XNAS:FWLT Foster Wheeler AG Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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.)

80 Rue de Lausanne

CH 1202 Geneva, Switzerland

  1202
(Address of principal executive offices)   (Zip Code)

41 22 741 8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate 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). Yes x No ¨

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 Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 107,808,822 registered shares (CHF 3.00 par value) were outstanding as of April 20, 2012.


Table of Contents

FOSTER WHEELER AG

INDEX

 

Part I FINANCIAL INFORMATION

     3   

Item 1  

           Financial Statements (Unaudited):   
      Consolidated Statement of Operations for the
Three Months Ended March 31, 2012 and 2011
     3   
      Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 2012 and 2011
     4   
      Consolidated Balance Sheet as of March 31, 2012 and
December 31, 2011
     5   
      Consolidated Statement of Changes in Equity
for the Three Months Ended March 31, 2012 and 2011
     6   
      Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2012 and 2011
     7   
      Notes to Consolidated Financial Statements      8   

Item 2  

           Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3  

           Quantitative and Qualitative Disclosures about Market Risk      47   

Item 4  

           Controls and Procedures      47   

Part II OTHER INFORMATION

    

48

  

Item 1

           Legal Proceedings      48   

Item 1A

           Risk Factors      48   

Item 2

           Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3

           Defaults Upon Senior Securities      48   

Item 4

           Mine Safety Disclosures      48   

Item 5

           Other Information      49   

Item 6

           Exhibits      50   

Signatures

    

51

  


Table of Contents
PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands of dollars, except per share amounts)

(unaudited)

 

     Three Months Ended March 31,  
    

 

2012

   

 

2011

 

Operating revenues

   $                 933,096      $                 1,036,252   

Cost of operating revenues

     793,764        936,997   
  

 

 

   

 

 

 

Contract profit

     139,332        99,255   

Selling, general and administrative expenses

     83,281        73,841   

Other income, net

     (8,184     (14,266

Other deductions, net

     4,064        6,117   

Interest income

     (3,169     (3,275

Interest expense

     3,416        3,879   

Net asbestos-related provision

     1,997        400   
  

 

 

   

 

 

 

Income before income taxes

     57,927        32,559   

Provision for income taxes

     14,884        7,283   
  

 

 

   

 

 

 

Net income

     43,043        25,276   
  

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     2,397        2,305   
  

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 40,646      $ 22,971   
  

 

 

   

 

 

 

Earnings per share (see Note 1):

    

Basic

   $ 0.38      $ 0.18   
  

 

 

   

 

 

 

Diluted

   $ 0.38      $ 0.18   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


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FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands of dollars)

(unaudited)

 

     Three Months Ended March 31,  
    

 

2012

   

 

2011

 

Net income

   $                 43,043      $                 25,276   

Other comprehensive income, net of tax:

    

Foreign currency translation adjustments

     14,272        21,230   

Cash flow hedges adjustments:

    

Unrealized (loss)/gain

     (1,277     1,115   

Reclassification for losses included in net income

     566        857   
  

 

 

   

 

 

 

Total cash flow hedges adjustments

     (711     1,972   

Pension and other postretirement benefits adjustment:

    

Amortization included in net periodic pension cost

     2,707        2,265   
  

 

 

   

 

 

 

Other comprehensive income

     16,268        25,467   
  

 

 

   

 

 

 

Comprehensive income

     59,311        50,743   

Less: Comprehensive income attributable to noncontrolling interests

     3,722        2,458   
  

 

 

   

 

 

 

Comprehensive income attributable to Foster Wheeler AG

   $ 55,589      $ 48,285   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


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FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

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

(unaudited)

 

     March 31, 2012     December 31, 2011  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 648,904      $ 718,049   

Short-term investments

     1,334        1,294   

Accounts and notes receivable, net:

    

Trade

     573,564        427,984   

Other

     100,632        97,495   

Contracts in process

     209,487        166,648   

Prepaid, deferred and refundable income taxes

     65,507        62,616   

Other current assets

     52,319        49,101   
  

 

 

   

 

 

 

Total current assets

     1,651,747        1,523,187   
  

 

 

   

 

 

 

Land, buildings and equipment, net

     344,876        341,987   

Restricted cash

     37,561        44,094   

Notes and accounts receivable - long-term

     6,478        6,210   

Investments in and advances to unconsolidated affiliates

     212,657        211,109   

Goodwill

     114,286        112,120   

Other intangible assets, net

     72,105        74,386   

Asbestos-related insurance recovery receivable

     148,246        157,127   

Other assets

     122,871        118,178   

Deferred tax assets

     23,746        25,482   
  

 

 

   

 

 

 

TOTAL ASSETS

   $                     2,734,573      $                     2,613,880   
  

 

 

   

 

 

 

LIABILITIES, TEMPORARY EQUITY AND EQUITY

    

Current Liabilities:

    

Current installments on long-term debt

   $ 13,004      $ 12,683   

Accounts payable

     300,380        250,821   

Accrued expenses

     222,711        237,089   

Billings in excess of costs and estimated earnings on uncompleted contracts

     598,845        550,746   

Income taxes payable

     33,858        39,645   
  

 

 

   

 

 

 

Total current liabilities

     1,168,798        1,090,984   
  

 

 

   

 

 

 

Long-term debt

     138,340        136,428   

Deferred tax liabilities

     47,070        44,622   

Pension, postretirement and other employee benefits

     169,557        171,065   

Asbestos-related liability

     262,254        269,520   

Other long-term liabilities

     165,828        160,596   

Commitments and contingencies

    
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,951,847        1,873,215   
  

 

 

   

 

 

 

Temporary Equity:

    

Non-vested share-based compensation awards subject to redemption

     6,295        4,993   
  

 

 

   

 

 

 

TOTAL TEMPORARY EQUITY

     6,295        4,993   
  

 

 

   

 

 

 

Equity:

    

Registered shares:

    

CHF 3.00 par value; authorized: 187,930,698 shares and 187,847,379 shares, respectively; conditionally authorized: 59,698,419 shares and 59,781,738 shares, respectively; issued: 125,612,742 shares and 125,529,423 shares, respectively; outstanding: 107,808,222 shares and 108,289,003 shares, respectively.

     321,455        321,181   

Paid-in capital

     609,916        606,053   

Retained earnings

     740,617        699,971   

Accumulated other comprehensive loss

     (515,125     (530,068

Treasury shares (outstanding: 17,804,520 shares and 17,240,420 shares, respectively)

     (420,345     (409,390
  

 

 

   

 

 

 

TOTAL FOSTER WHEELER AG SHAREHOLDERS’ EQUITY

     736,518        687,747   
  

 

 

   

 

 

 

Noncontrolling interests

     39,913        47,925   
  

 

 

   

 

 

 

TOTAL EQUITY

     776,431        735,672   
  

 

 

   

 

 

 

TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY

   $ 2,734,573      $ 2,613,880   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands of dollars)

(unaudited)

 

     Registered
Shares
     Paid-in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Loss
    Treasury
Shares
    Total Foster
Wheeler AG
Shareholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

Three Months Ended March 31, 2011:

                  

Balance at December 31, 2010

   $ 334,052       $ 659,739      $ 537,588       $ (464,504   $ (99,182   $ 967,693      $ 47,656      $ 1,015,349   

Net income

     -         -        22,971         -        -        22,971        2,305        25,276   

Other comprehensive income, net of tax

     -         -        -         25,314        -        25,314        153        25,467   

Issuance of registered shares upon exercise of stock options

     1,190         8,619        -         -        -        9,809        -        9,809   

Issuance of registered shares upon vesting of restricted awards

     149         (149     -         -        -        -        -        -   

Distributions to noncontrolling interests

     -         -        -         -        -        -        (8,672     (8,672

Capital contribution from noncontrolling interests

     -         -        -         -        -        -        125        125   

Share-based compensation expense

     -         3,800        -         -        -        3,800        -        3,800   

Excess tax benefit related to share-based compensation

     -         4        -         -        -        4        -        4   

Repurchase of registered shares

     -         -        -         -        (29,216     (29,216     -        (29,216
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $     335,391       $     672,013      $     560,559       $ (439,190   $ (128,398   $     1,000,375      $     41,567      $     1,041,942   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012:

                  

Balance at December 31, 2011

   $ 321,181       $ 606,053      $ 699,971       $ (530,068   $ (409,390   $ 687,747      $ 47,925      $ 735,672   

Net income

     -         -        40,646         -        -        40,646        2,397        43,043   

Other comprehensive income, net of tax

     -         -        -         14,943        -        14,943        1,325        16,268   

Issuance of registered shares upon exercise of stock options

     105         465        -         -        -        570        -        570   

Issuance of registered shares upon vesting of restricted awards

     169         (169     -         -        -        -        -        -   

Distributions to noncontrolling interests

     -         -        -         -        -        -        (11,734     (11,734

Share-based compensation expense

     -         3,624        -         -        -        3,624        -        3,624   

Excess tax shortfall related to share-based compensation

     -         (57     -         -        -        (57     -        (57

Repurchase of registered shares

     -         -        -         -        (10,955     (10,955     -        (10,955
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 321,455       $ 609,916      $ 740,617       $ (515,125   $ (420,345   $ 736,518      $ 39,913      $ 776,431   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

(unaudited)

 

     Three Months Ended March 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $                 43,043      $                 25,276   

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

    

Depreciation and amortization

     13,020        12,671   

Net asbestos-related provision

     1,997        400   

Share-based compensation expense

     4,926        4,871   

Excess tax shortfall/(benefit) related to share-based compensation

     57        (4

Deferred income tax provision/(benefit)

     5,467        (10,638

Gain on sale of assets

     (69     (616

Equity in earnings of investees, net of dividends

     (4,412     (2,619

Changes in assets and liabilities:

    

(Increase)/decrease in receivables

     (137,021     65,912   

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

     (9,252     8,853   

Increase/(decrease) in accounts payable and accrued expenses

     33,407        (16,619

Net change in other current assets and liabilities

     (9,975     (6,679

Net change in other long-term assets and liabilities

     (11,216     (14,305
  

 

 

   

 

 

 

Net cash (used in)/provided by operating activities

     (70,028     66,503   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Change in restricted cash

     7,182        (4,862

Capital expenditures

     (7,645     (11,530

Proceeds from sale of assets

     163        813   

Return of investment from unconsolidated affiliates

     6,117        -   
  

 

 

   

 

 

 

Net cash provided by/(used in) investing activities

     5,817        (15,579
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repurchase of shares

     (10,955     (29,216

Distributions to noncontrolling interests

     (11,734     (8,672

Proceeds from capital contribution from noncontrolling interests

     -        125   

Proceeds from stock options exercised

     570        9,101   

Excess tax (shortfall)/benefit related to share-based compensation

     (57     4   

Repayment of debt and capital lease obligations

     (686     (551
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,862     (29,209
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     17,928        23,945   
  

 

 

   

 

 

 

(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS

     (69,145     45,660   

Cash and cash equivalents at beginning of year

     718,049        1,057,163   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $     648,904      $     1,102,823   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation — The fiscal year of Foster Wheeler AG ends on December 31 of each calendar year. Foster Wheeler AG’s fiscal quarters end on the last day of March, June and September. The fiscal years of our non-U.S. operations are the same as the parent’s. The fiscal year of our U.S. operations is the 52- or 53-week annual accounting period ending on the last Friday in December.

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments only consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year.

The consolidated financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”), filed with the Securities and Exchange Commission on February 23, 2012. The consolidated balance sheet as of December 31, 2011 was derived from the audited financial statements included in our 2011 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America for annual consolidated financial statements.

Certain prior period amounts have been reclassified to conform to the current period presentation.

The consolidated financial statements include the accounts of Foster Wheeler AG and all significant U.S. and non-U.S. subsidiaries, as well as certain entities in which we have a controlling interest. Intercompany transactions and balances have been eliminated. See “—Variable Interest Entities” below for further information related to the consolidation of variable interest entities.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Changes in estimates are reflected in the periods in which they become known. Significant estimates are used in accounting for long-term contracts including estimates of total costs, progress toward completion and customer and vendor claims, employee benefit plan obligations and share-based compensation plans. In addition, we also use estimates when accounting for uncertain tax positions and deferred taxes, asbestos liabilities and expected recoveries and when assessing goodwill for impairment, among others.

Revenue Recognition on Long-Term Contracts — 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, 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.

 

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At any point, 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. These estimates may be revised as additional information becomes available or as specific project circumstances change. 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 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. The following table summarizes the number of separate projects that experienced final estimated contract profit revisions with an impact on contract profit in excess of $1,000 relating to the revaluation of work performed in prior periods:

 

     Three Months Ended March 31,  
     2012     2011  

Number of separate projects

     11        7   

Net increase/(decrease) in contract profit from the regular revaluation of final estimated contract profit revisions

   $                     14,100      $                     (4,600)   

The changes in final estimated contract profit revisions for our Global Power Group were increased during the three months ended March 31, 2012 for a favorable settlement with a subcontractor of approximately $6,900. The changes in final estimated contract profit revisions during the three months ended March 31, 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 Engineering and Construction Group (“Global E&C Group”) and our Global Power Group of approximately $3,200 and $4,600, respectively. The corrections were recorded in the first quarter of 2011 as they were not material to previously issued financial statements, nor were they material to the full year 2011 financial statements.

Please see Note 11 for further information related to changes in final estimated contract profit and the impact on business segment results.

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, disputed or unapproved change orders as to both scope and price or other causes of unanticipated additional costs. We record claims as additional contract revenue if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. These two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in our performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim may be recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred and are recorded in contracts in process. Our consolidated financial statements included commercial claims of $7,400 and $6,700 as of March 31, 2012 and December 31, 2011, respectively, while substantially all costs had been incurred as of each respective date.

In certain circumstances, we may defer pre-contract costs when it is probable that these costs will be recovered under a future contract. Such deferred costs would then be included in contract costs upon execution of the anticipated contract. Deferred pre-contract costs were inconsequential as of March 31, 2012 and December 31, 2011.

Certain special-purpose subsidiaries in our Global Power Group business segment are reimbursed by customers for their costs of building and operating certain facilities over the lives of the corresponding service contracts. Depending on the specific legal rights and obligations under these arrangements, in some cases those reimbursements are treated as operating revenues at gross value and other cases as a reduction of cost.

 

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Trade Accounts Receivable — Trade accounts receivable represent amounts billed to customers. In accordance with terms under our long-term contracts, our customers may withhold certain percentages of such billings until completion and acceptance of the work performed, which we refer to as retention receivables. Final payment of retention receivables might not be received within a one-year period. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, are included in current assets on the consolidated balance sheet. We have not recorded a provision for the outstanding retention receivable balances as of March 31, 2012 and December 31, 2011.

Variable Interest Entities — We sometimes form separate legal entities such as corporations, partnerships and limited liability companies in connection with the execution of a single contract or project. Upon formation of each separate legal entity, we perform an evaluation to determine whether the new entity is a variable interest entity, or VIE, and whether we are the primary beneficiary of the new entity, which would require us to consolidate the new entity in our financial results. We reassess our initial determination on whether the entity is a VIE upon the occurrence of certain events and whether we are the primary beneficiary as outlined in current accounting guidelines. If the entity is not a VIE, we determine the accounting for the entity under the voting interest accounting guidelines.

An entity is determined to be a VIE if either (a) the total equity investment is not sufficient for the entity to finance its own activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (such as the ability to make decisions through voting or other rights or the obligation to absorb losses or the right to receive benefits), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb losses of the entity and/or their rights to receive benefits of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

As of March 31, 2012 and December 31, 2011, we participated in certain entities determined to be VIEs, including a gas-fired cogeneration facility in Martinez, California and a refinery/electric power generation project in Chile. We consolidate the operations of the Martinez project while we record our participation in the project in Chile on the equity method of accounting.

Please see Note 3 for further information regarding our participation in these projects.

Fair Value Measurements — Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification, or FASB ASC, 820-10 defines fair value, establishes a fair value hierarchy that prioritizes the inputs used to measure fair value and provides guidance on required disclosures about fair value measurements. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Our financial assets and liabilities that are recorded at fair value on a recurring basis consist primarily of the assets or liabilities arising from derivative financial instruments and defined benefit pension plan assets. See Note 8 for further information regarding our derivative financial instruments.

The following methods and assumptions were used to estimate the fair value of our financial instruments for which it is practicable to estimate fair value:

Financial instruments valued independent of the fair value hierarchy:

 

   

Cash, Cash Equivalents and Restricted Cash — The carrying value of our cash, cash equivalents and restricted cash approximates fair value because of the demand nature of many of our deposits or short-term maturity of these instruments.

Financial instruments valued within the fair value hierarchy:

 

   

Short-term Investments — Short-term investments primarily consist of deposits with maturities in excess of three months but less than one year. Short-term investments are carried at cost plus accrued interest, which approximates fair value.

 

   

Long-term Debt — We estimate the fair value of our long-term debt (including current installments) based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities using level 2 inputs.

 

   

Foreign Currency Forward Contracts — We estimate the fair value of foreign currency forward contracts by obtaining quotes from financial institutions or market transactions in either the listed or over-the-counter markets, which we further corroborate with observable market data using level 2 inputs.

 

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Interest Rate Swaps — We estimate the fair value of our interest rate swaps based on quotes obtained from financial institutions, which we further corroborate with observable market data using level 2 inputs.

 

   

Defined Benefit Pension Plan Assets — We estimate the fair value of investments in equity securities at each year-end based on quotes obtained from financial institutions. The fair value of investments in commingled funds, invested primarily in debt and equity securities, is based on the net asset values communicated by the respective asset manager. We further corroborate the above valuations with observable market data using level 1 and 2 inputs. Additionally, we hold investments in private investment funds that are valued at net asset value as communicated by the asset manager using level 3 unobservable market data inputs.

Retirement of Shares under Share Repurchase Program — Under Swiss law, the cancellation of shares previously repurchased under our share repurchase program must be approved by our shareholders. Repurchased shares remain as treasury shares on our balance sheet until cancellation.

Any repurchases will be made at our discretion 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.

All treasury shares are carried at cost on the consolidated balance sheet until the cancellation of the shares has been approved by our shareholders and the cancellation is registered with the commercial register of the Canton of Zug in Switzerland. Upon the effectiveness of the cancellation of the shares, the cost of the shares cancelled will be removed from treasury shares, on the consolidated balance sheet, the par value of the cancelled shares will be removed from registered shares, on the consolidated balance sheet, and the excess of the cost of the treasury shares above par value will be removed from paid-in capital, on the consolidated balance sheet.

Once repurchased, treasury shares are no longer considered outstanding, which results in a reduction to the weighted-average number of shares outstanding during the reporting period when calculating earnings per share, as described below.

Earnings per Share — Basic earnings per share is computed by dividing net income attributable to Foster Wheeler AG by the weighted-average number of shares outstanding during the reporting period.

Diluted earnings per share is computed by dividing net income attributable to Foster Wheeler AG by the combination of the weighted-average number of shares outstanding during the reporting period and the impact of dilutive securities, if any, such as outstanding stock options and the non-vested portion of restricted stock units and performance-based restricted stock units (collectively, “restricted awards”) to the extent such securities are dilutive.

In profitable periods, outstanding stock options have a dilutive effect under the treasury stock method when the average share price for the period exceeds the assumed proceeds from the exercise of the option. The assumed proceeds include the exercise price, compensation cost, if any, for future service that has not yet been recognized in the consolidated statement of operations, and any tax benefits that would be recorded in paid-in capital when the option is exercised. Under the treasury stock method, the assumed proceeds are assumed to be used to repurchase shares in the current period. The dilutive impact of the non-vested portion of restricted awards is determined using the treasury stock method, but the proceeds include only the unrecognized compensation cost and tax benefits as assumed proceeds.

The computations of basic and diluted earnings per share were as follows:

 

     Three Months Ended March 31,  
     2012     2011  

Net income attributable to Foster Wheeler AG

   $ 40,646      $ 22,971   
  

 

 

   

 

 

 

Basic weighted-average number of shares outstanding

                     107,774,203                        124,680,060   

Effect of dilutive securities

     107,604        651,810   
  

 

 

   

 

 

 

Diluted weighted-average number of shares outstanding

     107,881,807        125,331,870   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.38      $ 0.18   
  

 

 

   

 

 

 

Diluted

   $ 0.38      $ 0.18   
  

 

 

   

 

 

 

 

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The following table summarizes options not included in the calculation of diluted earnings per share as the assumed proceeds from those options, on a per share basis, were greater than the average share price for the period, which would result in an antidilutive effect on diluted earnings per share:

 

     Three Months Ended March 31,  
     2012      2011  

Options not included in the computation of diluted earnings per share

                 2,022,794                     1,371,549   
  

 

 

    

 

 

 

2. Business Combinations

In December 2011, we acquired the stock of Graf-Wulff GmbH, a company based in Germany, for a purchase price of approximately €22,300 (approximately $29,400 at the exchange rate on the date of the acquisition), net of cash acquired. The acquired company designs, manufactures and installs equipment which utilizes circulating dry ash flue gas scrubbing technology for all types of steam generators in the power and industrial sectors. Our consolidated balance sheet as of December 31, 2011 filed in our 2011 Form 10-K included a preliminary purchase price allocation for this acquisition. As a result of updating our valuation of net assets acquired, we have increased the December 31, 2011 goodwill balance on our consolidated balance sheet as of March 31, 2012. The increase in goodwill was primarily attributable to an increased valuation of billings in excess of costs and estimated earnings on uncompleted contracts and a deferred tax liability related to intangible assets. The purchase price allocation and pro forma impact assuming the acquisition had occurred as of the beginning of 2011 were not significant to our consolidated financial statements. This company’s financial results are included within our Global Power Group business segment.

3. Investments

Investment in Unconsolidated Affiliates

We own a noncontrolling interest in two electric power generation projects, one waste-to-energy project and one wind farm project, which are all located in Italy, and in a refinery/electric power generation project, which is located in Chile. We also own a 50% noncontrolling interest in a project in Italy which generates earnings from royalty payments linked to the price of natural gas. Based on the outstanding equity interests of these entities, we own 41.65% of each of the two electric power generation projects in Italy, 39% of the waste-to-energy project and 50% of the wind farm project. We have a notional 85% equity interest in the project in Chile; however, we are not the primary beneficiary as a result of participating rights held by the minority shareholder. In determining that we are not the primary beneficiary, we considered the minority shareholder’s right to approve activities of the project that most significantly impact the project’s economic performance which include the right to approve or reject the annual financial (capital and operating) budget and the annual operating plan, the right to approve or reject the appointment of the general manager and senior management, and approval rights with respect to capital expenditures beyond those included in the annual budget.

On February 27, 2010, an earthquake occurred off the coast of Chile that caused significant damage to our unconsolidated affiliate’s facility in Chile. As a result of the damage, the project’s facility suspended normal operating activities on that date and subsequently filed a claim with its insurance carrier for property damage and business interruption recoveries. Based on the assessments and cost estimate, as well as correspondence received from the insurance carrier, we expect the property damage and business interruption insurance recoveries to be sufficient to cover the costs of repairing the facility and to substantially compensate our unconsolidated affiliate for the loss of profits while the facility suspended normal operating activities. Our unconsolidated affiliate’s receivable related to the remaining balance under their property damage and business interruption insurance recovery assessment was approximately $67,700 as of March 31, 2012, which is included in current assets in the table below. The facility achieved normal operating activities in the third quarter of 2011.

The summarized financial information presented below for the project in Chile includes an estimated recovery under a property damage insurance policy sufficient to cover the costs that have been incurred to repair the facility and an estimated recovery under a business interruption insurance policy for fixed costs along with an estimated recovery for lost profits during the period that the facility suspended normal operating activities. In accordance with authoritative accounting guidance on business interruption insurance, the project recorded an estimated recovery for lost profits as substantially all contingencies related to the insurance claim had been resolved as of the third quarter of 2010.

 

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We account for these investments in Italy and Chile under the equity method. The following is summarized financial information for these entities (each as a whole) based on where the projects are located:

 

     March 31, 2012      December 31, 2011  
     Italy      Chile      Italy      Chile  

Balance Sheet Data:

           

Current assets

   $             178,233       $             144,594       $             168,501       $             130,880   

Other assets (primarily buildings and equipment)

     377,577         105,761         366,414         108,165   

Current liabilities

     109,323         51,573         82,164         55,590   

Other liabilities (primarily long-term debt)

     244,020         48,636         232,356         45,105   

Net assets

     202,467         150,146         220,395         138,350   

 

     Three Months Ended March 31,  
     2012      2011  
     Italy     Chile      Italy      Chile  

Income Statement Data:

          

Total revenues

   $               36,751      $               24,801       $               29,417       $               20,817   

Gross (loss)/profit

     (1,765     13,901         12,067         129   

(Loss)/income before income taxes

     (4,247     14,198         9,256         14,766   

Net (loss)/earnings

     (2,349     11,796         5,647         11,813   

Our investment in these unconsolidated affiliates is recorded within investments in and advances to unconsolidated affiliates on the consolidated balance sheet and our equity in the net earnings of these unconsolidated affiliates is recorded within other income, net on the consolidated statement of operations. The investments and equity earnings of our unconsolidated affiliates in Italy and Chile are included in our Global E&C Group and Global Power Group business segments, respectively.

Our consolidated financial statements reflect the following amounts related to our unconsolidated affiliates in Italy and Chile:

 

     Three Months Ended March 31,  
     2012      2011  

Equity in the net earnings of unconsolidated affiliates

   $ 6,908       $ 12,493   

Distributions from equity affiliates

   $ 8,772       $ 9,677   
     March 31, 2012      December 31, 2011  

Investments in unconsolidated affiliates

   $                              195,510       $                              195,033   

Our equity (loss)/earnings from our projects in Italy were $(362) and $2,606 in the first three months of 2012 and 2011, respectively. Our equity loss in the three months ended March 31, 2012 included the impact of a net loss experienced by one of our projects in Italy, which recorded a charge to establish a reserve against its receivable balance for emission rights earned prior to 2012 and experienced decreased earnings as a result of a facility maintenance shutdown during the first three months of 2012.

Our equity earnings from our project in Chile were $7,270 and $9,887 in the first three months of 2012 and 2011, respectively. The decrease in equity earnings from our project in Chile in the three months ended March 31, 2012, compared to the same period in 2011, included the impact of lower marginal rates in 2012 for electrical power generation.

Equity earnings in the three months ended March 31, 2011 included our equity interest in the after tax estimated recovery under our project in Chile’s business interruption insurance policy which covers the period from the date of the earthquake through the period when the facility resumed normal operating activities.

We have guaranteed certain performance obligations of our project in Chile. We have a contingent obligation, which is measured annually based on the operating results of our project in Chile for the preceding year and is shared equally with our minority interest partner. We did not have a current payment obligation under this guarantee as of March 31, 2012 or December 31, 2011.

 

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In addition, we have provided a $10,000 debt service reserve letter of credit to cover debt service payments in the event that our project in Chile does not generate sufficient cash flows to make such payments. We are required to maintain the debt service reserve letter of credit during the term of our project in Chile’s debt, which matures in 2014. As of March 31, 2012, no amounts have been drawn under this letter of credit and we do not anticipate any amounts being drawn under this letter of credit.

We also have a wholly-owned subsidiary that provides operations and maintenance services to our project in Chile, which included assessing the damage caused by the earthquake and the related repair while the facility suspended normal operating activities. We record the fees for operations and maintenance services in operating revenues on our consolidated statement of operations and the corresponding receivable in trade accounts and notes receivable on our consolidated balance sheet.

Our consolidated financial statements include the following balances related to our project in Chile:

 

     Three Months Ended March 31,  
     2012      2011  

Fees for operations and maintenance services (included in operating revenues)

   $ 2,634       $ 2,660   
     March 31, 2012      December 31, 2011  

Receivable from our unconsolidated affiliate in Chile (included in trade receivables)

   $                         13,784       $                         8,881   

We also have guaranteed the performance obligations of our wholly-owned subsidiary under the operations and maintenance agreement governing our project in Chile. The guarantee is limited to $20,000 over the life of the operations and maintenance agreement, which extends through 2016. No amounts have been paid under the guarantee.

Other Investments

We are the majority equity partner and general partner of a gas-fired cogeneration project in Martinez, California, which we have determined to be a VIE as of March 31, 2012 and December 31, 2011. We were the primary beneficiary of the VIE, since we had the power to direct the activities that most significantly impact the VIE’s performance. These activities include the operations and maintenance of the facilities. Accordingly, as the primary beneficiary of the VIE, we have consolidated this entity. The aggregate net assets of this entity are presented below.

 

Balance Sheet Data (excluding intercompany balances):    March 31, 2012      December 31, 2011  

Current assets

   $                                  3,484       $                                19,328   

Other assets (primarily buildings and equipment)

     40,267         39,760   

Current liabilities

     6,915         6,198   

Other liabilities

     4,412         4,462   

Net assets

     32,424         48,428   

4. Goodwill and Other Intangible Assets

We have tracked accumulated goodwill impairments since December 29, 2001, the first day of fiscal year 2002 and our date of adoption of the accounting guidelines related to the assessment of goodwill for impairment. There were no accumulated goodwill impairment losses as of that date. The following table provides our net carrying amount of goodwill by geographic region in which our reporting units are located:

 

     Global E&C Group      Global Power Group  
     March 31, 2012      December 31, 2011      March 31, 2012      December 31, 2011  

U.S.

   $ 39,357       $ 39,357       $ 4,266       $ 4,266   

Asia

     926         887                   

Europe

                     69,737         67,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             40,283       $             40,244       $             74,003       $             71,876   
  

 

 

    

 

 

    

 

 

    

 

 

 

Please see Note 2 for further information regarding an increase to our goodwill balance as of December 31, 2011 related to our Graf-Wulff GmbH purchase price allocation.

 

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The following table sets forth amounts relating to our identifiable intangible assets:

 

     March 31, 2012      December 31, 2011  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Patents

   $ 41,214       $ (30,887   $ 10,327       $ 40,920       $ (30,237   $ 10,683   

Trademarks

     64,141         (30,110     34,031         63,711         (29,337     34,374   

Customer relationships, pipeline and backlog

     30,904         (9,590     21,314         30,586         (7,725     22,861   

Technology

     6,671         (238     6,433         6,468                6,468   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $             142,930       $           (70,825   $             72,105       $           141,685       $             (67,299   $             74,386   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of March 31, 2012, the net carrying amounts of our identifiable intangible assets were $58,097 for our Global Power Group and $14,008 for our Global E&C Group. Amortization expense related to identifiable intangible assets is recorded within cost of operating revenues on the consolidated statement of operations.

The following table details amortization expense related to identifiable intangible assets by period:

 

     Three Months Ended March 31,  
     2012      2011  

Amortization expense

   $                              3,022       $                              1,648   

Approximate full year amortization expense for years:

     

2012

      $ 12,000   

2013

        7,900   

2014

        7,900   

2015

        7,800   

2016

        5,300   

5. Borrowings

The following table shows the components of our long-term debt:

 

     March 31, 2012      December 31, 2011  
     Current      Long-term      Total      Current      Long-term      Total  

Capital Lease Obligations

   $ 2,522       $ 55,797       $ 58,319       $ 2,463       $ 56,080       $ 58,543   

Special-Purpose Limited Recourse Project Debt:

                 

FW Power S.r.l.

     8,570         71,952         80,522         8,308         69,757         78,065   

Energia Holdings, LLC at 11.443% interest, due April 15, 2015

     1,912         9,308         11,220         1,912         9,308         11,220   

Subordinated Robbins Facility Exit Funding Obligations: 1999C Bonds at 7.25% interest, due October 15, 2024

             1,283         1,283                 1,283         1,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $           13,004       $           138,340       $           151,344       $           12,683       $           136,428       $           149,111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated fair value

         $ 170,532             $ 164,590   
        

 

 

          

 

 

 

 

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U.S. Senior Credit Agreement — On July 30, 2010, Foster Wheeler AG, Foster Wheeler Ltd., certain of Foster Wheeler Ltd.’s subsidiaries and BNP Paribas, as Administrative Agent, entered into a four-year amendment and restatement of our U.S. senior credit agreement, which we entered into in October 2006. The amended and restated U.S. senior credit agreement, which became an unsecured facility in March 2012 as described below, provides for a facility of $450,000, and includes a provision which permits future incremental increases of up to an aggregate of $225,000 in total additional availability under the facility. The amended and restated U.S. senior credit agreement permits us to issue up to $450,000 in letters of credit under the facility. Letters of credit issued under the amended and restated U.S. senior credit agreement have performance pricing that is decreased (or increased) as a result of improvements (or reductions) in our corporate credit rating as reported by Moody’s Investors Service, which we refer to as Moody’s, and/or Standard & Poor’s, which we refer to as S&P. We received a corporate credit rating of BBB- as issued by S&P during the third quarter of 2010, which, under the amended and restated U.S. senior credit agreement, reduces our pricing for letters of credit issued under the agreement. We received a corporate credit rating of Baa3 as issued by Moody’s during the first quarter of 2012, which led to the automatic release and termination of all liens securing our obligations under the agreement. Based on our current credit ratings, letter of credit fees for performance and financial letters of credit issued under the amended and restated U.S. senior credit agreement are 1.000% and 2.000% per annum of the outstanding amount, respectively, excluding fronting fees. We also have the option to use up to $100,000 of the $450,000 for revolving borrowings at a rate equal to adjusted LIBOR, as defined in the agreement, plus 2.000%, subject also to the performance pricing noted above.

Fees and expenses incurred in conjunction with the execution of our amended and restated U.S. senior credit agreement were approximately $4,300 and are being amortized to expense over the four-year term of the agreement, which commenced in the third quarter of 2010.

Prior to becoming an unsecured facility in March 2012, our amended and restated U.S. senior credit agreement required that the assets and/or stock of certain of our subsidiaries be held as collateral. Our amended and restated U.S. senior credit agreement contains various customary restrictive covenants that generally limit our ability to, among other things, incur additional indebtedness or guarantees, create liens or other encumbrances on property, sell or transfer certain property and thereafter rent or lease such property for substantially the same purposes as the property sold or transferred, enter into a merger or similar transaction, make investments, declare dividends or make other restricted payments, enter into agreements with affiliates that are not on an arms’ length basis, enter into any agreement that limits our ability to create liens or the ability of a subsidiary to pay dividends, engage in new lines of business, with respect to Foster Wheeler AG, change Foster Wheeler AG’s fiscal year or, with respect to Foster Wheeler AG, Foster Wheeler Ltd. and one of our holding company subsidiaries, directly acquire ownership of the operating assets used to conduct any business.

In addition, our amended and restated U.S. senior credit agreement contains financial covenants requiring us not to exceed a total leverage ratio, which compares total indebtedness to EBITDA, and to maintain a minimum interest coverage ratio, which compares EBITDA to interest expense. All such terms are defined in our amended and restated U.S. senior credit agreement. We must be in compliance with the total leverage ratio at all times, while the interest coverage ratio is measured quarterly. We have been in compliance with all financial covenants and other provisions of our U.S. senior credit agreement prior and subsequent to our amendment and restatement of the agreement.

We had approximately $253,700 and $225,600 of letters of credit outstanding under our U.S. senior credit agreement as of March 31, 2012 and December 31, 2011, respectively. The letter of credit fees under the U.S. senior credit agreement outstanding as of March 31, 2012 and December 31, 2011 ranged from 1.000% to 2.000% of the outstanding amount, excluding fronting fees. There were no funded borrowings outstanding under our U.S. senior credit agreement as of March 31, 2012 and December 31, 2011.

6. Pensions and Other Postretirement Benefits

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

Defined Benefit Pension Plans — 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.

 

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Based on the minimum statutory funding requirements for 2012, we are not required to make any mandatory contributions to our U.S. pension plans. The following table provides details on 2012 mandatory contribution activity for our non-U.S. pension plans:

 

Contributions in the three months ended March 31, 2012

   $ 5,600   

Remaining contributions expected for the year 2012

     16,300   
  

 

 

 

Contributions expected for the year 2012

   $                 21,900   
  

 

 

 

We did not make any discretionary contributions during the first three months of 2012; however, we may elect to make discretionary contributions to our U.S. and/or non-U.S. pension plans during 2012.

Other Postretirement Benefit Plans — Certain employees in the U.S. and Canada may become eligible for health care and life insurance benefits (“other postretirement benefits”) if they qualify for and commence 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, referred to as the Survivor Income Plan (“SIP”), which provides coverage for an employee’s beneficiary upon the death of the employee. This plan has been closed to new entrants since 1988.

The components of net periodic benefit cost/(credit) for our defined benefit pension plans and other postretirement benefit plans were as follows:

 

     Defined Benefit Pension Plans     Other Postretirement Benefit Plans  
      Three Months Ended March 31,     Three Months Ended March 31,  
      2012     2011     2012     2011  

Net periodic benefit cost:

        

Service cost

   $ 275      $ 369      $ 24      $ 27   

Interest cost

     13,134        15,611        805        912   

Expected return on plan assets

     (16,015     (18,141     -        -   

Amortization of net actuarial loss

     4,136        3,454        120        77   

Amortization of prior service (credit)/cost

     (393     9        (879     (891

Amortization of transition obligation

     13        12        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $                 1,150      $                 1,314      $                 70      $                 125   
  

 

 

   

 

 

   

 

 

   

 

 

 

The above amortization components of net periodic benefit cost are included on our consolidated statement of comprehensive income net of tax.

7. Guarantees and Warranties

We have agreed to indemnify certain third parties relating to businesses and/or assets that we previously owned and sold to such third parties. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by us prior to the sale of such businesses and/or assets. It is not possible to predict the maximum potential amount of future payments under these or similar indemnifications due to the conditional nature of the obligations and the unique facts and circumstances involved in each particular indemnification.

 

     Maximum    Carrying Amount of Liability  
        Potential Payment          March 31, 2012              December 31, 2011      

Environmental indemnifications

   No limit    $                 7,700       $                 8,200   

Tax indemnifications

   No limit    $ -       $ -   

We also maintain contingencies for warranty expenses on certain of our long-term contracts. Generally, warranty contingencies are accrued over the life of the contract so that a sufficient balance is maintained to cover our aggregate exposure at the conclusion of the project.

 

         Three Months Ended March 31,      
     2012     2011  

Warranty Liability:

    

Balance at beginning of year

   $                 93,000      $                 100,300   

Accruals

     8,400        7,600   

Settlements

     (2,800     (4,900

Adjustments to provisions, including foreign currency translation

     (4,100     100   
  

 

 

   

 

 

 

Balance at end of period

   $ 94,500      $ 103,100   
  

 

 

   

 

 

 

 

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We are contingently liable under standby letters of credit, bank guarantees and surety bonds, totaling $1,003,700 and $990,300 as of March 31, 2012 and December 31, 2011, respectively, primarily for guarantees of our performance on projects currently in execution or under warranty. These amounts include the standby letters of credit issued under the U.S. senior credit agreement discussed in Note 5 and under other facilities worldwide. No material claims have been made against these guarantees, and based on our experience and current expectations, we do not anticipate any material claims.

We have also guaranteed certain performance obligations in a refinery/electric power generation project based in Chile in which we hold a noncontrolling interest. See Note 3 for further information.

8. Derivative Financial Instruments

We are exposed to certain risks relating to our ongoing business operations. The risks managed by using derivative financial instruments relate primarily to foreign currency exchange rate risk and, to a significantly lesser extent, interest rate risk. Derivative financial instruments held by our consolidated entities are recognized as assets or liabilities at fair value on our consolidated balance sheet. Our proportionate share of the fair value of derivative financial instruments held by our equity method investees is included in investments in and advances to unconsolidated affiliates on our consolidated balance sheet. The fair values of derivative financial instruments held by our consolidated entities were as follows:

 

Fair Values of Derivative Financial Instruments  
          Asset Derivatives           Liability Derivatives  
     

Balance Sheet

Location

   March 31,
2012
     December 31,
2011
    

Balance Sheet

Location

   March 31,
2012
     December 31,
2011
 

Derivatives designated as
hedging instruments:

                 

Interest rate swap
contracts

  

Other assets

   $ -       $ -      

Other long-term liabilities

   $ 9,658       $ 8,707   

Derivatives not designated
as hedging instruments:

                 

Foreign currency
forward contracts

  

Contracts in process or
billings in excess of costs
and estimated earnings on
uncompleted contracts

     3,661         1,691      

Contracts in process or
billings in excess of costs
and estimated earnings on
uncompleted contracts

     3,705         6,446   

Foreign currency forward contracts

  

Other accounts receivable

     80         75      

Accounts payable

     -         34   
     

 

 

    

 

 

       

 

 

    

 

 

 

Total derivatives

      $                 3,741       $                 1,766          $                 13,363       $                 15,187   
     

 

 

    

 

 

       

 

 

    

 

 

 

Foreign Currency Exchange Rate Risk

We operate on a worldwide basis with substantial operations in Europe that subject us to foreign currency exchange rate risk mainly relative to the British pound, Euro and Polish Zloty. 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 exposed item, such as anticipated purchases or revenues, back to their functional currency.

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 March 31, 2012, we had a total gross notional amount of approximately $416,100 related to foreign currency forward contracts. 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 2012 through 2014.

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).

Increases in the fair value of the currencies sold forward result in losses while increases in the fair value of the currencies bought forward result in gains. For foreign currency forward contracts used to mitigate currency risk on our projects, the gain or loss from the portion of the mark-to-market adjustment related to the completed portion

 

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of the underlying project is included in cost of operating revenues at the same time as the underlying foreign currency exposure occurs. The gain or loss from the remaining portion of the mark-to-market adjustment, specifically the portion relating to the uncompleted portion of the underlying project is reflected directly in cost of operating revenues in the period in which the mark-to-market adjustment occurs. We also utilize foreign currency forward contracts to mitigate non-project related currency risks, which are recorded in other deductions, net. The gain or loss from the remaining uncompleted portion of our projects and other non-project related transactions were as follows:

 

     Location of Gain/(Loss)    Amount of Gain/(Loss)
Recognized in Income on Derivatives
 
Derivatives Not Designated as    Recognized    Three Months Ended March 31,  

Hedging Instruments

  

    in Income on Derivatives    

   2012      2011  

Foreign currency forward contracts

   Cost of operating revenues    $ 3,146       $ 1,814   

Foreign currency forward contracts

   Other deductions, net      91         70   
     

 

 

    

 

 

 

Total

      $                 3,237       $                 1,884   
     

 

 

    

 

 

 

The mark-to-market adjustments on foreign currency forward exchange contracts for these unrealized gains or losses are primarily recorded in either contracts in process or billings in excess of costs and estimated earnings on uncompleted contracts on the consolidated balance sheet.

During the three months ended March 31, 2012 and 2011, we included net cash inflows on the settlement of derivatives of $713 and $182, respectively, within the “net change in contracts in process and billings in excess of costs and estimated earnings on uncompleted contracts,” a component of cash flows from operating activities on the consolidated statement of cash flows.

Interest Rate Risk

We use interest rate swap contracts to manage interest rate risk associated with a portion of our variable rate special-purpose limited recourse project debt. The aggregate notional amount of the receive-variable/pay-fixed interest rate swaps was $67,800 as of March 31, 2012.

Upon entering into the swap contracts, we designate the interest rate swaps as cash flow hedges. We assess at inception, and on an ongoing basis, whether the interest rate swaps are highly effective in offsetting changes in the cash flows of the project debt. Consequently, we record the fair value of interest rate swap contracts on our consolidated balance sheet at each balance sheet date. Changes in the fair value of the interest rate swap contracts are recorded as a component of other comprehensive income.

The impact from interest rate swap contracts in cash flow hedging relationships for our consolidated entities was as follows:.

 

     Three Months Ended March 31,  
     2012     2011  

(Loss)/gain recognized in other comprehensive income

   $ (1,156   $ 847   

Loss reclassified from accumulated other comprehensive loss

                                  485                                     615   

The above balances for our consolidated entities and our proportionate share of the impact from interest rate swap contracts in cash flow hedging relationships held by our equity method investees are included on our consolidated statement of comprehensive income net of tax.

9. Share-Based Compensation Plans

Our share-based compensation plans include both stock options and restricted awards. The following table summarizes our share-based compensation expense and related income tax benefit:

 

     Three Months Ended March 31,  
     2012      2011  

Share-based compensation

   $                     4,926       $                     4,871   

Related income tax benefit

     110         81   

 

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As of March 31, 2012, we had $14,164 and $22,199 of total unrecognized compensation cost related to stock options and restricted awards, respectively. Those amounts are expected to be recognized as expense over a weighted-average period of approximately two years.

We estimate 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:

 

   

Expected volatility – we estimate the volatility of our share price at the date of grant 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 estimate the expected term using the “simplified” method, as outlined in Staff Accounting Bulletin No. 107, “Share-Based Payment.”

   

Risk-free interest rate – we estimate 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 use an expected dividend yield of zero because we have not declared or paid a cash dividend since July 2001 and we do not have any plans to declare or pay any cash dividends.

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).

Certain of our executives have been awarded performance-based restricted share units, or performance RSUs. Under these 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).

Our share-based compensation plans include a “change in control” provision, which provides for cash redemption of equity awards issued thereunder in certain limited circumstances. In accordance with Securities and Exchange Commission Accounting Series Release No. 268, “Presentation in Financial Statements of Redeemable Preferred Stocks,” we present the redemption amount of these equity awards as temporary equity on the consolidated balance sheet as the equity award is amortized during the vesting period. The redemption amount represents the intrinsic value of the equity award on the grant date. In accordance with current accounting guidance regarding the classification and measurement of redeemable securities, we do not adjust the redemption amount each reporting period unless and until it becomes probable that the equity awards will become redeemable (upon a change in control event). Upon vesting of the equity awards, we reclassify the intrinsic value of the equity awards, as determined on the grant date, to permanent equity.

Reconciliations of temporary equity for the three months ended March 31, 2012 and 2011 were as follows:

 

         March 31, 2012             March 31, 2011      

Balance at beginning of year

   $                     4,993      $                     4,935   

Compensation cost during the period for those equity awards with
intrinsic value on the grant date

     3,058        2,580   

Intrinsic value of equity awards vested during the period for
those equity awards with intrinsic value on the grant date

     (1,756     (1,510
  

 

 

   

 

 

 

Balance at end of period

   $ 6,295      $ 6,005   
  

 

 

   

 

 

 

Our articles of association provide for conditional capital of 62,317,956 shares for the issuance of shares under our share-based compensation plans and other convertible or exercisable securities we may issue in the future. Conditional capital decreases upon issuance of shares in connection with the exercise of outstanding stock options or vesting of restricted share units, with an offsetting increase to our issued and authorized share capital. As of March 31, 2012, our remaining available conditional capital was 59,698,419 shares.

10. Income Taxes

The tax provision for each year-to-date period is calculated by multiplying pre-tax income by the estimated annual effective tax rate for such period. Although we are a Swiss corporation, our shares are exclusively traded on a U.S. exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate

 

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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 significantly from the U.S. federal statutory rate as a result of income taxed in various non-U.S. jurisdictions with rates different from the U.S. statutory rate, as a result of our inability to recognize a tax benefit for losses generated by certain unprofitable operations and as a result of 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 pre-tax 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 pre-tax losses, the corresponding increase in the valuation allowance has an unfavorable impact on our effective tax rate.

Effective Tax Rate for 2012

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

 

   

Income earned in tax jurisdictions with tax rates lower than the U.S. statutory rate, which is expected to contribute to an approximate 16-percentage point reduction in our effective tax rate for the full year 2012.

   

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 is expected to contribute to an approximate three-percentage point increase in our effective tax rate for the full year 2012.

Effective Tax Rate for 2011

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

 

   

Income earned in tax jurisdictions with tax rates lower than the U.S. statutory rate, which contributed to an approximate 14-percentage point reduction in our effective tax rate.

   

A valuation allowance increase because we were unable to recognize a tax benefit for year-to-date losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.).

   

Discrete items, including, primarily, changes in judgment regarding unrecognized tax benefits and certain adjustments to deferred taxes and taxes payable for prior years.

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

Our subsidiaries file income tax returns in numerous tax jurisdictions, including the U.S., 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 2007.

A number of tax years are under audit by the relevant tax authorities in various jurisdictions, including the U.S. and several states within the U.S. We anticipate that several of these audits may be concluded in the foreseeable future, including in the remainder of 2012. 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. 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.

11. Business Segments

We operate through two business groups: our Global E&C Group and our Global Power Group.

 

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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 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 metals and mining 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 also 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 generates revenues from design, engineering, procurement, construction and project management activities pursuant to contracts which generally span up to approximately four years in duration and from returns on its equity investments in various power production facilities.

Global Power Group

Our Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations, district heating and industrial facilities worldwide. Additionally, our Global Power Group owns and operates a waste-to-energy facility; holds a controlling interest and operates a combined-cycle gas turbine facility; owns a noncontrolling interest in a petcoke-fired circulating fluidized-bed facility for refinery steam and power generation; and operates a university cogeneration power facility for steam/electric generation. 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 steam generating equipment includes a broad range of steam generation and environmental technologies, offering independent power producers, utilities, municipalities and industrial clients high-value technology 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.

Corporate and Finance Group

In addition to these two business groups, which also represent two of our operating segments for financial reporting purposes, we report 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.

Operating Revenues

We conduct our business on a global basis. Operating revenues by industry and business segment were as follows:

 

         Three Months Ended March 31,      
     2012      2011  

Operating Revenues (Third-Party) by Industry:

     

Power generation

   $                     252,115       $                     195,129   

Oil refining

     325,161         363,529   

Pharmaceutical

     12,979         11,184   

Oil and gas

     231,551         272,047   

Chemical/petrochemical

     68,320         153,977   

Power plant operation and maintenance

     29,280         28,329   

Environmental

     2,188         2,559   

Other, net of eliminations

     11,502         9,498   
  

 

 

    

 

 

 

Total

   $ 933,096       $ 1,036,252   
  

 

 

    

 

 

 

Operating Revenues (Third-Party) by Business Segment:

     

Global E&C Group

   $ 670,873       $ 823,743   

Global Power Group

     262,223         212,509   
  

 

 

    

 

 

 

Total

   $ 933,096       $ 1,036,252   
  

 

 

    

 

 

 

 

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EBITDA

EBITDA is the primary measure of operating performance used by our chief operating decision maker. We define EBITDA as net income attributable to Foster Wheeler AG before interest expense, income taxes, depreciation and amortization.

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

 

         Three Months Ended March 31,      
      2012     2011  

EBITDA:

    

Global E&C Group

   $                     46,928      $                     41,668   

Global Power Group

     52,316        26,464   

C&F Group *

     (27,278     (21,328
  

 

 

   

 

 

 

Total

     71,966        46,804   
  

 

 

   

 

 

 

Add: Net income attributable to noncontrolling interests

     2,397        2,305   

Less: Interest expense

     3,416        3,879   

Less: Depreciation and amortization

     13,020        12,671   
  

 

 

   

 

 

 

Income before income taxes

     57,927        32,559   

Less: Provision for income taxes

     14,884        7,283   
  

 

 

   

 

 

 

Net income

     43,043        25,276   

Less: Net income attributable to noncontrolling interests

     2,397        2,305   
  

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 40,646      $ 22,971   
  

 

 

   

 

 

 

 

*

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:

 

         Three Months Ended March 31,      
     2012      2011  

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

     

Global E&C Group(2)

   $                 3,800       $                 800   

Global Power Group(2)

     10,300         (5,400
  

 

 

    

 

 

 

Total

     14,100         (4,600
  

 

 

    

 

 

 

Net asbestos-related provision in our C&F Group(3)

     2,000         400   

 

(1) 

Please refer to “Revenue Recognition on Long-Term Contracts” in Note 1 for further information regarding changes in our final estimated contract profit.

(2) 

The changes in final estimated contract profit revisions for our Global Power Group were increased during the three months ended March 31, 2012 for a favorable settlement with a subcontractor of approximately $6,900. The changes in final estimated contract profit revisions during the three months ended March 31, 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 the first quarter of 2011 and are included in the three months ended March 31, 2011 as they were not material to previously issued financial statements, nor were they material to the full year 2011 financial statements.

(3) 

Please refer to Note 12 for further information regarding the revaluation of our asbestos liability and related asset.

The accounting policies of our business segments are the same as those described in our summary of significant accounting policies as disclosed in our 2011 Form 10-K. 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.

12. Litigation and Uncertainties

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 U.S. and the U.K. 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.

 

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United States

A summary of our U.S. claim activity is as follows:

 

          Three Months Ended March 31,      
      2012     2011  

Number of Claims by period:

    

Open claims at beginning of period

                     124,540                        124,420   

New claims

     1,160        1,280   

Claims resolved

     (1,420     (2,120
  

 

 

   

 

 

 

Open claims at end of period

     124,280        123,580   
  

 

 

   

 

 

 

We had the following U.S. asbestos-related assets and liabilities recorded on our consolidated balance sheet as of the dates set forth below. Total U.S. asbestos-related liabilities are estimated through the first quarter of 2027. Although it is likely that claims will continue to be filed after that date, the uncertainties inherent in any long-term forecast prevent us from making reliable estimates of the indemnity and defense costs that might be incurred after that date.

 

United States Asbestos

       March 31, 2012              December 31, 2011      

Asbestos-related assets recorded within:

     

Accounts and notes receivable-other

   $                     42,203       $                     43,677   

Asbestos-related insurance recovery receivable

     122,132         131,007   
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 164,335       $ 174,684   
  

 

 

    

 

 

 

Asbestos-related liabilities recorded within:

     

Accrued expenses

   $ 44,875       $ 50,900   

Asbestos-related liability

     236,140         243,400   
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 281,015       $ 294,300   
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 54,910       $ 56,700   

Future unasserted claims

     226,105         237,600   
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 281,015       $ 294,300   
  

 

 

    

 

 

 

We have worked with Analysis, Research & Planning Corporation, or ARPC, nationally recognized consultants in the U.S. with respect to projecting asbestos liabilities, to estimate the amount of asbestos-related indemnity and defense costs at each year-end based on a forecast for the next 15 years. Each year we have recorded our estimated asbestos liability at a level consistent with ARPC’s reasonable best estimate. Our estimated asbestos liability decreased during the first three months of 2012 as a result of indemnity and defense cost payments totaling approximately $15,300, partially offset by an increase of $2,000 related to the accrual of our rolling 15-year asbestos-related liability estimate. 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 the first quarter of 2027.

Our liability estimate is based upon the following information and/or assumptions: number of open claims, forecasted number of future claims, estimated average cost per claim by disease type – mesothelioma, lung cancer and non-malignancies – and the breakdown of known and future claims into disease type – mesothelioma, lung cancer or non-malignancies, 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 the first quarter of 2027, 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 the first quarter of 2027, 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 the first quarter of 2027.

Through March 31, 2012, total cumulative indemnity costs paid, prior to insurance recoveries, were approximately $774,100 and total cumulative defense costs paid were approximately $373,400, or approximately 33% of total defense and indemnity costs. The overall historic average combined indemnity and defense cost per resolved claim through March 31, 2012 has been approximately $3.1. The average cost per resolved claim is increasing and we believe it will continue to increase in the future.

 

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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. During the first three months of 2011, our subsidiaries 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 asset and recorded settlement gains. Please see the table below for a breakout of the gains by period.

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. Asbestos-related insurance recovery receivable also includes our best estimate of actual and probable insurance recoveries relating to our liability for pending and estimated future asbestos claims through the first quarter of 2027. 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 March 31, 2012 and December 31, 2011, we have not recorded an allowance for uncollectible balances against our asbestos-related insurance assets. We write-off receivables from insurers that have become insolvent; there have been no such write-offs during the three months ended March 31, 2012 and 2011. 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 2011. The asset awarded under the bankruptcy liquidation for this insurer was $4,500 and was included in our asbestos-related assets as of March 31, 2012 and December 31, 2011. 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.

The following table summarizes our net asbestos-related provision:

 

         Three Months Ended March 31,      
     2012      2011  

Provision for revaluation

   $                     1,997       $                 2,000   

Gain on the settlement of coverage litigation

     -         (1,600
  

 

 

    

 

 

 

Net asbestos-related provision

   $ 1,997       $ 400   
  

 

 

    

 

 

 

Our net asbestos-related provision is the result of our revaluation of our asbestos liability and related asset resulting from adjustments for actual settlement experience different from our estimates and the accrual of our rolling 15-year asbestos liability estimate, partially offset by gains on the settlement of coverage litigation with asbestos insurance carriers.

The following table summarizes our approximate asbestos-related payments and insurance proceeds:

 

         Three Months Ended March 31,      
     2012     2011  

Asbestos litigation, defense and case resolution payments

   $                     15,300      $                     21,600   

Insurance proceeds

     (10,500     (9,100
  

 

 

   

 

 

 

Net asbestos-related payments

   $ 4,800      $ 12,500   
  

 

 

   

 

 

 

We expect to have net cash outflows of $7,400 during the full year 2012 as a result of asbestos liability indemnity and defense payments in excess of insurance settlement proceeds. This estimate assumes no additional settlements with insurance companies and no 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 liability, the asbestos-related insurance receivable recorded on our consolidated balance sheet will continue to decrease.

 

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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 amounts 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.

Based on our December 31, 2011 liability estimate, an increase of 25% in the average per claim indemnity settlement amount would increase the liability by $47,700 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 on our consolidated statement of operations of approximately 80% 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 will decline.

United Kingdom

Some of our subsidiaries in the United Kingdom have also received claims alleging personal injury arising from exposure to asbestos. To date, 1,003 claims have been brought against our U.K. subsidiaries, of which 300 remained open as of March 31, 2012. None of the settled claims have resulted in material costs to us.

The following table summarizes our asbestos-related liabilities and assets for our U.K. subsidiaries based on open (outstanding) claims and our estimate for future unasserted claims through the first quarter of 2027:

 

      March 31, 2012      December 31, 2011  

United Kingdom Asbestos

     

Asbestos-related assets:

     

Accounts and notes receivable-other

   $ 2,770       $ 2,677   

Asbestos-related insurance recovery receivable

     26,114         26,120   
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 28,884       $ 28,797   
  

 

 

    

 

 

 

Asbestos-related liabilities:

     

Accrued expenses

   $ 2,770       $ 2,677   

Asbestos-related liability

     26,114         26,120   
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 28,884       $ 28,797   
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 7,393       $ 8,030   

Future unasserted claims

     21,491         20,767   
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 28,884       $ 28,797   
  

 

 

    

 

 

 

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 and related asset recorded in the U.K. would be approximately $42,500.

Project Claims

In the ordinary course of business, we are parties to litigation involving clients and subcontractors arising out of project contracts. Such litigation includes claims and counterclaims by and against us for canceled contracts, for additional costs incurred in excess of current contract provisions, as well as for back charges for alleged breaches of warranty and other contract commitments. If we were found to be liable for any of the claims/counterclaims against us, we would incur a charge against earnings to the extent a reserve had not been established for the matter in our accounts or if the liability exceeds established reserves.

Due to the inherent commercial, legal and technical uncertainties underlying the estimation of our project claims, the amounts ultimately realized or paid by us could differ materially from the balances, if any, included in our financial statements, which could result in additional material charges against earnings, and which could also materially adversely impact our financial condition and cash flows.

 

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Environmental Matters

CERCLA and Other Remedial Matters

Under U.S. federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Clean Water Act and the Clean Air Act, and similar state laws, the current owner or operator of real property and the past owners or operators of real property (if disposal of toxic or hazardous substances took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or remediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person, which we refer to as an off-site facility. Liability at such off-site facilities is typically allocated among all of the financially viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site and other factors.

We currently own and operate industrial facilities and we have also transferred our interests in industrial facilities that we formerly owned or operated. It is likely that as a result of our current or former operations, hazardous substances have affected the facilities or the real property on which they are or were situated. We also have received and may continue to receive claims pursuant to indemnity obligations from the present owners of facilities we have transferred, which claims may require us to incur costs for investigation and/or remediation.

We are currently engaged in the investigation and/or remediation under the supervision of the applicable regulatory authorities at two of our or our subsidiaries’ former facilities (including Mountain Top, which is described below). In addition, we sometimes engage in investigation and/or remediation without the supervision of a regulatory authority. Although we do not expect the environmental conditions at our present or former facilities to cause us to incur material costs in excess of those for which reserves have been established, it is possible that various events could cause us to incur costs materially in excess of our present reserves in order to fully resolve any issues surrounding those conditions. Further, no assurance can be provided that we will not discover additional environmental conditions at our currently or formerly owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring us to incur material expenditures to investigate and/or remediate such conditions.

We have been notified that we are a potentially responsible party (“PRP”) under CERCLA or similar state laws at three off-site facilities. At each of these sites, our liability should be substantially less than the total site remediation costs because the percentage of waste attributable to us compared to that attributable to all other PRPs is low. We do not believe that our share of cleanup obligations at any of the off-site facilities as to which we have received a notice of potential liability will exceed $500 in the aggregate. We have also received and responded to a request for information from the United States Environmental Protection Agency (“USEPA”) regarding a fourth off-site facility. We do not know what, if any, further actions USEPA may take regarding this fourth off-site facility.

Mountain Top

In February 1988, one of our subsidiaries, Foster Wheeler Energy Corporation (“FWEC”), entered into a Consent Agreement and Order with the USEPA and the Pennsylvania Department of Environmental Protection (“PADEP”) regarding its former manufacturing facility in Mountain Top, Pennsylvania. The order essentially required FWEC to investigate and remediate as necessary contaminants, including trichloroethylene (“TCE”), in the soil and groundwater at the facility. Pursuant to the order, in 1993 FWEC installed a “pump and treat” system to remove TCE from the groundwater. It is not possible at the present time to predict how long FWEC will be required to operate and maintain this system.

In the fall of 2004, FWEC sampled the private domestic water supply wells of certain residences in Mountain Top and identified approximately 30 residences whose wells contained TCE at levels in excess of Safe Drinking Water Act standards. The subject residences are located approximately one mile to the southwest of where the TCE previously was discovered in the soils at the former FWEC facility. Since that time, FWEC, USEPA and PADEP have cooperated in responding to the foregoing. Although FWEC believed the evidence available was not sufficient to support a determination that FWEC was responsible for the TCE in the residential wells, FWEC immediately provided the affected residences with bottled water, followed by water filters, and, pursuant to a settlement agreement with USEPA, it hooked them up to the public water system. Pursuant to an amendment of the settlement agreement, FWEC subsequently agreed with USEPA to arrange and pay for the hookup of several additional residences, even though TCE has not been detected in the wells at those residences. The hookups to the agreed-upon residences have been completed. FWEC is incurring costs related to public outreach and communications in the affected area, and it may be required to pay the agencies’ costs in overseeing and responding to the situation.

 

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FWEC is also incurring further costs in connection with a Remedial Investigation / Feasibility Study (“RI/FS”) that in March 2009 it agreed to conduct. In April 2009, USEPA proposed for listing on the National Priorities List (“NPL”) an area consisting of FWEC’s former manufacturing facility and the affected residences, but it also stated that the proposed listing may not be finalized if FWEC complies with its agreement to conduct the RI/FS. FWEC submitted comments opposing the proposed listing. FWEC has accrued its best estimate of the cost of the foregoing and it reviews this estimate on a quarterly basis.

Other costs to which FWEC could be exposed could include, among other things, FWEC’s counsel and consulting fees, further agency oversight and/or response costs, costs and/or exposure related to potential litigation, and other costs related to possible further investigation and/or remediation. At present, it is not possible to determine whether FWEC will be determined to be liable for some or all of the items described in this paragraph or to reliably estimate the potential liability associated with the items. If one or more third-parties are determined to be a source of the TCE, FWEC will evaluate its options regarding the potential recovery of the costs FWEC has incurred, which options could include seeking to recover those costs from those determined to be a source.

Other Environmental Matters

Our operations, especially our manufacturing and power plants, are subject to comprehensive laws adopted for the protection of the environment and to regulate land use. The laws of primary relevance to our operations regulate the discharge of emissions into the water and air, but can also include hazardous materials handling and disposal, waste disposal and other types of environmental regulation. These laws and regulations in many cases require a lengthy and complex process of obtaining licenses, permits and approvals from the applicable regulatory agencies. Noncompliance with these laws can result in the imposition of material civil or criminal fines or penalties. We believe that we are in substantial compliance with existing environmental laws. However, no assurance can be provided that we will not become the subject of enforcement proceedings that could cause us to incur material expenditures. Further, no assurance can be provided that we will not need to incur material expenditures beyond our existing reserves to make capital improvements or operational changes necessary to allow us to comply with future environmental laws.

With regard to the foregoing, the waste-to-energy facility operated by our Camden County Energy Recovery Associates, LP (“CCERA”) project subsidiary is subject to certain revisions to New Jersey’s mercury air emission regulations. The revisions made CCERA’s mercury control requirements more stringent, especially when the last phase of the revisions became effective on January 3, 2012. CCERA’s management believes that the data generated during stack testing in 2011 and the several prior years tends to indicate that the facility will be able to comply with even the most stringent of the regulatory revisions without installing additional control equipment. Estimates of the cost of installing the additional control equipment are approximately $30,000 based on our last assessment.

 

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ITEM 2. 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 quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2011, which we refer to as our 2011 Form 10-K.

Safe Harbor Statement

This management’s discussion and analysis of financial condition and results of operations, other sections of this quarterly report on Form 10-Q 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 Part I, Item 1A, “Risk Factors,” in our 2011 Form 10-K, which we filed with the Securities and Exchange Commission, or SEC, on February 23, 2012, and the following, could cause business conditions and our results to differ materially from what is contained in forward-looking statements:

 

   

benefits, effects or results of our redomestication or the relocation of our principal executive offices to Geneva, Switzerland;

   

benefits, effects or results of our strategic renewal initiative;

   

further 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;

   

currency fluctuations;

   

war, terrorist attacks and/or natural disasters 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.

 

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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-Business Segments,” within this Item 2.

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 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 technical capabilities or access to new market segments. We are also exploring acquisitions within the power generation industry to complement the products our Global Power Group offers. In December 2011, we acquired a company based in Germany that designs, manufactures and installs equipment which utilizes circulating dry ash flue gas scrubbing technology for all types of steam generators in the power and industrial sectors.

However, there is no assurance that we will consummate any acquisitions in the future.

Summary Financial Results for the Three Months Ended March 31, 2012

Our summary financial results for the three months ended March 31, 2012 and 2011 are as follows:

 

      Three Months Ended March 31,  
      2012     2011  

Consolidated Statement of Operations Data:

    

Operating revenues (1)

   $ 933,096      $ 1,036,252   

Contract profit(1)

     139,332        99,255   

Selling, general and administrative expenses (1)

     83,281        73,841   

Net income attributable to Foster Wheeler AG

     40,646        22,971   

Earnings per share :

    

Basic

     0.38        0.18   

Diluted

     0.38        0.18   

Net cash (used in)/provided by operating activities(2)

     (70,028     66,503   

 

(1) 

Please refer to the section entitled “—Results of Operations” within this Item 2 for further discussion.

(2) 

Please refer to the section entitled “—Liquidity and Capital Resources” within this Item 2 for further discussion.

Cash and cash equivalents totaled $648,904 and $718,049 as of March 31, 2012 and December 31, 2011, respectively.

Net income attributable to Foster Wheeler AG increased in the first three months of 2012, compared to the same period of 2011, primarily driven by the pre-tax increase in contract profit of $40,100, partially offset by the pre-tax impact related to increased sales pursuit costs of $6,100 and decreased equity earnings of $5,300.

Please refer to the discussion within the section entitled “—Results of Operations” within this Item 2.

 

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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 growth and the resultant demand for oil and gas, electric power, petrochemicals and refined products.

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. The engineering and construction industry has been negatively impacted since 2008 by the global economic downturn, which has resulted in intense competition among engineering and construction contractors and pricing pressure for contracts awarded. We are now seeing clients developing new projects and reactivating planned projects that had previously been placed on hold. Some of these clients have been releasing, and continue to release, tranches of work on a piecemeal basis, conducting further analysis before deciding to proceed with their investments or reevaluating the size, timing or configuration of specific planned projects. Our clients plan their investments on long-term time horizons. We believe that global demand for energy, chemicals 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.

The challenges and drivers for our Global E&C Group are discussed in more detail in the section entitled “—Results of Operations-Business Segments-Global E&C Group-Overview of Segment,” within this Item 7.

We believe that there will be sustained demand for the products and services of our Global Power Group, with opportunities in Asia, the Middle East and South America driven by growing electricity demand and industrial production in these regions. 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, as well as the outlook for continued lower natural gas pricing over the next three to five years, which have increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. These factors may continue in the future. The challenges and drivers for our Global Power Group are discussed in more detail in the section entitled “—Results of Operations-Business Segments-Global Power Group-Overview of Segment,” within this Item 2.

There is potential downside risk to global economic growth driven primarily by sovereign debt and bank funding pressures in the Eurozone, the speed at which governmental efforts directed at spending and debt reduction are being implemented and geopolitical oil supply risks, which could impact global economic growth through a significant rise in oil prices. If these risks materialize, both of our business groups could be impacted.

New Orders and Backlog of Unfilled Orders

The tables below summarize our new orders and backlog of unfilled orders by period:

 

      Three Months Ended  
      March 31, 2012      December 31, 2011      March 31, 2011  

New orders, measured in future revenues:

        

Global E&C Group*

   $                 672,600       $                 1,052,100       $                 719,800   

Global Power Group

     161,700         462,200         143,700   
  

 

 

    

 

 

    

 

 

 

Total*

   $ 834,300       $ 1,514,300       $ 863,500   
  

 

 

    

 

 

    

 

 

 

 

*  Balances include the following Global E&C Group

flow-through revenues, as defined in the section entitled

     

  

“—Resultsof Operations-Operating Revenues” within this Item 2 :

   $ 301,600       $ 676,300       $ 338,400   

Please refer to the section entitled “—Backlog and New Orders” within this Item 2 for further detail.

Results of Operations

Operating Revenues

 

     Three Months Ended March 31,
     2012      2011      $ Change     % Change

Global E&C Group

   $                 670,873       $                 823,743       $ (152,870   (18.6)%

Global Power Group

     262,223         212,509                         49,714                  23.4%            
  

 

 

    

 

 

    

 

 

   

 

Total

   $ 933,096       $ 1,036,252       $ (103,156   (10.0)%
  

 

 

    

 

 

    

 

 

   

 

 

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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 2, 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 the three months ended March 31, 2012 and 2011, were as follows:

 

     Three Months Ended March 31,  
      2012      2011      $ Change     % Change  

Africa

   $ 22,752       $ 54,920       $ (32,168     (58.6)%   

Asia

     214,914         188,315                         26,599        14.1%   

Australasia and other*

     190,758         240,021         (49,263     (20.5)%   

Europe

     218,777         187,628         31,149        16.6%   

Middle East

     48,284         69,833         (21,549     (30.9)%   

North America

     158,491         233,618         (75,127     (32.2)%   

South America

     79,120         61,917         17,203                        27.8%   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $                 933,096       $                 1,036,252       $ (103,156     (10.0)%   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Australasia and other primarily represents Australia, New Zealand and the Pacific Islands.

Our operating revenues decreased in the three months ended March 31, 2012, compared to the same period in 2011, which includes decreased flow-through revenues of $159,300, as described below. Excluding the impact of the change in flow-through revenues and currency fluctuations, our operating revenues increased 13% in the three months ended March 31, 2012, compared to the same period in 2011. The increase in operating revenues, excluding flow-through revenues and currency fluctuations, during the first three months of 2012 was the result of increased operating revenues in both our Global E&C Group and our Global Power Group.

Flow-through revenues and costs result when we purchase materials, equipment or third-party services on behalf of our customer 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.

Please refer to the section entitled “—Business Segments,” within this Item 2, for further discussion related to operating revenues and our view of the market outlook for both of our operating groups.

Contract Profit

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        139,332        

   $        99,255            $        40,077                    40.4%        

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.

Contract profit increased during the three months ended March 31, 2012, compared to the same period in 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 2, for further information related to contract profit for both of our operating groups.

 

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Selling, General and Administrative (SG&A) Expenses

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        83,281        

   $        73,841            $        9,440                    12.8%        

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

SG&A expenses increased in the first three months of 2012, compared to the same period in 2011, primarily as a result of increased sales pursuit costs of $6,100 and general overhead costs of $3,300, while research and development costs were relatively unchanged.

Other Income, net

 

Three Months Ended March 31,

                2012                     

  

                2011                 

  

                $ Change                

  

                % Change                

$        8,184        

   $        14,266            $        (6,082)                    (42.6)%        

Other income, net in the three months ended March 31, 2012 consisted primarily of equity earnings of $7,000 generated from our investments, primarily from our ownership interests in build, own and operate projects in Chile and Italy. Our equity earnings from our Global Power Group’s project in Chile were $7,300, while our Global E&C Group’s projects in Italy experienced an equity loss of $400, during the three months ended March 31, 2012.

Other income, net decreased in the first three months of 2012, compared to the same period in 2011, primarily driven by decreased equity earnings in our Global E&C Group’s projects in Italy of $3,000 and decreased equity earnings in our Global Power Group’s project in Chile of $2,600.

For further information related to our equity earnings, please refer to the sections within this Item 2 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 3 to the consolidated financial statements in this quarterly report on Form 10-Q.

Other Deductions, net

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        4,064        

   $        6,117            $        (2,053)                    (33.6)%        

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.

Other deductions, net in the first three months of 2012 consisted primarily of legal fees of $4,000, bank fees of $800, penalties on unrecognized tax benefits of $400 and consulting fees of $300, partially offset by a net foreign exchange transaction gain of $2,500. The decrease in other deductions, net in the first three months of 2012, compared to the same period in 2011, was primarily the result of a favorable impact of $1,800 related to the change in net foreign exchange transaction gains and losses.

Net foreign exchange transaction gains and losses were 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

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        3,169        

   $        3,275            $        (106)                    (3.2)%        

 

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Interest income decreased in the three months ended March 31, 2012, compared to the same period in 2011, primarily as a result of lower average cash and cash equivalents balances, partially offset by higher investment yields on cash and cash equivalents balances.

Interest Expense

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        3,416            $        3,879            $        (463)                    (11.9)%        

Interest expense decreased in the three months ended March 31, 2012, compared to the same period in 2011, primarily as a result of the favorable impact from decreased average borrowings, excluding foreign currency translation effects.

Net Asbestos-Related Provision

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$        1,997        

   $        400    $        1,597                    N/M        

 

N/M - Not meaningful.

The increase in the net asbestos-related provision in the first three months of 2012, compared to the same period in 2011, primarily resulted from the unfavorable impact of the inclusion of a gain on the settlement of coverage litigation with asbestos insurance carriers of $1,600 recognized during the first three months of 2011.

Provision for Income Taxes

 

             Three Months Ended March 31,          
             2012                     2011                     $ Change                      % Change          

Provision for income taxes

   $         14,884              $         7,283              $         7,601                         104.4%           

Effective Tax Rate

     25.7%        22.4%        

The tax provision for each year-to-date period is calculated by multiplying pre-tax income by the estimated annual effective tax rate for such period. Although we are a Swiss corporation, our shares are exclusively traded 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 significantly from the U.S. federal statutory rate as a result of income taxed in various non-U.S. jurisdictions with rates different from the U.S. statutory rate, as a result of our inability to recognize a tax benefit for losses generated by certain unprofitable operations and as a result of 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 pre-tax 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 pre-tax losses, the corresponding increase in the valuation allowance has an unfavorable impact on our effective tax rate.

 

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Effective Tax Rate for 2012

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

 

   

Income earned in tax jurisdictions with tax rates lower than the U.S. statutory rate, which is expected to contribute to an approximate 16-percentage point reduction in our effective tax rate for the full year 2012.

   

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 is expected to contribute to an approximate three-percentage point increase in our effective tax rate for the full year 2012.

Effective Tax Rate for 2011

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

 

   

Income earned in tax jurisdictions with tax rates lower than the U.S. statutory rate, which contributed to an approximate 14-percentage point reduction in our effective tax rate.

   

A valuation allowance increase because we were unable to recognize a tax benefit for year-to-date losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.).

   

Discrete items, including, primarily, changes in judgment regarding unrecognized tax benefits and certain adjustments to deferred taxes and taxes payable for prior years.

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

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$                 2,397                    $                 2,305                    $                92                                     4.0%                 

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.

Net income attributable to noncontrolling interests was relatively unchanged during the first three months of 2012, compared to the same period in 2011, which included the net result of an increase in net income from our subsidiary in Poland, offset by a decrease in net income from our subsidiary in Martinez, California.

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 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.

 

Three Months Ended March 31,

                2012                 

  

                2011                 

  

                $ Change                

  

                % Change                

$                71,966                     $                46,804                     $                25,162                                     53.8%                 

 

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EBITDA increased in the first three months of 2012, compared to the same period in 2011, primarily driven by increased contract profit of $40,100, partially offset by increased sales pursuit costs of $6,100 and decreased equity earnings of $5,300.

Please refer to the preceding discussion of each of these items within this “—Results of Operations” section.

See 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 U.S. senior 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 U.S. senior 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

   

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 to net income attributable to Foster Wheeler AG is shown below.

 

         Three Months Ended March 31,      
      2012      2011  

EBITDA:

     

Global E&C Group

   $             46,928                    $             41,668                

Global Power Group

     52,316                      26,464                

C&F Group *

     (27,278)                     (21,328)               
  

 

 

    

 

 

 

Total

     71,966                      46,804                
  

 

 

    

 

 

 

Less: Interest expense

     3,416                      3,879                

Less: Depreciation and amortization

     13,020                      12,671                

Less: Provision for income taxes

     14,884                      7,283               
  

 

 

    

 

 

 

Net income attributable to Foster Wheeler AG

   $ 40,646                    $ 22,971                
  

 

 

    

 

 

 

 

 

*

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

 

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EBITDA in the above table includes the following:

 

     Three Months Ended March 31,  
     2012      2011  

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

     

Global E&C Group(2)

   $                         3,800       $                         800   

Global Power Group(2)

     10,300         (5,400
  

 

 

    

 

 

 

Total(2)

     14,100         (4,600
  

 

 

    

 

 

 

Net asbestos-related provision in our C&F Group(3)

     2,000         400   

 

(1) 

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

(2) 

The changes in final estimated contract profit revisions for our Global Power Group were increased during the three months ended March 31, 2012 for a favorable settlement with a subcontractor of approximately $6,900. The changes in final estimated contract profit revisions during the three months ended March 31, 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 the first quarter of 2011 and are included in the three months ended March 31, 2011 as they were not material to previously issued financial statements, nor were they material to the full year 2011 financial statements.

(3) 

Please refer to Note 12 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding the revaluation of our asbestos liability and related asset.

The accounting policies of our business segments are the same as those described in our summary of significant accounting policies as disclosed in our 2011 Form 10-K. 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

 

     Three Months Ended March 31,  
     2012      2011      $ Change          % Change      

Operating revenues

   $                 670,873       $                 823,743       $                 (152,870)                         (18.6)%   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 46,928       $ 41,668       $ 5,260         12.6%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Results

Our Global E&C Group’s operating revenues by geographic region for the three months ended March 31, 2012 and 2011, based on location of our projects, were as follows:

 

      Three Months Ended March 31,  
     2012      2011      $ Change         % Change      

Africa

   $                 21,574       $                 54,920       $                 (33,346                     (60.7)%   

Asia

     101,758         118,698         (16,940     (14.3)%   

Australasia and other*

     190,758         240,021         (49,263     (20.5)%   

Europe

     134,393         113,376         21,017        18.5%   

Middle East

     45,104         60,931         (15,827     (26.0)%   

North America

     105,956         181,337         (75,381     (41.6)%   

South America

     71,330         54,460         16,870        31.0%   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 670,873       $ 823,743       $ (152,870     (18.6)%   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

*

Australasia and other primarily represents Australia, New Zealand and the Pacific Islands.

Our Global E&C Group experienced a decrease in operating revenues of 19% in the first three months of 2012, compared to the same period in 2011. The decrease in the period was primarily driven by decreased flow-through revenues of $159,100. Excluding flow-through revenues and foreign currency fluctuations, our Global E&C Group’s operating revenues increased 4% in the first three months of 2012, compared to the same period in 2011. Please refer to the “—Overview of Segment” section below for a discussion of our Global E&C Group’s market outlook.

 

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Our Global E&C Group’s EBITDA increased in the first three months of 2012, compared to the same period in 2011, primarily driven by increased contract profit of $14,200. The increase in contract profit primarily resulted from increased contract profit margins and, to a lesser extent, increased volume of operating revenues, excluding flow-through revenues. The increase in EBITDA also included the unfavorable impact of increased sales pursuit costs of $4,100, driven by increased new proposal activity, and decreased equity earnings from our Global E&C Group’s projects in Italy of $3,000. Our equity loss in the three months ended March 31, 2012 included the impact of a net loss experienced by one of our projects in Italy, which recorded a charge to establish a reserve against its receivable balance for emission rights earned prior to 2012 and experienced decreased earnings as a result of a facility maintenance shutdown during the first three months of 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, natural gas liquefaction 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 metals and mining 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 also 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.

   

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 has experience with, and is able to work with, a wide range of processes owned by others.

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. The engineering and construction industry has been negatively impacted since 2008 by the global economic downturn, which has resulted in intense competition among engineering and construction contractors and pricing pressure for contracts awarded.

We are now seeing clients developing new projects and reactivating planned projects that had previously been placed on hold. Some of these clients have been releasing, and continue to release, tranches of work on a piecemeal basis, conducting further analysis before deciding to proceed with their investments or reevaluating the size, timing or configuration of specific planned projects.

Our clients plan their investments based on long-term time horizons. We believe that global demand for energy, chemicals 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.

There is potential downside risk to global economic growth driven primarily by sovereign debt and bank funding pressures in the Eurozone, the speed at which governmental efforts directed at spending and debt reduction are being implemented and geopolitical oil supply risks, which could impact global economic growth through a significant rise in oil prices. If these risks materialize, our Global E&C Group could be impacted.

 

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We have continued to be successful in booking contracts of varying types and sizes in our key end markets, including a strategic worldwide umbrella agreement from a global chemicals company for engineering, procurement and construction management, or EPCm, project management, consulting and construction services, an EPCm contract for the revamp of a hydrodesulfurization unit at a European refinery, a project management consultancy contract, or PMC, for a refinery revamp in Asia, a basic design and front-end engineering design contract for a new liquefied natural gas receiving terminal in Central America, an EPCm contract for a cogeneration facility at a European refinery, additional work under an existing contract for a cogeneration facility at a European chemicals facility, a PMC contract for a new chemicals facility in the Middle East, an engineering and procurement contract for a refinery upgrade in Asia, an engineering contract for work on a copper smelter in South America, and a PMC award for a power project in Europe.

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

Global Power Group

 

     Three Months Ended March 31,  
     2012      2011      $ Change          % Change      

Operating revenues

   $                 262,223       $                 212,509       $                 49,714                         23.4%   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 52,316       $ 26,464       $ 25,852         97.7%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Results

Our Global Power Group’s operating revenues by geographic region for the three months ended March 31, 2012 and 2011, based on location of our projects, were as follows:

 

      Three Months Ended March 31,  
      2012      2011      $ Change         % Change      

Africa

   $                 1,178       $                 -       $                 1,178                        N/M   

Asia

     113,156         69,617         43,539        62.5%   

Europe

     84,384         74,252         10,132        13.6%   

Middle East

     3,180         8,902         (5,722     (64.3)%   

North America

     52,535         52,281         254        0.5%   

South America

     7,790         7,457         333        4.5%   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 262,223       $ 212,509       $ 49,714        23.4%   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

N/M — Not meaningful.

Our Global Power Group experienced increased operating revenues in the first three months of 2012, compared to the same period in 2011. The increase was primarily attributable to an increased volume of business, partially offset by an unfavorable impact from foreign currency fluctuations. Excluding foreign currency fluctuations, our Global Power Group’s operating revenues increased 28% in the first three months of 2012, compared to the same period in 2011. Please refer to the “—Overview of Segment” section below for a discussion of our Global Power Group’s market outlook.

Our Global Power Group’s EBITDA increased significantly in the first three months of 2012, compared to the same period in 2011, primarily driven by increased contract profit of $25,900. The increase in contract profit primarily resulted from increased volume of operating revenues and contract profit margins. The increase in EBITDA included the favorable impact of a settlement with a subcontractor of approximately $6,900 during the first three months of 2012 and the favorable impact of the inclusion of an out-of-period correction recorded in the first three months of 2011 for a reduction of final estimated profit of approximately $4,600, both of which are discussed in the preceding section within this Item 2 entitled “—Results of 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 $2,600. Please see below for further discussion.

 

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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 under its business interruption insurance policy in its financial statements, which covered through the period while the facility suspended normal operating activities. In accordance with authoritative accounting guidance on business interruption insurance, the project recorded an estimated recovery for lost profits as substantially all contingencies related to the insurance claim had been resolved as of the third quarter of 2010. 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.

Our equity earnings from our project in Chile were $7,300 and $9,900 in the first three months of 2012 and 2011, respectively. The decrease in equity earnings in the three months ended March 31, 2012, compared to the same period in 2011, included the impact of lower marginal rates in 2012 for electrical power generation.

Overview of Segment

Our Global Power Group designs, manufactures and erects steam generators and auxiliary equipment for electric power generating stations, district heating and power plants and industrial facilities worldwide. 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. 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 petroleum coke, lignite, municipal waste, waste wood, biomass, and numerous other materials. 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. Additionally, our Global Power Group owns and operates a waste-to-energy facility; holds a controlling interest 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:

 

   

Designing, manufacturing and installing 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, maintenance engineering, steam generator upgrading and life extension, 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.

We believe that there will be sustained demand for the products and services of our Global Power Group, with opportunities in Asia, the Middle East and South America driven by growing electricity demand and industrial production in these regions.

A number of 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 and with 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, driven by increasing supply and new liquefied natural gas capacity, 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.

 

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There is potential downside risk to global economic growth driven primarily by sovereign debt and bank funding pressures in the Eurozone, the speed at which governmental efforts directed at spending and debt reduction are being implemented and geopolitical oil supply risks, which could impact global economic growth through a significant rise in oil prices. 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 coal plants 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 have also received an award for four 550 MWe supercritical CFB steam generators for a power project in South Korea, which is an indication of the successful scale-up of our CFB technology and further advances our CFB supercritical technology with a vertical-tube, once-through design.

We completed an engineering and supply project for a pilot-scale (approximately 30 megawatt thermal, equivalent to approximately 10 megawatt electrical, or MWe) CFB steam generator, which incorporates our carbon-capturing Flexi-BurnTM technology. Further, we are executing a project, together with other parties, which is funded by a grant agreement with the European Commission, or EC, to support the technology development of a commercial scale (approximately 300 MWe) Carbon Capture and Storage, or CCS, demonstration plant featuring our Flexi-BurnTM CFB technology.

Recently we were awarded contracts which include the design and supply of a 50 MWe clean burning CFB steam generator for an industrial customer in China and a 35 MW CFB designed to burn 100% biomass in Sweden. The solutions we provide are based on our clients’ varied needs and we believe our success in winning new awards comes from our track record of developing innovative technology to competitively combine reliability with efficiency and achieve environmental goals.

Liquidity and Capital Resources

Cash Flows Activities

Our cash and cash equivalents, short-term investments and restricted cash balances were:

 

     As of               
         March 31, 2012              December 31, 2011              $ Change             % Change      

Cash and cash equivalents

   $                 648,904       $                 718,049       $ (69,145     (9.6)%   

Short-term investments

     1,334         1,294                               40                        3.1%   

Restricted cash

     37,561         44,094         (6,533     (14.8)%   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 687,799       $ 763,437       $ (75,638     (9.9)%   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash and cash equivalents, short-term investments and restricted cash held by our non-U.S. entities as of March 31, 2012 and December 31, 2011 were $578,600 and $630,000, respectively.

During the first three months of 2012, we experienced a decrease in cash and cash equivalents of $69,100, primarily as a result of cash used in operating activities of $70,000. The decrease in cash and cash equivalents also included the net impact of distributions to noncontrolling interests of $11,700 and cash used to repurchase shares and to pay related commissions under our share repurchase program of $11,000, partially offset by a favorable impact related to exchange rate changes on our cash and cash equivalents of $17,900.

Cash Flows from Operating Activities

 

     Three Months Ended March 31,  
                 2012                              2011                               $ Change               

Net cash (used in)/provided by operating activities

   $ (70,028   $ 66,503       $ (136,531

 

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Net cash used in operating activities in the first three months of 2012 primarily resulted from cash used for working capital of $122,800, partially offset by cash provided by net income of $64,000, which excludes non-cash charges of $21,000.

The increase in net cash used in operating activities of $136,500 in the first three months of 2012, compared to the same period of 2011, resulted primarily from a decrease in cash related to working capital of $174,300, partially offset by increased cash provided by net income of $34,700.

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 the first three months of 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. During the first three months of 2011, we generated cash from the conversion of working capital. During the first three months of 2012 we used cash to fund working capital in both our Global E&C Group and our Global Power Group.

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 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

 

     Three Months Ended March 31,  
                 2012                               2011                              $ Change               

Net cash provided by/(used in) investing activities

   $ 5,817       $ (15,579   $ 21,396   

The net cash provided by investing activities in the first three months of 2012 was attributable primarily to a decrease in restricted cash, excluding foreign currency translation effects, of $7,200 and a return of investment from unconsolidated affiliates of $6,100, partially offset by capital expenditures of $7,600.

The net cash used in investing activities in the first three months of 2011 was attributable primarily to capital expenditures of $11,500 and an increase in restricted cash, excluding foreign currency translation effects, of $4,900.

The capital expenditures in the first three months of 2012 and 2011 related primarily to leasehold improvements, information technology equipment and office equipment.

Cash Flows from Financing Activities

 

     Three Months Ended March 31,  
                 2012                              2011                              $ Change               

Net cash used in financing activities

   $ (22,862   $ (29,209   $ 6,347   

The net cash used in financing activities in the first three months of 2012 was attributable primarily to distributions to noncontrolling interests of $11,700 and cash used to repurchase shares and to pay related commissions under our share repurchase program of $11,000.

The net cash used in financing activities in the first three months of 2011 was attributable primarily to cash used to repurchase shares and to pay related commissions under our share repurchase program of $29,200. Other financing activities included cash provided from exercises of stock options of $9,100, partially offset by distributions to noncontrolling interests of $8,700.

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 12-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 12 months. Based on these forecasts, our primary cash needs will be working capital, capital expenditures, pension contributions and net asbestos-related payments. We may also use cash for acquisitions, discretionary pension plan contributions or to repurchase our shares under the share repurchase

 

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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, particularly in the Eurozone countries, 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 12 months.

We are dependent on cash repatriations from our subsidiaries to cover essentially all payments and expenses of our holding company and principal executive offices in Switzerland, to cover cash needs related to our asbestos-related liability and other overhead expenses in the U.S. and, at our discretion, the acquisition of our shares under 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 U.S. senior credit facility, if needed.

Our net asbestos-related payments are the result of asbestos liability indemnity and defense costs payments in excess of insurance settlement proceeds. During the first three months of 2012, we had net asbestos-related cash outflows of approximately $4,800. We expect the 2012 full year net cash outflows to be approximately $7,400. 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 liability or any future insurance settlements, the asbestos-related insurance receivable recorded on our balance sheet will continue to decrease.

On July 30, 2010, Foster Wheeler AG, Foster Wheeler Ltd., certain of Foster Wheeler Ltd.’s subsidiaries and BNP Paribas, as Administrative Agent, entered into a four-year amendment and restatement of our U.S. senior credit agreement, which we entered into in October 2006. The amended and restated U.S. senior credit agreement, which became an unsecured facility in March 2012 as described below, provides for a facility of $450,000, and includes a provision which permits future incremental increases of up to an aggregate of $225,000 in total additional availability under the facility. The amended and restated U.S. senior credit agreement permits us to issue up to $450,000 in letters of credit under the facility. Letters of credit issued under the amended and restated U.S. senior credit agreement have performance pricing that is decreased (or increased) as a result of improvements (or reductions) in our corporate credit rating as reported by Moody’s Investors Service, which we refer to as Moody’s, and/or Standard & Poor’s, which we refer to as S&P. We received a corporate credit rating of BBB- as issued by S&P during the third quarter of 2010, which, under the amended and restated U.S. senior credit agreement, reduces our pricing for letters of credit issued under the agreement. We received a corporate credit rating of Baa3 as issued by Moody’s during the first quarter of 2012, which led to the automatic release and termination of all liens securing our obligations under the agreement. Based on our current credit ratings, letter of credit fees for performance and financial letters of credit issued under the amended and restated U.S. senior credit agreement are 1.000% and 2.000% per annum of the outstanding amount, respectively, excluding fronting fees. We also have the option to use up to $100,000 of the $450,000 for revolving borrowings at a rate equal to adjusted LIBOR, as defined in the agreement, plus 2.000%, subject also to the performance pricing noted above.

Prior to becoming an unsecured facility in March 2012, our amended and restated U.S. senior credit agreement required that the assets and/or stock of certain of our subsidiaries be held as collateral.

We had approximately $253,700 and $225,600 of letters of credit outstanding under our U.S. senior credit agreement as of March 31, 2012 and December 31, 2011, respectively. There were no funded borrowings under our U.S. senior credit agreement outstanding as of March 31, 2012 and December 31, 2011. Based on our current operating plans and cash forecasts, we do not intend to borrow under our U.S. senior credit facility over the next 12 months. Please refer to Note 5 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our debt obligations.

 

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On February 27, 2010, an earthquake occurred off the coast of Chile that caused significant damage to our unconsolidated affiliate’s facility in Chile. As a result of the damage, the project’s facility suspended normal operating activities on that date and subsequently filed claims with its insurance carrier for property damage and business interruption recoveries. Based on the assessments and cost estimate, as well as correspondence received from the insurance carrier, we expect the property damage and business interruption insurance recoveries to be sufficient to cover the costs of repairing the facility and to substantially compensate our unconsolidated affiliate for the loss of profits while the facility suspended normal operating activities. Our unconsolidated affiliate’s receivable related to the remaining balance under its property damage and business interruption insurance recovery assessment was approximately $67,700 as of March 31, 2012. The facility achieved normal operating activities in the third quarter of 2011.

We are not required to make any mandatory contributions to our U.S. pension plans in 2011 based on the minimum statutory funding requirements. We made mandatory contributions totaling approximately $5,600 to our non-U.S. pension plans during the first three months of 2012. Based on the minimum statutory funding requirements for 2012, we expect to make mandatory contributions totaling approximately $21,900 to our non-U.S. pension plans for the full year. Additionally, we may elect to make discretionary contributions to our U.S. and/or non-U.S. pension plans during 2012.

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 $419,400, 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 March 31, 2012, we were authorized to repurchase up to an additional $80,600 of our outstanding shares, prior to our May 1, 2012 share repurchase authorization increase noted above. 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. As of May 1, 2012, we were authorized to repurchase up to $500,000 of our outstanding shares, based on the additional increase to our share repurchase program approved by our shareholders at our 2012 annual general meeting. 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 March 31, 2012, we have repurchased 40,215,749 shares for an aggregate cost of approximately $1,004,400 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 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 2 of this quarterly report on Form 10-Q.

We have not declared or paid a cash dividend since July 2001 and we do not have any plans to declare or pay any cash dividends. Our current U.S. senior credit agreement contains limitations on cash dividend payments as well as other restricted payments.

Off-Balance Sheet Arrangements

We own several noncontrolling 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 our project in Chile. Please refer to Note 3 to the consolidated financial statements in this quarterly report on Form 10-Q for further information related to these projects.

 

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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. Although backlog represents only business that is considered likely to be performed, cancellations or scope adjustments may and do occur. The elapsed time from the award of a contract to completion of performance may be up to approximately four years. 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. We cannot predict with certainty the portion of backlog to be performed in a given year. 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.

New Orders, Measured in Terms of Future Revenues

 

     Three Months Ended  
     March 31, 2012      March 31, 2011  
     Global
E&C
Group
     Global
Power
Group
     Total      Global
E&C
Group
     Global
Power
Group
     Total  

By Project Location:

                 

North America

   $ 53,300       $ 40,600       $ 93,900       $ 84,000       $ 82,600       $ 166,600   

South America

     71,100         7,500         78,600         69,100         3,900         73,000   

Europe

     213,400         79,700         293,100         150,500         31,100         181,600   

Asia

     100,900         33,800         134,700         84,200         12,400         96,600   

Middle East

     45,200         100         45,300         26,200         8,000         34,200   

Africa

     13,000                 13,000         47,500         5,700         53,200   

Australasia and other*

     175,700                 175,700         258,300                 258,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $                 672,600       $                 161,700       $                 834,300       $                 719,800       $                 143,700       $                 863,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Industry:

                 

Power generation

   $ 27,000       $ 138,100       $ 165,100       $ 3,300       $ 121,800       $ 125,100   

Oil refining

     308,800                 308,800         323,900                 323,900   

Pharmaceutical

     14,900                 14,900         7,900                 7,900   

Oil and gas

     206,600                 206,600         276,500                 276,500   

Chemical/petrochemical

     97,900                 97,900         87,600                 87,600   

Power plant operation and maintenance

     5,700         23,600         29,300         5,200         21,900         27,100   

Environmental

     3,400                 3,400         1,600                 1,600   

Other, net of eliminations

     8,300                 8,300         13,800                 13,800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 672,600       $ 161,700       $ 834,300       $ 719,800       $ 143,700       $ 863,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Australasia and other primarily represents Australia, New Zealand and the Pacific Islands.

 

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Backlog, Measured in Terms of Future Revenues

 

     As of March 31, 2012      As of December 31, 2011  
     Global
E&C
Group
     Global
Power
Group
     Total      Global
E&C
Group
     Global
Power
Group
     Total  

By Contract Type:

                                  

Lump-sum turnkey

     $                $         184,200         $         184,200         $                 $         164,300         $         164,300   

Other fixed-price

       523,100            910,700            1,433,800            515,400            997,200            1,512,600   

Reimbursable

       1,927,700            44,700            1,972,400            1,904,800            44,400            1,949,200   
    

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total

     $        2,450,800         $         1,139,600         $         3,590,400         $         2,420,200         $         1,205,900         $         3,626,100   
    

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

By Project Location:

                                  

North America

     $        427,800         $         204,100         $         631,900         $         483,200         $         217,400         $         700,600   

South America

       338,200            27,000            365,200            328,100            25,500            353,600   

Europe

       735,300            251,800            987,100            637,100            234,500            871,600   

Asia

       357,300            643,500            1,000,800            413,300            711,100            1,124,400   

Middle East

       323,900            11,900            335,800            275,700            15,000            290,700   

Africa

       100,800            1,300            102,100            104,700            2,400            107,100   

Australasia and other*

       167,500                       167,500            178,100                       178,100