.27      $
1.35
  
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

73


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands of dollars)

 

     2013     2012     2011  

Net income

   $ 101,107      $ 149,896      $ 176,728   

Other comprehensive income/(loss), net of tax:

      

Foreign currency translation adjustments:

      

Foreign currency translation adjustments

     (5,851     8,044        (24,489

Tax impact

     (8     (384     —     
  

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax

     (5,859     7,660        (24,489
  

 

 

   

 

 

   

 

 

 

Cash flow hedges adjustments, net of tax:

      

Unrealized gain/(loss)

     687        (6,153     (7,404

Tax impact

     (261     2,309        2,531   
  

 

 

   

 

 

   

 

 

 

Unrealized gain/(loss), net of tax

     426        (3,844     (4,873
  

 

 

   

 

 

   

 

 

 

Reclassification for losses included in net income

     4,546        3,862        4,240   

Tax impact

     (1,405     (1,395     (1,069
  

 

 

   

 

 

   

 

 

 

Reclassification for losses included in net income, net of tax

     3,141        2,467        3,171   
  

 

 

   

 

 

   

 

 

 

Total cash flow hedges adjustments, net of tax

     3,567        (1,377     (1,702
  

 

 

   

 

 

   

 

 

 

Pension and other postretirement benefits adjustments, net of tax:

      

Net actuarial gain/(loss)

     28,338        (66,477     (93,645

Tax impact

     (1,662     12,320        8,395   
  

 

 

   

 

 

   

 

 

 

Net actuarial gain/(loss), net of tax

     26,676        (54,157     (85,250
  

 

 

   

 

 

   

 

 

 

Prior service credit/(cost)

     17,428        (25     48,056   

Tax impact

     —          —          (12,494
  

 

 

   

 

 

   

 

 

 

Prior service credit/(cost), net of tax

     17,428        (25     35,562   
  

 

 

   

 

 

   

 

 

 

Amortization included in net periodic pension cost (see Note 6 for further information):

      

Net actuarial loss

     18,921        17,308        13,626   

Tax impact

     1,628        (2,430     (1,963
  

 

 

   

 

 

   

 

 

 

Net actuarial loss, net of tax

     20,549        14,878        11,663   
  

 

 

   

 

 

   

 

 

 

Prior service credit

     (5,106     (5,075     (4,480

Tax impact

     311        401        243   
  

 

 

   

 

 

   

 

 

 

Prior service credit, net of tax

     (4,795     (4,674     (4,237
  

 

 

   

 

 

   

 

 

 

Transition obligation

     56        52        46   

Tax impact

     (13     13        15   
  

 

 

   

 

 

   

 

 

 

Transition obligation, net of tax

     43        65        61   
  

 

 

   

 

 

   

 

 

 

Total pension and other postretirement benefits adjustments, net of tax

     59,901        (43,913     (42,201
  

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss), net of tax

     57,609        (37,630     (68,392
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     158,716        112,266        108,336   

Less: Comprehensive income attributable to noncontrolling interests

     3,263        13,779        11,517   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Foster Wheeler AG

   $ 155,453      $ 98,487      $ 96,819   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

74


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in thousands of dollars, except share data and per share amounts)

 

     December 31,
2013
     December 31,
2012
 

ASSETS

     

Current Assets:

     

Cash and cash equivalents

   $ 556,190       $ 582,322   

Accounts and notes receivable, net:

     

Trade

     671,770         609,213   

Other

     57,262         86,981   

Contracts in process

     197,232         228,979   

Prepaid, deferred and refundable income taxes

     62,856         57,404   

Other current assets

     38,431         47,138   

Current assets of discontinued operations

     —           1,505   
  

 

 

    

 

 

 

Total current assets

     1,583,741         1,613,542   
  

 

 

    

 

 

 

Land, buildings and equipment, net

     279,981         285,402   

Restricted cash

     82,867         62,189   

Notes and accounts receivable - long-term

     15,060         14,119   

Investments in and advances to unconsolidated affiliates

     181,315         205,476   

Goodwill

     169,801         133,518   

Other intangible assets, net

     113,463         105,100   

Asbestos-related insurance recovery receivable

     120,489         132,438   

Long-term assets of discontinued operations

     —           49,579   

Other assets

     143,848         90,509   

Deferred tax assets

     49,707         42,052   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 2,740,272       $ 2,733,924   
  

 

 

    

 

 

 

LIABILITIES, TEMPORARY EQUITY AND EQUITY

     

Current Liabilities:

     

Current installments on long-term debt

   $ 12,513       $ 13,672   

Accounts payable

     282,403         298,411   

Accrued expenses

     304,312         231,602   

Billings in excess of costs and estimated earnings on uncompleted contracts

     569,652         564,356   

Income taxes payable

     39,078         64,992   

Liabilities of discontinued operations

     —           3,154   
  

 

 

    

 

 

 

Total current liabilities

     1,207,958         1,176,187   
  

 

 

    

 

 

 

Long-term debt

     113,719         124,034   

Deferred tax liabilities

     39,714         40,889   

Pension, postretirement and other employee benefits

     111,221         177,345   

Asbestos-related liability

     257,180         259,350   

Other long-term liabilities

     210,651         190,132   

Commitments and contingencies

     
  

 

 

    

 

 

 

TOTAL LIABILITIES

     1,940,443         1,967,937   
  

 

 

    

 

 

 

Temporary Equity:

     

Non-vested share-based compensation awards subject to redemption

     15,664         8,594   
  

 

 

    

 

 

 

TOTAL TEMPORARY EQUITY

     15,664         8,594   
  

 

 

    

 

 

 

 

75


Table of Contents
     December 31,
2013
    December 31,
2012
 

Equity:

    

Registered shares:

    

CHF 3.00 par value; authorized: 157,863,694 shares and 171,018,974 shares; conditionally authorized: 58,168,412 shares and 59,369,723 shares; issued: 105,642,900 shares and 108,701,018 shares; outstanding: 99,051,200 shares and 104,441,589 shares.

     259,937        269,633   

Paid-in capital

     216,450        266,943   

Retained earnings

     933,160        835,993   

Accumulated other comprehensive loss

     (509,317     (567,603

Treasury shares (outstanding: 6,591,700 shares and 4,259,429 shares)

     (150,131     (90,976
  

 

 

   

 

 

 

TOTAL FOSTER WHEELER AG SHAREHOLDERS’ EQUITY

     750,099        713,990   
  

 

 

   

 

 

 

Noncontrolling interests

     34,066        43,403   
  

 

 

   

 

 

 

TOTAL EQUITY

     784,165        757,393   
  

 

 

   

 

 

 

TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY

   $ 2,740,272      $
2,733,924
  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

76


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands of dollars, except share data)

 

     Shares     Registered
Shares

Value
    Paid-in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive

Loss
    Treasury
Shares
Value
    Total Foster
Wheeler AG
Shareholders’

Equity
    Noncontrolling
Interests
    Total
Equity
 
     Registered     Treasury                   

Balance at December 31, 2010

     128,948,622        4,312,710      $  334,052      $ 659,739      $  537,588       $  (464,504   $  (99,182   $ 967,693      $ 47,656      $  1,015,349   

Net income

     —          —          —          —          162,383         —          —          162,383        14,345        176,728   

Other comprehensive loss, net of tax

     —          —          —          —          —           (65,564     —          (65,564     (2,828     (68,392

Issuance of registered shares upon exercise of stock options

     414,361        —          1,334        9,557        —           —          —          10,891        —          10,891   

Issuance of registered shares upon vesting of restricted awards

     479,150        —          1,570        (1,570     —           —          —          —          —          —     

Distributions to noncontrolling interests

     —          —          —          —          —           —          —          —          (11,373     (11,373

Capital contribution from noncontrolling interests

     —          —          —          —          —           —          —          —          125        125   

Share-based compensation expense

     —          —          —          21,791        —           —          —          21,791        —          21,791   

Excess tax shortfall related to share-based compensation

     —          —          —          (57     —           —          —          (57     —          (57

Repurchase of registered shares

     —          17,240,420        —          —          —           —          (409,390     (409,390     —          (409,390

Retirement of registered shares

     (4,312,710     (4,312,710     (15,775     (83,407     —           —          99,182        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     125,529,423        17,240,420      $ 321,181      $ 606,053      $ 699,971       $ (530,068   $ (409,390   $ 687,747      $ 47,925      $ 735,672   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —          —          —          136,022         —          —          136,022        13,874        149,896   

Other comprehensive loss, net of tax

     —          —          —          —          —           (37,535     —          (37,535     (95     (37,630

Issuance of registered shares upon exercise of stock options

     48,623        —          158        649        —           —          —          807        —          807   

Issuance of registered shares upon vesting of restricted awards

     363,392        —          1,179        (1,179     —           —          —          —          —          —     

Distributions to noncontrolling interests

     —          —          —          —          —           —          —          —          (18,301     (18,301

Share-based compensation expense

     —          —          —          18,023        —           —          —          18,023        —          18,023   

Excess tax shortfall related to share-based compensation

     —          —          —          (98     —           —          —          (98     —          (98

Repurchase of registered shares

     —          4,259,429        —          —          —           —          (90,976     (90,976     —          (90,976

Retirement of registered shares

     (17,240,420     (17,240,420     (52,885     (356,505     —           —          409,390        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     108,701,018        4,259,429      $ 269,633      $ 266,943      $ 835,993       $ (567,603   $ (90,976   $ 713,990      $ 43,403      $ 757,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —          —          —          97,167         —          —          97,167        3,940        101,107   

Other comprehensive income/(loss), net of tax

     —          —          —          —          —           58,286        —          58,286        (677     57,609   

Issuance of registered shares upon exercise of stock options

     882,830        —          2,889        16,267        —           —          —          19,156        —          19,156   

Issuance of registered shares upon vesting of restricted awards

     318,481        —          1,023        (1,023     —           —          —          —          —          —     

 

77


Table of Contents
     Shares     Registered
Shares

Value
    Paid-in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive

Loss
    Treasury
Shares
Value
    Total Foster
Wheeler AG
Shareholders’

Equity
    Noncontrolling
Interests
    Total
Equity
 
     Registered     Treasury                   

Distributions to noncontrolling interests

     —          —          —          —          —           —          —          —          (12,600     (12,600

Share-based compensation expense

     —          —          —          11,783        —           —          —          11,783        —          11,783   

Excess tax shortfall related to share-based compensation

     —          —          —          (152     —           —          —          (152     —          (152

Repurchase of registered shares

     —          6,591,700        —          —          —           —          (150,131     (150,131     —          (150,131

Retirement of registered shares

     (4,259,429     (4,259,429     (13,608     (77,368     —           —          90,976        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     105,642,900        6,591,700      $ 259,937      $ 216,450      $ 933,160       $ (509,317   $ (150,131   $ 750,099      $ 34,066      $ 784,165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

78


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

 

     2013     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income

   $ 101,107      $ 149,896      $ 176,728   

Adjustments to reconcile net income to cash flows from operating activities:

      

Depreciation and amortization

     57,574        50,234        44,551   

Net non-cash asbestos-related provision

     45,957        30,505        9,915   

Share-based compensation expense

     18,853        21,623        21,849   

Shortfall in tax benefit related to share-based compensation

     151        98        57   

Deferred income tax benefit

     (6,752     (9,669     (16,316

Gain on sale of assets

     —          (173     (974

Dividends, net of equity in earnings of unconsolidated affiliates

     40,621        3,012        8,017   

Other noncash items, net

     283        936        —     

Changes in assets and liabilities, net of effects from acquisitions and divestiture:

      

(Increase)/decrease in receivables

     (8,962     (154,035     128,672   

Net change in contracts in process and billings in excess of costs and estimated earnings on uncompleted contracts

     29,832        (57,247     (127,789

(Decrease)/increase in accounts payable and accrued expenses

     (15,417     44,845        9,085   

(Decrease)/increase in income taxes payable

     (34,032     23,082        (5,192

Net change in other current assets and liabilities

     4,010        385        (3,356

Decrease in pension, postretirement and other employee benefits

     (22,668     (23,850     (73,464

Net change in asbestos-related assets and liabilities

     (18,162     (8,993     (7,898

Net change in other long-term assets and liabilities

     10        21,720        20,061   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities — continuing operations

     192,405        92,369        183,946   
  

 

 

   

 

 

   

 

 

 

Net cash (used in)/provided by operating activities — discontinued operations

     (385     932        1,800   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     192,020        93,301        185,746   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Payments related to acquisition of businesses, net of cash acquired

     (52,127     (69,675     (29,376

Proceeds from disposition of business

     48,600        —          —     

Change in restricted cash

     (17,413     (18,135     (18,707

Capital expenditures

     (27,725     (34,687     (26,219

Investments in and advances to unconsolidated affiliates

     (11,618     (2,003     —     

Return of investment from unconsolidated affiliates

     87        6,207        2   

Purchase of short-term investments

     —          —          (1,546

Proceeds from sale of short-term investments

     —          1,255        —     

Other investing activities

     1,176        578        2,157   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     (59,020     (116,460     (73,689
  

 

 

   

 

 

   

 

 

 

Net cash provided by/(used in) investing activities — discontinued operations

     385        (932     (1,800
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (58,635     (117,392     (75,489