XNAS:FWLT Foster Wheeler AG Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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: 107,867,980 registered shares (CHF 3.00 par value) were outstanding as of July 20, 2012.


Table of Contents

FOSTER WHEELER AG

INDEX

 

Part I FINANCIAL INFORMATION 

     3   

Item 1

     –         Financial Statements (Unaudited):      3   
      Consolidated Statement of Operations for the
Quarters and Six Months Ended June 30, 2012 and 2011
     3   
      Consolidated Statement of Comprehensive Income for the
Quarters and Six Months Ended June 30, 2012 and 2011
     4   
      Consolidated Balance Sheet as of June 30, 2012 and
December 31, 2011
     5   
      Consolidated Statement of Changes in Equity
for the Six Months Ended June 30, 2012 and 2011
     6   
      Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 2012 and 2011
     7   
      Notes to Consolidated Financial Statements      8   

Item 2

     –         Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 3

     –         Quantitative and Qualitative Disclosures about Market Risk      52   

Item 4

     –         Controls and Procedures      52   

Part II OTHER INFORMATION

    

52

  

Item 1

     –         Legal Proceedings      52   

Item 1A

     –         Risk Factors      52   

Item 2

     –         Unregistered Sales of Equity Securities and Use of Proceeds      53   

Item 3

     –         Defaults Upon Senior Securities      53   

Item 4

     –         Mine Safety Disclosures      53   

Item 5

     –         Other Information      53   

Item 6

     –         Exhibits      54   

Signatures

    

55

  


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)

 

                                                                       
     Quarter Ended June 30,     Six Months Ended June 30,  
    

 

2012

   

 

2011

   

 

2012

   

 

2011

 

Operating revenues

   $         943,026     $         1,183,878     $         1,876,122     $         2,220,130  

Cost of operating revenues

     803,475       1,030,266       1,597,239       1,967,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contract profit

     139,551       153,612       278,883       252,867  

Selling, general and administrative expenses

     85,427       80,402       168,708       154,243  

Other income, net

     (10,571     (21,390     (18,755     (35,656

Other deductions, net

     12,274       6,721       16,338       12,838  

Interest income

     (2,949     (4,428     (6,118     (7,703

Interest expense

     4,249       3,427       7,665       7,306  

Net asbestos-related provision

     3,713       2,000       5,710       2,400  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     47,408       86,880       105,335       119,439  

Provision for income taxes

     12,291       19,044       27,175       26,327  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     35,117       67,836       78,160       93,112  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     4,258       4,527       6,655       6,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 30,859     $ 63,309     $ 71,505     $ 86,280  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share (see Note 1):

        

Basic

   $ 0.29     $ 0.52     $ 0.66     $ 0.70  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.29     $ 0.52     $ 0.66     $ 0.70  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands of dollars)

(unaudited)

 

                                                   
     Quarter Ended June 30,     Six Months Ended June 30,  
    

 

2012

   

 

2011

   

 

2012

   

 

2011

 

Net income

   $         35,117     $         67,836     $         78,160     $         93,112  

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

        

Foreign currency translation adjustments

     (23,592     6,992       (9,320     28,222  

Cash flow hedges adjustments, net of tax:

        

Unrealized (loss)/gain

     (521     (898     (1,798     217  

Reclassification for losses included in net income

     472       888       1,038       1,745  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedges adjustments, net of tax

     (49     (10     (760     1,962  

Pension and other postretirement benefits adjustments, net of tax:

        

Net actuarial loss

     -        (2,664     -        (2,664

Prior service credit

     -        35,561       -        35,561  

Amortization included in net periodic pension cost

     2,886       1,820       5,593       4,085  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pension and other postretirement benefits adjustments, net of tax

     2,886       34,717       5,593       36,982  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)/income, net of tax

     (20,755     41,699       (4,487     67,166  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     14,362       109,535       73,673       160,278  

Less: Comprehensive income attributable to noncontrolling interests

     2,701       4,821       6,423       7,279  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Foster Wheeler AG

   $ 11,661     $ 104,714     $ 67,250     $ 152,999  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

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

(unaudited)

 

                                   
     June 30, 2012     December 31, 2011  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 767,259     $ 718,049  

Short-term investments

     -        1,294  

Accounts and notes receivable, net:

    

Trade

     529,690       427,984  

Other

     87,446       97,495  

Contracts in process

     212,209       166,648  

Prepaid, deferred and refundable income taxes

     63,812       62,616  

Other current assets

     41,397       49,101  
  

 

 

   

 

 

 

Total current assets

     1,701,813       1,523,187  
  

 

 

   

 

 

 

Land, buildings and equipment, net

     333,519       341,987  

Restricted cash

     35,384       44,094  

Notes and accounts receivable - long-term

     6,453       6,210  

Investments in and advances to unconsolidated affiliates

     193,474       211,109  

Goodwill

     110,904       112,120  

Other intangible assets, net

     67,432       74,386  

Asbestos-related insurance recovery receivable

     141,952       157,127  

Other assets

     123,791       118,178  

Deferred tax assets

     26,404       25,482  
  

 

 

   

 

 

 

TOTAL ASSETS

   $                     2,741,126     $                 2,613,880  
  

 

 

   

 

 

 

LIABILITIES, TEMPORARY EQUITY AND EQUITY

    

Current Liabilities:

    

Current installments on long-term debt

   $ 12,610     $ 12,683  

Accounts payable

     343,758       250,821  

Accrued expenses

     222,662       237,089  

Billings in excess of costs and estimated earnings on uncompleted contracts

     571,591       550,746  

Income taxes payable

     34,821       39,645  
  

 

 

   

 

 

 

Total current liabilities

     1,185,442       1,090,984  
  

 

 

   

 

 

 

Long-term debt

     127,578       136,428  

Deferred tax liabilities

     44,502       44,622  

Pension, postretirement and other employee benefits

     165,253       171,065  

Asbestos-related liability

     253,713       269,520  

Other long-term liabilities

     161,748       160,596  

Commitments and contingencies

    
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,938,236       1,873,215  
  

 

 

   

 

 

 

Temporary Equity:

    

Non-vested share-based compensation awards subject to redemption

     8,369       4,993  
  

 

 

   

 

 

 

TOTAL TEMPORARY EQUITY

     8,369       4,993  
  

 

 

   

 

 

 

Equity:

    

Registered shares:

    

CHF 3.00 par value; authorized: 187,989,987 shares and 187,847,379 shares, respectively; conditionally authorized: 59,639,130 shares and 59,781,738 shares, respectively; issued: 125,672,031 shares and 125,529,423 shares, respectively; outstanding: 107,867,511 shares and 108,289,003 shares, respectively.

     321,646       321,181  

Paid-in capital

     613,453       606,053  

Retained earnings

     771,476       699,971  

Accumulated other comprehensive loss

     (534,323     (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

     751,907       687,747  
  

 

 

   

 

 

 

Noncontrolling interests

     42,614       47,925  
  

 

 

   

 

 

 

TOTAL EQUITY

     794,521       735,672  
  

 

 

   

 

 

 

TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY

   $ 2,741,126     $ 2,613,880  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


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
 

Six Months Ended June 30, 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

     -         -        86,280        -        -        86,280        6,832       93,112  

Other comprehensive income, net of tax

     -         -        -         66,719        -        66,719        447       67,166  

Issuance of registered shares upon exercise of stock options

     1,308        9,444        -         -        -        10,752        -        10,752  

Issuance of registered shares upon vesting of restricted awards

     357        (357     -         -        -        -        -        -   

Distributions to noncontrolling interests

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

Capital contribution from noncontrolling interests

     -         -        -         -        -        -        125       125  

Share-based compensation expense

     -         7,890        -         -        -        7,890        -        7,890  

Excess tax benefit related to share-based compensation

     -         3        -         -        -        3        -        3  

Repurchase of registered shares

     -         -        -         -        (160,086     (160,086     -        (160,086
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $     335,717      $     676,719      $     623,868      $ (397,785   $ (259,268   $     979,251      $     46,388     $     1,025,639  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012:

                  

Balance at December 31, 2011

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

Net income

     -         -        71,505        -        -        71,505        6,655       78,160  

Other comprehensive loss, net of tax

     -         -        -         (4,255     -        (4,255     (232     (4,487

Issuance of registered shares upon exercise of stock options

     126        477        -         -        -        603        -        603  

Issuance of registered shares upon vesting of restricted awards

     339        (339     -         -        -        -        -        -   

Distributions to noncontrolling interests

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

Share-based compensation expense

     -         7,319        -         -        -        7,319        -        7,319  

Excess tax shortfall related to share-based compensation

     -         (57     -         -        -        (57     -        (57

Repurchase of registered shares

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 321,646      $ 613,453      $ 771,476      $ (534,323   $ (420,345   $ 751,907      $ 42,614     $ 794,521  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

(unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $                 78,160     $                 93,112  

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

    

Depreciation and amortization

     25,796       25,177  

Net asbestos-related provision

     5,710       2,400  

Share-based compensation expense

     10,694       10,092  

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

     57       (3

Deferred income tax provision/(benefit)

     1,830       (4,518

Gain on sale of assets

     (134     (816

Dividends, net of equity in earnings of unconsolidated affiliates

     10,511       16,152  

Changes in assets and liabilities:

    

(Increase)/decrease in receivables

     (107,372     49,581  

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

     (22,288     (25,310

Increase in accounts payable and accrued expenses

     93,758       7,462  

Net change in other current assets and liabilities

     (1,895     (5,506

Net change in other long-term assets and liabilities

     (14,283     (28,859
  

 

 

   

 

 

 

Net cash provided by operating activities

     80,544       138,964  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Change in restricted cash

     7,854       (12,112

Capital expenditures

     (16,222     (17,277

Proceeds from sale of assets

     289       1,327  

Return of investment from unconsolidated affiliates

     6,207       3  

Investments in and advances to unconsolidated affiliates

     (1,090     -   

Proceeds from sale of short-term investments

     1,255       -   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,707     (28,059
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repurchase of shares

     (10,955     (160,086

Distributions to noncontrolling interests

     (11,734     (8,672

Proceeds from capital contribution from noncontrolling interests

     -        125  

Proceeds from stock options exercised

     603       11,772  

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

     (57     3  

Repayment of debt and capital lease obligations

     (6,474     (7,225
  

 

 

   

 

 

 

Net cash used in financing activities

     (28,617     (164,083
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (1,010     33,248  
  

 

 

   

 

 

 

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

     49,210       (19,930

Cash and cash equivalents at beginning of year

     718,049       1,057,163  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $     767,259     $     1,037,233  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

7


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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Number of separate projects

     9        17        17        20  

Net increase in contract profit from the regular revaluation of final estimated contract profit revisions

   $             8,200      $             15,800      $             31,600      $             13,500  

The changes in final estimated contract profit revisions for our Global Power Group were increased during the six months ended June 30, 2012 for a favorable settlement with a subcontractor of approximately $6,900 recognized in the first quarter of 2012. The changes in final estimated contract profit revisions during the six months ended June 30, 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 $8,600 and $6,700 as of June 30, 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 June 30, 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 June 30, 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 June 30, 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 three level 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.

 

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

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Net income attributable to Foster Wheeler AG

   $ 30,859      $ 63,309      $ 71,505      $ 86,280  

Basic weighted-average number of shares outstanding

     107,840,679        122,331,265        107,807,441        123,499,174  

Effect of dilutive securities

     2,576        515,740        60,153        637,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average number of shares outstanding

     107,843,255        122,847,005        107,867,594        124,136,890  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.29      $ 0.52      $ 0.66      $ 0.70  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.29      $ 0.52      $ 0.66      $ 0.70  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes options and restricted awards not included in the calculation of diluted earnings per share as the assumed proceeds from those options and restricted awards, 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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Options not included in the computation of diluted earnings per share

             2,850,267                1,347,442                2,021,500                1,340,549  
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted awards not included in the computation of diluted earnings per share

     930,884        -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 finalizing our valuation of net assets acquired, we have increased the goodwill balance as of December 31, 2011 which is presented on our consolidated balance sheet and related financial statement notes for the period and six months ended June 30, 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 participation 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.

 

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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 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 $68,100 as of June 30, 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.

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:

 

     June 30, 2012      December 31, 2011  
     Italy      Chile      Italy      Chile  

Balance Sheet Data:

           

Current assets

   $             149,800      $             114,256      $             168,501      $             130,880  

Other assets (primarily buildings and equipment)

     350,636        103,357        366,414        108,165  

Current liabilities

     95,272        34,626        82,164        55,590  

Other liabilities (primarily long-term debt)

     217,172        48,636        232,356        45,105  

Net assets

     187,992        134,351        220,395        138,350  

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  
     Italy      Chile      Italy      Chile      Italy      Chile      Italy      Chile  

Income Statement Data:

                       

Total revenues

   $       45,989      $       26,089      $       53,307      $       27,512      $       82,740      $       50,890      $       82,724      $       48,329  

Gross profit

     12,217        14,776        19,658        17,726        10,452        28,677        31,725        17,855  

Income before income taxes

     9,717        14,198        16,667        19,699        5,470        28,396        25,923        34,465  

Net earnings

     5,996        11,571        10,306        13,914        3,647        23,367        15,953        25,728  

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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Equity in the net earnings of unconsolidated affiliates

   $     8,911      $     15,586      $     15,819      $     28,079  

Distributions from unconsolidated affiliates

   $         23,145      $         33,733      $         31,917      $         43,410  

 

     June 30, 2012      December 31, 2011  

Total investment in unconsolidated affiliates

   $                         176,745      $                         195,033  

 

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Our equity earnings from our projects in Italy were $2,790 and $4,000 in the second quarter of 2012 and 2011, respectively, and were $2,428 and $6,606 in the first six months of 2012 and 2011, respectively. Our equity earnings in the first six months of 2012 were unfavorably impacted by the results of one of our projects in Italy that recorded a charge to establish a reserve against its receivable balance for emission rights earned prior to 2012 and experienced decreased earnings as a result of a facility maintenance shutdown during the first quarter of 2012.

Our equity earnings from our project in Chile were $6,121 and $11,586 in the second quarter of 2012 and 2011, respectively, and were $13,391 and $21,473 in the first six months of 2012 and 2011, respectively. The decrease in equity earnings in the quarter and six months ended June 30, 2012, compared to the same periods in 2011, included the impact of lower marginal rates in 2012 for electrical power generation.

Equity earnings in the quarter and six months ended June 30, 2011 included our equity interest in the after tax estimated recovery under our project in Chile’s business interruption insurance policy, as described above.

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 June 30, 2012 or December 31, 2011.

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 June 30, 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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

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

   $         2,623      $         2,660      $         5,257      $         5,320  

 

     June 30, 2012      December 31, 2011  

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

   $                         9,735      $                         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 June 30, 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):    June 30, 2012      December 31, 2011  

Current assets

   $                                  7,757      $                                19,328  

Other assets (primarily buildings and equipment)

     39,851        39,760  

Current liabilities

     4,854        6,198  

Other liabilities

     4,335        4,462  

Net assets

     38,419        48,428  

 

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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  
     June 30, 2012      December 31, 2011      June 30, 2012      December 31, 2011  

U.S.

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

Asia

     845        887                  

Europe

                     66,436        67,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             40,202      $             40,244      $             70,702      $             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.

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

 

     June 30, 2012      December 31, 2011  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Patents

   $ 40,670      $ (31,055   $ 9,615      $ 40,920      $ (30,237   $ 10,683  

Trademarks

     63,344        (30,075     33,269        63,711        (29,337     34,374  

Customer relationships, pipeline and backlog

     29,523        (10,819     18,704        30,586        (7,725     22,861  

Technology

     6,294        (450     5,844        6,468               6,468  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $             139,831      $ (72,399   $            67,432      $           141,685      $ (67,299   $             74,386  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of June 30, 2012, the net carrying amounts of our identifiable intangible assets were $54,050 for our Global Power Group and $13,382 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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Amortization expense

   $                              2,530      $                              1,649      $                              5,552      $                              3,297  

Approximate full year amortization expense for years:

           

2012

            $ 9,300  

2013

              7,800  

2014

              7,800  

2015

              7,700  

2016

              5,300  

 

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5. Borrowings

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

 

     June 30, 2012      December 31, 2011  
     Current      Long-term      Total      Current      Long-term      Total  

Capital Lease Obligations

   $ 2,485      $ 54,430      $ 56,915      $ 2,463      $ 56,080      $ 58,543  

Special-Purpose Limited Recourse Project Debt:

                 

FW Power S.r.l.

     8,213        64,470        72,683        8,308        69,757        78,065  

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

     1,912        7,395        9,307        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

   $           12,610      $           127,578      $           140,188      $           12,683      $           136,428      $           149,111  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated fair value

         $ 159,344            $ 164,590  
        

 

 

          

 

 

 

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, reduced 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.

 

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We had approximately $275,500 and $225,600 of letters of credit outstanding under our U.S. senior credit agreement as of June 30, 2012 and December 31, 2011, respectively. The letter of credit fees under the U.S. senior credit agreement outstanding as of June 30, 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 June 30, 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.

As a result of a change in the U.K. governmental standard, our U.K. pension plan adopted the use of the U.K. consumer prices index as a basis for inflationary increases in the calculation of the funded status of our U.K. pension plan during the six months ended June 30, 2011. The U.K. retail prices index was the former U.K. governmental standard that was used by our U.K. pension plan. We accounted for this change as a plan amendment as of May 31, 2011 and recognized a prior service credit in our consolidated statement of comprehensive income during the quarter and six months ended June 30, 2011 of approximately £29,600 (approximately $48,100 at the exchange rate in effect during the period).

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 six months ended June 30, 2012

   $ 10,800  

Remaining contributions expected for the year 2012

     12,000  
  

 

 

 

Contributions expected for the year 2012

   $                 22,800  
  

 

 

 

We did not make any discretionary contributions during the first six 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  
     Quarter Ended June 30,     Six Months Ended June 30,     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011     2012     2011     2012     2011  

Net periodic benefit cost/(credit):

                

Service cost

   $ 262     $ 333     $ 537     $ 702     $ 12     $ 20     $ 36     $ 47  

Interest cost

     13,187       15,314       26,321       30,925       569       735       1,374       1,647  

Expected return on plan assets

     (16,058     (17,830     (32,073     (35,971     -        -        -        -   

Amortization of net actuarial loss/(gain)

     4,349       3,501       8,485       6,955       93       (6     213       71  

Amortization of prior service (credit)/cost

     (396     9       (789     18       (878     (891     (1,757     (1,782

Amortization of transition obligation

     12       11       25       23       -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost/(credit)

   $       1,356     $       1,338     $       2,506     $       2,652     $       (204   $       (142   $       (134   $       (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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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          June 30, 2012              December 31, 2011      

Environmental indemnifications

   No limit    $                 7,900      $                 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.

 

         Six Months Ended June 30,      
     2012     2011  

Warranty Liability:

    

Balance at beginning of year

   $                 93,000     $                 100,300  

Accruals

     17,000       14,000  

Settlements

     (9,900     (9,500

Adjustments to provisions, including foreign currency translation

     (9,200     (3,600
  

 

 

   

 

 

 

Balance at end of period

   $ 90,900     $ 101,200  
  

 

 

   

 

 

 

We are contingently liable under standby letters of credit, bank guarantees and surety bonds, totaling $983,800 and $990,300 as of June 30, 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

   June 30,
2012
     December 31,
2011
   

Balance Sheet

Location

   June 30,
2012
     December 31,
2011
 

Derivatives designated as hedging instruments:

               

Interest rate swap contracts

 

Other assets

   $ -       $ -     

Other long-term liabilities

   $ 9,292      $ 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

     1,075        1,691    

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

     6,088        6,446  

Foreign currency forward contracts

 

Other accounts receivable

     441        75    

Accounts payable

     247        34  
    

 

 

    

 

 

      

 

 

    

 

 

 

Total derivatives

     $                 1,516      $                 1,766        $                 15,627      $                 15,187  
    

 

 

    

 

 

      

 

 

    

 

 

 

 

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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 June 30, 2012, we had a total gross notional amount of approximately $421,500 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 the remainder of 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 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    Quarter Ended June 30,     Six Months Ended June 30,  

Hedging Instruments

  

    in Income on Derivatives    

   2012     2011     2012     2011  

Foreign currency forward contracts

  

Cost of operating revenues

   $ (3,646   $ (1,089   $ (500   $ 725  

Foreign currency forward contracts

  

Other deductions, net

     (13     (54     78       16  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $           (3,659   $           (1,143   $           (422   $           741  
     

 

 

   

 

 

   

 

 

   

 

 

 

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 six months ended June 30, 2012 and 2011, we included net cash inflows on the settlement of derivatives of $930 and $656, 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 $61,300 as of June 30, 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.

 

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

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

(Loss)/gain recognized in other comprehensive income

   $ (629   $ (743   $ (1,785   $ 104  

Loss reclassified from accumulated other comprehensive loss

                     450                       639                       935                       1,255  

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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Share-based compensation

   $                 5,768      $                 5,221      $                 10,694      $                 10,092  

Related income tax benefit

     149        102        259        183  

As of June 30, 2012, we had $11,908 and $18,630 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).

 

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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 six months ended June 30, 2012 and 2011 were as follows:

 

     June 30, 2012     June 30, 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

     6,600       5,398  

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

     (3,224     (3,184
  

 

 

   

 

 

 

Balance at end of period

   $ 8,369     $ 7,149  
  

 

 

   

 

 

 

Our articles of association provide for conditional capital 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 June 30, 2012, our remaining available conditional capital was 59,639,130 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 listed on a U.S. exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate meaningful comparison with peer companies in the U.S. capital markets. Our effective tax rate can fluctuate significantly from period to period and may differ 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 six 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 non-U.S. jurisdictions which is expected to contribute to an approximate 16-percentage point reduction in our effective tax rate for the full year 2012, primarily because of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax incentives and credits, and other items.

   

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 four-percentage point increase in our effective tax rate for the full year 2012.

 

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Effective Tax Rate for 2011

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

   

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.), which contributed to an approximate four-percentage point increase in our effective tax rate.

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

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.

Our subsidiaries file income tax returns in many 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.

In the quarter and six months ended June 30, 2012, we received an adverse court decision, which we are appealing, related to an audit of a prior tax year. As a result of the decision, our provision for income taxes was increased by $1,360, our penalties on unrecognized tax benefits increased by $2,529 and our interest expense on unrecognized tax benefits increased by $318.

11. Business Segments

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

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.

 

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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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Operating Revenues (Third-Party) by Industry:

           

Power generation

   $             262,321      $             269,054      $             514,436      $             464,183  

Oil refining

     360,750        383,465        685,911        746,994  

Pharmaceutical

     13,614        15,290        26,593        26,474  

Oil and gas

     183,563        336,055        415,114        608,102  

Chemical/petrochemical

     77,427        130,409        145,747        284,386  

Power plant operation and maintenance

     34,913        34,235        64,193        62,564  

Environmental

     2,456        2,977        4,644        5,536  

Other, net of eliminations

     7,982        12,393        19,484        21,891  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 943,026      $ 1,183,878      $ 1,876,122      $ 2,220,130  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Revenues (Third-Party) by Business Segment:

           

Global E&C Group

   $ 666,142      $ 892,080      $ 1,337,015      $ 1,715,823  

Global Power Group

     276,884        291,798        539,107        504,307  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 943,026      $ 1,183,878      $ 1,876,122      $ 2,220,130  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

EBITDA:

        

Global E&C Group

   $             39,917     $             54,842     $             86,845     $             96,510  

Global Power Group

     43,850       67,735       96,166       94,199  

C&F Group *

     (23,592     (24,291     (50,870     (45,619
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     60,175       98,286       132,141       145,090  
  

 

 

   

 

 

   

 

 

   

 

 

 

Add: Net income attributable to noncontrolling interests

     4,258       4,527       6,655       6,832  

Less: Interest expense

     4,249       3,427       7,665       7,306  

Less: Depreciation and amortization

     12,776       12,506       25,796       25,177  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     47,408       86,880       105,335       119,439  

Less: Provision for income taxes

     12,291       19,044       27,175       26,327  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     35,117       67,836       78,160       93,112  

Less: Net income attributable to noncontrolling interests

     4,258       4,527       6,655       6,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 30,859     $ 63,309     $ 71,505     $ 86,280  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

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:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012     2011      2012      2011  

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

          

Global E&C Group(2)

   $ (2,800   $ 1,500      $ 5,100      $ 3,900  

Global Power Group(2)

     11,000       14,300        26,500        9,600  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 8,200     $ 15,800      $ 31,600      $ 13,500  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net asbestos-related provisions:(3)

          

Global E&C Group

   $ 1,700     $ -       $ 1,700      $ -   

C&F Group

     2,000       2,000        4,000        2,400  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $       3,700     $       2,000      $       5,700      $       2,400  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(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 six months ended June 30, 2012 for a favorable settlement with a subcontractor of approximately $6,900 recognized in the first quarter of 2012. The changes in final estimated contract profit revisions during the six months ended June 30, 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 six months ended June 30, 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:

 

         Quarter Ended June 30,             Six Months Ended June 30,      
     2012     2011     2012     2011  
Number of Claims by period:         

Open claims at beginning of period

     124,280       123,580       124,540       124,420  

New claims

     1,180       1,100       2,340       2,380  

Claims resolved

     (780     (690     (2,200     (2,810
  

 

 

   

 

 

   

 

 

   

 

 

 

Open claims at end of period

     124,680       123,990       124,680       123,990  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 second 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

       June 30, 2012              December 31, 2011      

Asbestos-related assets recorded within:

     

Accounts and notes receivable-other

   $                     34,593      $                     43,677  

Asbestos-related insurance recovery receivable

     118,465        131,007  
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 153,058      $ 174,684  
  

 

 

    

 

 

 

Asbestos-related liabilities recorded within:

     

Accrued expenses

   $ 41,050      $ 50,900  

Asbestos-related liability

     228,649        243,400  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 269,699      $ 294,300  
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 54,770      $ 56,700  

Future unasserted claims

     214,929        237,600  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 269,699      $ 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 six months of 2012 as a result of indemnity and defense cost payments totaling approximately $28,600, partially offset by an increase of $4,000 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 second 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 second 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 second 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 second quarter of 2027.

Through June 30, 2012, total cumulative indemnity costs paid, prior to insurance recoveries, were approximately $781,300 and total cumulative defense costs paid were approximately $379,500, or approximately 33% of total defense and indemnity costs. The overall historic average combined indemnity and defense cost per resolved claim through June 30, 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 six 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 second 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 June 30, 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 six months ended June 30, 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 December 31, 2011. This receivable was subsequently collected during the first six months of 2012. Other insurers may become insolvent in the future and our insurers may fail to reimburse amounts owed to us on a timely basis. If we fail to realize the expected insurance recoveries, or experience delays in receiving material amounts from our insurers, our business, financial condition, results of operations and cash flows could be materially adversely affected.

The following table summarizes our net asbestos-related provision:

 

         Quarter Ended June 30,              Six Months Ended June 30,      
     2012      2011      2012      2011  

Provision for revaluation

   $         2,000      $         2,000      $         3,997      $         4,000  

Gain on the settlement of coverage litigation

     -         -         -         (1,600
  

 

 

    

 

 

    

 

 

    

 

 

 

Net asbestos-related provision

   $ 2,000      $ 2,000      $ 3,997      $ 2,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

Our net asbestos-related provision is the result of our rolling 15-year asbestos liability estimate, net of anticipated insurance recoveries, 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:

 

         Quarter Ended June 30,             Six Months Ended June 30,      
     2012     2011     2012     2011  

Asbestos litigation, defense and case resolution payments

   $         13,300     $         14,900     $         28,600     $         36,500  

Insurance proceeds

     (11,200     (6,900     (21,700     (16,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asbestos-related payments

   $ 2,100     $ 8,000     $ 6,900     $ 20,500  
  

 

 

   

 

 

   

 

 

   

 

 

 

We expect to have net cash outflows of $7,900 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, 1,008 claims have been brought against our U.K. subsidiaries, of which 299 remained open as of June 30, 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 second quarter of 2027:

 

United Kingdom Asbestos

   June 30, 2012      December 31, 2011  

Asbestos-related assets:

     

Accounts and notes receivable-other

   $ 2,698      $ 2,677  

Asbestos-related insurance recovery receivable

     23,487        26,120  
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 26,185      $ 28,797  
  

 

 

    

 

 

 

Asbestos-related liabilities:

     

Accrued expenses

   $ 2,698      $ 2,677  

Asbestos-related liability

     25,063        26,120  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 27,761      $ 28,797  
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 6,832      $ 8,030  

Future unasserted claims

     20,929        20,767  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 27,761      $ 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 recorded in the U.K. would be approximately $41,000, with a corresponding increase in the asbestos-related asset.

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 2012 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 Quarter and Six Months Ended June 30, 2012

Our summary financial results for the quarter and six months ended June 30, 2012 and 2011 are as follows:

 

         Quarter Ended June 30,              Six Months Ended June 30,      
     2012      2011      2012      2011  

Consolidated Statement of Operations Data:

           

Operating revenues(1)

   $ 943,026      $ 1,183,878      $ 1,876,122      $ 2,220,130  

Contract profit(1)

     139,551        153,612        278,883        252,867  

Selling, general and administrative expenses(1)

     85,427        80,402        168,708        154,243  

Net income attributable to Foster Wheeler AG

     30,859        63,309        71,505        86,280  

Earnings per share :

           

Basic

     0.29        0.52        0.66        0.70  

Diluted

     0.29        0.52        0.66        0.70  

Net cash provided by operating activities(2)

           80,544        138,964  

 

(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 $767,259 and $718,049 as of June 30, 2012 and December 31, 2011, respectively.

Net income attributable to Foster Wheeler AG decreased in the second quarter of 2012, compared to the same period of 2011, primarily driven by pre-tax impacts related to decreased contract profit of $14,100, increased sales pursuit costs of $6,100, an unfavorable impact related to the change in net foreign exchange transactions of $5,100, and the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized during the second quarter of 2011, as well as the after-tax impact of decreased equity earnings of $6,700 and an increase in our effective tax rate.

 

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Net income attributable to Foster Wheeler AG decreased in the first six months of 2012, compared to the same period of 2011, primarily driven by pre-tax impacts related to increased sales pursuit costs of $12,200, the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized during the first six months of 2011, an unfavorable impact related to the change in net foreign exchange transactions of $3,300 and an increased net asbestos-related provision of $3,300, as well as the after-tax impact of decreased equity earnings of $12,100 and an increase in our effective tax rate, partially offset by the pre-tax impact related to increased contract profit of $26,000.

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

Challenges and Drivers

Our primary operating focus continues to be booking quality new business and effectively and efficiently executing our contracts. The global markets in which we operate are largely dependent on overall economic conditions and 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. 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. Global markets in the engineering and construction industry have experienced intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Additionally, some clients have been releasing, and continue to release, tranches of work on a piecemeal basis. However, we are seeing clients developing new projects and reactivating planned projects that had previously been placed on hold.

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 2.

We believe that there will be sustained demand in 2012, compared to 2011, 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 has 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 continued sovereign debt and bank funding pressures in the Eurozone, the speed at which governmental efforts directed at spending and debt reduction are being implemented, a slowdown in the economic growth rate in China 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.

 

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New Orders and Backlog of Unfilled Orders

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

 

     Quarter Ended  
     June 30, 2012      March 31, 2012      June 30, 2011  

New orders, measured in future revenues:

        

Global E&C Group*

   $ 496,900      $ 672,600      $ 664,900  

Global Power Group

     116,200        161,700        576,000  
  

 

 

    

 

 

    

 

 

 

Total*

   $             613,100      $             834,300      $             1,240,900  
  

 

 

    

 

 

    

 

 

 

 

*  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 :

   $ 105,400      $ 301,600      $ 284,100  

 

     As of  
     June 30, 2012      March 31, 2012      December 31, 2011  

Backlog of unfilled orders, measured in future revenues

   $             3,142,000      $             3,590,400      $             3,626,100  

Backlog, measured in Foster Wheeler scope*

   $ 2,241,300      $ 2,527,300      $ 2,562,300  

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

     10,300        10,900        11,600  

 

*

As defined in the section entitled “—Backlog and New Orders” within this Item 2.

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

Results of Operations

Operating Revenues

 

     June 30, 2012      June 30, 2011      $ Change              % Change          

Quarter Ended:

           

Global E&C Group

   $                 666,142      $                 892,080      $                 (225,938)         (25.3)%   

Global Power Group

     276,884        291,798        (14,914)         (5.1)%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 943,026      $ 1,183,878      $ (240,852)         (20.3)%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended:

           

Global E&C Group

   $ 1,337,015      $ 1,715,823      $ (378,808)         (22.1)%   

Global Power Group

     539,107        504,307        34,800        6.9%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,876,122      $ 2,220,130      $ (344,008)         (15.5)%   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Our operating revenues by geographic region, based upon where our projects are being executed, for the quarter and six months ended June 30, 2012 and 2011, were as follows:

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      $ Change     % Change      2012      2011      $ Change     % Change  

Africa

   $ 24,909      $ 27,963      $ (3,054     (10.9)%       $ 47,661      $ 82,883      $ (35,222     (42.5)%   

Asia

     191,167        229,364        (38,197     (16.7)%         406,081        417,679        (11,598     (2.8)%   

Australasia and other*

     119,761        308,369        (188,608     (61.2)%         310,519        548,390        (237,871     (43.4)%   

Europe

     240,155        248,116        (7,961     (3.2)%         458,932        435,744        23,188       5.3%   

Middle East

     64,565        55,811        8,754       15.7%         112,849        125,644        (12,795     (10.2)%   

North America

     214,694        245,276        (30,582     (12.5)%         373,185        478,894        (105,709     (22.1)%   

South America

     87,775        68,979        18,796       27.2%         166,895        130,896        35,999       27.5%   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $     943,026      $     1,183,878      $     (240,852     (20.3)%       $     1,876,122      $     2,220,130      $     (344,008     (15.5)%   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

*

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

Our operating revenues decreased in the quarter and six months ended June 30, 2012, compared to the same periods in 2011, which includes decreased flow-through revenues of $277,900 and $437,200, respectively, as described below. Excluding the impact of the change in flow-through revenues and currency fluctuations, our operating revenues increased 12% and 13% in the quarter and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increase in operating revenues, excluding flow-through revenues and currency fluctuations, in the quarter and six months ended June 30, 2012, compared to the same periods in 2011, 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

 

     June 30, 2012      June 30, 2011      $ Change           % Change        

Quarter Ended

   $ 139,551      $ 153,612      $ (14,061     (9.2)%   

Six Months Ended

   $                 278,883      $                 252,867      $                 26,016       10.3%   

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

Contract profit decreased during the quarter ended June 30, 2012, compared to the same period in 2011. The decrease was the net result of decreased contract profit in our Global Power Group, partially offset by increased contract profit in our Global E&C Group.

Contract profit increased during the six months ended June 30, 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

 

     June 30, 2012      June 30, 2011      $ Change              % Change          

Quarter Ended

   $ 85,427      $ 80,402      $ 5,025        6.2%   

Six Months Ended

   $                     168,708      $                 154,243      $                     14,465        9.4%   

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 second quarter of 2012, compared to the same period in 2011, primarily as a result of increased sales pursuit costs of $6,100, partially offset by decreased general overhead costs of $900, while research and development costs were relatively unchanged.

SG&A expenses increased in the first six months of 2012, compared to the same period in 2011, primarily as a result of increased sales pursuit costs of $12,200 and increased general overhead costs of $2,500, while research and development costs were relatively unchanged.

Other Income, net

 

     June 30, 2012      June 30, 2011      $ Change             % Change          

Quarter Ended

   $ 10,571      $ 21,390      $ (10,819     (50.6)%   

Six Months Ended

   $                     18,755      $                 35,656      $                     (16,901     (47.4)%   

Other income, net during the quarter and six months ended June 30, 2012 consisted primarily of equity earnings of $8,300 and $15,300, respectively, generated from our investments, primarily from our ownership interests in build, own and operate projects in Italy and Chile.

Other income, net decreased in the second quarter of 2012, compared to the same period in 2011, primarily driven by decreased equity earnings in our Global Power Group’s project in Chile of $5,500, decreased equity earnings in our Global E&C Group’s projects in Italy of $1,200 and the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized during the second quarter of 2011.

Other income, net decreased in the first six months of 2012, compared to the same period in 2011, primarily driven by decreased equity earnings in our Global Power Group’s project in Chile of $8,100, decreased equity earnings in our Global E&C Group’s projects in Italy of $4,200 and the unfavorable impact of the inclusion of a $4,000 gain in the first six months of 2011 related to the revaluation of a contingent consideration liability.

For further information related to our equity earnings, please refer to the sections within this Item 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

 

     June 30, 2012      June 30, 2011      $ Change              % Change          

Quarter Ended

   $ 12,274      $ 6,721      $ 5,553        82.6%   

Six Months Ended

   $                     16,338      $                 12,838      $                     3,500        27.3%   

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

 

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Other deductions, net in the second quarter of 2012 consisted primarily of legal fees of $3,300, a net foreign exchange transaction loss of $3,200, net penalties on unrecognized tax benefits of $2,300, a $1,500 charge recognized by our Global E&C Group in the second quarter of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy that, due to recent legislation, was no longer an economically viable project, and bank fees of $800. The increase in other deductions, net in the second quarter of 2012, compared to the same period in 2011, was primarily the net result of an unfavorable impact of $5,100 related to the change in net foreign currency exchange transactions, increased net penalties on unrecognized tax benefits of $1,900 and the unfavorable impact of a $1,500 charge recognized by our Global E&C Group in the second quarter of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy, as further described above, partially offset by decreased legal fees of $2,600.

Other deductions, net in the first six months of 2012 consisted primarily of legal fees of $7,300, net penalties on unrecognized tax benefits of $2,700, bank fees of $1,700, a $1,500 charge recognized by our Global E&C Group in the first six months of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy, as further described above, and a net foreign exchange transaction loss of $700. The increase in other deductions, net in the first six months of 2012, compared to the same period in 2011, was primarily the net result of an unfavorable impact of $3,300 related to the change in net foreign currency exchange transactions, increased net penalties on unrecognized tax benefits of $1,600 and the unfavorable impact of a $1,500 charge recognized by our Global E&C Group in the first six months of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy, as further described above, partially offset by decreased legal fees of $2,000.

Net foreign currency 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.

Please refer to the section entitled “—Provision for Income Taxes” within this Item 2 for further information related to the impact of penalties on unrecognized tax benefits during the quarter and six months ended June 30, 2012 in connection with an adverse court decision, which we are appealing, with respect to an audit of a prior tax year.

Interest Income

 

             June 30, 2012                       June 30, 2011                       $ Change                     % Change          

Quarter Ended

   $         2,949      $         4,428      $ (1,479     (33.4)%   

Six Months Ended

   $         6,118      $         7,703      $ (1,585     (20.6)%   

Interest income decreased in the quarter ended June 30, 2012, compared to the same period in 2011, primarily as a result of lower average cash and cash equivalents balances, while investment yields on cash and cash equivalents balances were relatively unchanged.

Interest income decreased in the six months ended June 30, 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

 

             June 30, 2012                       June 30, 2011                       $ Change                      % Change          

Quarter Ended

   $         4,249      $         3,427      $         822        24.0%   

Six Months Ended

   $         7,665      $         7,306      $         359        4.9%   

Interest expense increased in the quarter and six months ended June 30, 2012, compared to the same periods in 2011, primarily as a result of increases in net interest expense on unrecognized tax benefits of $1,300 and $1,200, respectively, partially offset by the favorable impacts from decreased average borrowings, excluding foreign currency translation effects, in the quarter and six months ended June 30, 2012.

Please refer to the section entitled “—Provision for Income Taxes” within this Item 2 for further information related to the impact of interest expense on unrecognized tax benefits during the quarter and six months ended June 30, 2012 in connection with an adverse court decision, which we are appealing, with respect to an audit of a prior tax year.

 

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Net Asbestos-Related Provision

 

             June 30, 2012                       June 30, 2011                       $ Change                      % Change          

Quarter Ended

   $         3,713      $         2,000      $         1,713        85.7%   

Six Months Ended

   $         5,710      $         2,400      $         3,310        137.9%   

The net asbestos-related provision increased during the second quarter of 2012, compared to the same period in 2011, primarily as a result of the unfavorable impact of the revaluation of our U.K. asbestos-related asset of $1,700 recognized during the second quarter of 2012.

The increase in the net asbestos-related provision in the first six months of 2012, compared to the same period in 2011, was the result of the unfavorable impact of the revaluation of our U.K. asbestos-related asset of $1,700 recognized during the first six months of 2012 and 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 six months of 2011.

Provision for Income Taxes

 

             June 30, 2012                       June 30, 2011                       $ Change                     % Change          

Quarter Ended

   $         12,291      $         19,044      $ (6,753     (35.5)%   

Effective tax rate

     25.9%         21.9%        

Six Months Ended

   $ 27,175      $ 26,327      $ 848       3.2%   

Effective tax rate

     25.8%         22.0%        

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 listed on a U.S. exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate meaningful comparison with peer companies in the U.S. capital markets. Our effective tax rate can fluctuate significantly from period to period and may differ 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 six 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 non-U.S. jurisdictions which is expected to contribute to an approximate 16-percentage point reduction in our effective tax rate for the full year 2012, primarily because of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax incentives and credits, and other items.

   

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 four-percentage point increase in our effective tax rate for the full year 2012.

 

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Effective Tax Rate for 2011

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

   

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.), which contributed to an approximate four-percentage point increase in our effective tax rate.

In the quarter and six months ended June 30, 2012, we received an adverse court decision, which we are appealing, related to an audit of a prior tax year. As a result of the decision, our provision for income taxes was increased by $1,400, our penalties on unrecognized tax benefits increased by $2,500 and our interest expense on unrecognized tax benefits increased by $300.

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.

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

 

             June 30, 2012                       June 30, 2011                       $ Change                     % Change          

Quarter Ended

   $ 4,258      $ 4,527      $ (269     (5.9)%   

Six Months Ended

   $ 6,655      $ 6,832      $ (177     (2.6)%   

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 decreased in the second quarter of 2012, compared to the same period in 2011, which was the net result of decreased net income from our operations in Poland and South Africa, partially offset by increased net income from our operations in Martinez, California.

Net income attributable to noncontrolling interests was relatively unchanged in the first six months of 2012, compared to the same period in 2011, which was the net result of decreased net income from our operations in South Africa, partially offset by increased net income from our operations in Malaysia, Martinez, California and Poland.

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.

 

             June 30, 2012                       June 30, 2011                       $ Change                     % Change          

Quarter Ended

   $ 60,175      $ 98,286      $ (38,111     (38.8)%   

Six Months Ended

   $ 132,141      $ 145,090      $ (12,949     (8.9)%   

 

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EBITDA decreased in the second quarter of 2012, compared to the same period in 2011, primarily driven by decreased contract profit of $14,100, increased sales pursuit costs of $6,100, decreased equity earnings of $6,700, the unfavorable impact related to the change in net foreign exchange transactions of $5,100, the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized by our Global E&C Group during the second quarter of 2011, increased net penalties on unrecognized tax benefits of $1,900 and the unfavorable impact of a $1,500 charge recognized by our Global E&C Group in the second quarter of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy that, due to recent legislation, was no longer an economically viable project.

EBITDA decreased in the first six months of 2012, compared to the same period in 2011, primarily driven by increased sales pursuit costs of $12,200, decreased equity earnings of $12,100, the unfavorable impact of the inclusion of a $4,000 gain related to the revaluation of a contingent consideration liability that was recognized during the first six months of 2011, the unfavorable impact related to the change in net foreign exchange transactions of $3,300, increased net asbestos-related provision of $3,300, increased net penalties on unrecognized tax benefits of $1,600 and the unfavorable impact of a $1,500 charge recognized by our Global E&C Group in the first six months of 2012 related to the write-off of capitalized costs for a wind farm development project in Italy, as further described above, partially offset by increased contract profit of $26,000.

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.

 

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

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

EBITDA:

        

Global E&C Group

   $       39,917     $       54,842     $       86,845     $       96,510  

Global Power Group

     43,850       67,735       96,166       94,199  

C&F Group*

     (23,592     (24,291     (50,870     (45,619
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     60,175       98,286       132,141       145,090  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Interest expense

     4,249       3,427       7,665       7,306  

Less: Depreciation and amortization

     12,776       12,506       25,796       25,177  

Less: Provision for income taxes

     12,291       19,044       27,175       26,327  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 30,859     $ 63,309     $ 71,505     $ 86,280  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

*

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:    Quarter Ended June 30,      Six Months Ended June 30,  
     2012     2011      2012      2011  

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

          

Global E&C Group(2)

   $ (2,800   $       1,500      $       5,100      $       3,900  

Global Power Group(2)

     11,000       14,300        26,500        9,600  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total(2)

   $ 8,200     $       15,800      $       31,600      $       13,500  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net asbestos-related provisions:(3)

          

Global E&C Group

   $ 1,700     $       $ 1,700      $   

C&F Group

     2,000       2,000        4,000        2,400  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 3,700     $ 2,000      $ 5,700      $ 2,400  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

 

(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 six months ended June 30, 2012 for a favorable settlement with a subcontractor of approximately $6,900 recognized in the first quarter of 2012. The changes in final estimated contract profit revisions during the six months ended June 30, 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 six months ended June 30, 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

 

     Quarter Ended June 30,      Six Months Ended June 30,  
     2012      2011      $ Change     % Change      2012      2011      $ Change     % Change  

Operating revenues

   $         666,142      $         892,080      $ (225,938     (25.3)%       $         1,337,015      $         1,715,823      $ (378,808     (22.1)%   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

   $ 39,917      $ 54,842      $ (14,925     (27.2)%       $ 86,845      $ 96,510      $ (9,665     (10.0)%   
  

 

 

    

 

 

    

 

 

   

 

 

    

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