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, 2012 (“2012 Form 10-K”), filed with the Securities and Exchange Commission on March 1, 2013. The consolidated balance
sheet as of December 31, 2012 was derived from the audited financial statements included in our 2012 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. These
reclassifications include the presentation of our Statement of Comprehensive Income as a result of our adoption of “ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income”, or ASU No. 2013-02. ASU No. 2013-02 was issued by the Financial Accounting Standards Board in February 2013. The standard requires disclosure of the effects on the line items of net income for significant amounts reclassified
out of accumulated other comprehensive income and a cross-reference to other disclosures when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., contracts in
process or billings in excess of costs and estimated earnings on uncompleted contracts for pension-related amounts) instead of directly to income or expense. The adoption of this standard did not have an impact on our results of operations,
financial position or cash flows.
Reclassifications from accumulated other comprehensive loss related to cash flow hedges amounted to losses
of $741 and $2,356 during the quarter and nine months ended September 30, 2013, respectively, and $679 and $1,717 during the quarter and nine months ended September 30, 2012, respectively. These losses included amounts related to 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. Amounts that are reclassified from accumulated other comprehensive loss
related to cash flow hedges from our consolidated entities are recognized within interest expense on the consolidated statement of operations, whereas amounts related to our equity method investees are recognized within equity earnings in other
income, net on the consolidated statement of operations. Please refer to Note 8 for further information.
Reclassifications from accumulated
other comprehensive loss related to pension and other postretirement benefits are included as a component of net periodic pension cost. Please refer to Note 6 for further information.
The tax effect related to foreign currency translation adjustments was inconsequential during the quarters and nine months ended September 30, 2013 and 2012.
Reclassifications also include the presentation of our former waste-to-energy business as a result of its classification as held-for-sale and, in turn,
discontinued operations. Please refer to Note 13 for further information.
The consolidated financial statements include the accounts of
Foster Wheeler AG and all 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
8
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 or decreased for estimated losses, less billings to the customer and progress payments on uncompleted
contracts. A full provision for loss contracts is made at the time the loss becomes probable regardless of the stage of completion.
At any
time, we have numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total contract costs and estimates of progress toward completion to
determine the extent of revenue and profit recognition. 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:
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|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Number of separate projects
|
|
|
10
|
|
|
|
12
|
|
|
|
28
|
|
|
|
27
|
|
|
Net increase in contract profit from the regular revaluation of final estimated contract profit revisions
|
|
$
|
30,200
|
|
|
$
|
22,700
|
|
|
$
|
74,800
|
|
|
$
|
58,000
|
|
The changes in final estimated contract profit revisions for our Global Power Group were increased during the nine months
ended September 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 for our Global E&C Group and our financial
results did not include an increase in final estimated contract profit of approximately $5,300 during the quarter and nine months ended September 30, 2012. The correction was recorded in the quarter ended December 31, 2012 as it was not
material to the financial results for the quarter and nine months ended September 30, 2012 (the periods in which it should have been recorded), nor was it material to the financial results for the year ended December 31, 2012.
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
9
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, which can include amounts from unapproved change orders when the two requirements described above are met. Unapproved change orders or similar items subject to uncertainty that do not meet the two requirements described
above are expensed without the recognition of additional contract revenue. 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 $4,600 and $8,800 as of September 30, 2013 and December 31, 2012, respectively, of which substantially all costs had been incurred as of September 30, 2013 and December 31, 2012.
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. In the event that we defer pre-contract costs and we are not successful in obtaining the contract, we write off the deferred costs through our consolidated
statement of operations in the period when we no longer assess recoverability of such costs as probable. Deferred pre-contract costs were inconsequential as of September 30, 2013 and December 31, 2012.
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.
Trade Accounts Receivable
— Trade accounts receivable represent amounts billed to customers. We
assess the need for an allowance for doubtful accounts on a project-by-project basis, which includes the consideration of security instruments that provide us protection in the event of non-payment. When there is a risk of non-payment related to
customer credit risk, we record an allowance for doubtful accounts. Because of the nature of our customer base and our rigorous customer credit risk assessment process prior to entering into contracts, the level of our allowance for doubtful
accounts is typically a very small percentage of our gross accounts receivable balance. To the extent that there is a risk of non-payment related to commercial or performance issues, we record an allowance against the valuation of contract work in
progress within the contract.
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 September 30, 2013
or December 31, 2012.
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 September 30, 2013 and
December 31, 2012, 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.
10
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 each class of financial instruments for which it is practicable to estimate
fair value:
Financial instruments valued independent of the fair value hierarchy:
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•
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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.
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Financial instruments valued
within the fair value hierarchy:
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•
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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.
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|
•
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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. Our estimate of the fair value of foreign currency forward contracts also includes an assessment of non-performance by our counterparties. We further corroborate
the valuations with observable market data using level 2 inputs.
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|
•
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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.
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|
•
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|
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.
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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 amounts have been computed based on the weighted-average number of shares outstanding during the reporting period.
11
Diluted earnings per share amounts have been based on the combination of the weighted-average number of
shares outstanding during the reporting period and the impact of dilutive securities, if any, such as outstanding stock options and the non-vested portion of restricted stock units and performance-based restricted stock units (collectively,
“restricted awards”) to the extent such securities are dilutive.
In profitable periods, outstanding stock options have a dilutive
effect under the treasury stock method when the average share price for the period exceeds the assumed proceeds from the exercise of the option. The assumed proceeds include the exercise price, compensation cost, if any, for future service that has
not yet been recognized in the consolidated statement of operations, and any tax benefits that would be recorded in paid-in capital when the option is exercised. Under the treasury stock method, the assumed proceeds are assumed to be used to
repurchase shares in the current period. The dilutive impact of the non-vested portion of restricted awards is determined using the treasury stock method, but the proceeds include only the unrecognized compensation cost and tax benefits as assumed
proceeds.
The computations of basic and diluted earnings per share were as follows:
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|
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Quarter Ended September 30,
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|
|
Nine Months Ended September 30,
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|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Income from continuing operations attributable to Foster Wheeler AG
|
|
$
|
48,853
|
|
|
$
|
58,667
|
|
|
$
|
134,073
|
|
|
$
|
130,578
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
|
98,172,200
|
|
|
|
107,065,999
|
|
|
|
100,830,719
|
|
|
|
107,558,489
|
|
|
Effect of dilutive securities
|
|
|
431,386
|
|
|
|
253,963
|
|
|
|
495,874
|
|
|
|
298,879
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares outstanding
|
|
|
98,603,586
|
|
|
|
107,319,962
|
|
|
|
101,326,593
|
|
|
|
107,857,368
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|
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|
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Income from continuing operations per share:
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|
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|
|
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|
|
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Basic
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
1.33
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
1.32
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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The following table summarizes share-based compensation awards not included in the calculation of diluted earnings per
share as the assumed proceeds from those 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:
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|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,356,167
|
|
|
|
2,809,894
|
|
|
|
1,393,499
|
|
|
|
2,809,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based restricted share units
|
|
|
1,144,694
|
|
|
|
—
|
|
|
|
1,144,694
|
|
|
|
—
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2. Business Combinations
In June 2013, we acquired all of the outstanding shares of a privately held upstream consultancy business located in the United Kingdom and additional related assets in the Middle East. This acquired
business specializes in field development and project decision support, focused on the evaluation and implementation of oil and gas field developments covering greenfield and brownfield assets. At closing, we paid cash consideration net of cash
acquired of £6,300 (approximately $9,700 based on the exchange rate in effect on the closing date), subject to customary working capital adjustments, as specified in the sale and purchase agreement. The sale and purchase agreement also
included an earnout provision for additional consideration with an estimated maximum of £3,000 (approximately $4,600 based on the exchange rate in effect on September 30, 2013), depending on the acquired business’ performance, as
defined in the sale and purchase agreement, over a period of approximately 3 and a half years subsequent to the acquisition date. Any amounts recognized under the earnout will be reported as compensation expense in periods subsequent to the
acquisition date rather than as part of the purchase price for the business. Our consolidated balance sheet as of September 30, 2013 included a preliminary purchase price allocation for this acquisition as we are in process of finalizing
the valuation of the individual assets acquired and liabilities assumed. The preliminary purchase price allocation was based on the best estimate of management and we expect to finalize the purchase price allocation upon completion of an independent
appraisal over the next several months, but no later than one year from the acquisition date. The preliminary purchase price allocation and pro forma impact assuming the acquisition had occurred as of the beginning of 2012 were not significant to
our consolidated financial statements. As a result of the preliminary purchase price allocation, we recognized goodwill of $4,465 and other intangible assets of $5,307 related to this acquisition. The assets, liabilities and results of
operations of the acquired business are included within our Global Engineering and Construction Group (“Global E&C Group”) business segment.
12
Also in June 2013, we acquired all of the outstanding shares of a privately held engineering and
project management business located in Mexico with experience in both offshore and onshore upstream oil and gas, downstream oil and gas and power projects. At closing, we paid cash consideration net of cash acquired of approximately $15,900, subject
to customary working capital adjustments, as specified in the sale and purchase agreement. Our consolidated balance sheet as of September 30, 2013 included a preliminary purchase price allocation for this acquisition as we are in process of
finalizing the valuation of the individual assets acquired and liabilities assumed. The preliminary purchase price allocation was based on the best estimate of management and we expect to finalize the purchase price allocation upon completion of an
independent appraisal over the next several months, but no later than one year from the acquisition date. The preliminary purchase price allocation and pro forma impact assuming the acquisition had occurred as of the beginning of 2012 were not
significant to our consolidated financial statements. As part of our post-acquisition valuation of assets and liabilities acquired during the quarter ended September 30, 2013, we recorded additional assets and liabilities of $20,782 and
$32,647, respectively, and recorded a corresponding net increase to goodwill of $11,865. As a result of the preliminary purchase price allocation, we recognized goodwill of $18,143 and other intangible assets of $7,100 related to this acquisition.
The assets, liabilities and results of operations of the acquired business are included within our Global E&C Group business segment.
During our U.S. operations’ fiscal first quarter of 2013, we acquired all of the outstanding shares of a privately held U.S.-based business that
specializes in the management of construction and commissioning of pharmaceutical and biotech facilities and which also has the capabilities to manage the full engineering, procurement and construction of such facilities. In addition, the acquired
business has the ability to provide modular project delivery services on a worldwide basis through its participation in a project-services partnership. At closing, we paid cash consideration net of cash acquired of approximately $25,100. The sale
and purchase agreement also included an earnout provision for additional consideration with an estimated maximum of approximately $6,600, depending on the acquired business’ performance, as defined in the sale and purchase agreement, over a
period of approximately 5 years subsequent to the acquisition date. Any amounts recognized under the earnout will be reported as compensation expense in periods subsequent to the acquisition date rather than as part of the purchase price for
the business. The purchase price allocation and pro forma impact assuming the acquisition had occurred as of the beginning of 2012 were not significant to our consolidated financial statements. As a result of the purchase price allocation, we
recognized goodwill of $10,571 and other intangible assets of $13,980 related to this acquisition. The assets, liabilities and results of operations of the acquired business are included within our Global E&C Group business segment.
In November 2012, we acquired all of the outstanding shares of a privately held multi-discipline full service engineering, procurement, and construction
management business located in North America. At closing, we paid cash consideration net of cash acquired of approximately $70,800. The sale and purchase agreement also included an earnout provision for additional consideration with an estimated
maximum of approximately $20,000, depending on the acquired business’ performance, as defined in the sale and purchase agreement, over a period of approximately 5 years subsequent to the acquisition date. The earnout will be reported as
compensation expense in periods subsequent to the acquisition date rather than as part of the purchase price for the business. As a result of the purchase price allocation, we recognized goodwill of $18,708 and other intangible assets of
$42,921 related to this acquisition. The assets, liabilities and results of operations of the acquired business are included within our Global E&C 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.
13
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:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
Italy
|
|
|
Chile
|
|
|
Italy
|
|
|
Chile
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
141,817
|
|
|
$
|
55,220
|
|
|
$
|
142,584
|
|
|
$
|
137,626
|
|
|
Other assets (primarily buildings and equipment)
|
|
|
353,173
|
|
|
|
91,339
|
|
|
|
358,366
|
|
|
|
98,550
|
|
|
Current liabilities
|
|
|
97,545
|
|
|
|
20,254
|
|
|
|
91,085
|
|
|
|
60,082
|
|
|
Other liabilities (primarily long-term debt)
|
|
|
198,230
|
|
|
|
15,953
|
|
|
|
214,025
|
|
|
|
23,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
199,215
|
|
|
$
|
110,352
|
|
|
$
|
195,840
|
|
|
$
|
153,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Italy
|
|
|
Chile
|
|
|
Italy
|
|
|
Chile
|
|
|
Italy
|
|
|
Chile
|
|
|
Italy
|
|
|
Chile
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
30,570
|
|
|
$
|
18,065
|
|
|
$
|
65,746
|
|
|
$
|
19,377
|
|
|
$
|
97,585
|
|
|
$
|
59,394
|
|
|
$
|
148,486
|
|
|
$
|
70,267
|
|
|
Gross profit
|
|
|
6,700
|
|
|
|
12,539
|
|
|
|
7,976
|
|
|
|
12,120
|
|
|
|
20,702
|
|
|
|
36,097
|
|
|
|
18,428
|
|
|
|
40,797
|
|
|
Income before income taxes
|
|
|
5,125
|
|
|
|
11,928
|
|
|
|
5,435
|
|
|
|
15,770
|
|
|
|
15,478
|
|
|
|
34,066
|
|
|
|
10,905
|
|
|
|
44,166
|
|
|
Net earnings
|
|
|
3,180
|
|
|
|
9,303
|
|
|
|
3,209
|
|
|
|
12,853
|
|
|
|
9,919
|
|
|
|
26,535
|
|
|
|
6,856
|
|
|
|
36,220
|
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Equity in the net earnings of unconsolidated affiliates
|
|
$
|
6,944
|
|
|
$
|
6,856
|
|
|
$
|
27,382
|
|
|
$
|
22,675
|
|
|
Distributions from equity affiliates
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,933
|
|
|
$
|
31,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Investments in unconsolidated affiliates
|
|
$
|
161,127
|
|
|
$
|
187,363
|
|
Our equity earnings from our projects in Italy were $1,531 and $1,573 in the third quarter of 2013 and 2012,
respectively, and were $4,915 and $4,001 in the first nine months of 2013 and 2012, respectively.
Our equity earnings from our project in
Chile were $5,413 and $5,283 in the third quarter of 2013 and 2012, respectively, and were $22,467 and $18,674 in the first nine months of 2013 and 2012, respectively.
The increase in equity earnings in the nine months ended September 30, 2013, compared to the same period in 2012, was primarily driven by three items: a $3,200 increase in our share of the
project’s 2012 earnings recognized as a result of a revised earnings allocation for 2012 that was approved in connection with the approval by the project’s governing board of the 2012 earnings distribution in the second quarter of 2013,
and a $3,000 increase from the reversal of an insurance-related contingency during the second quarter of 2013, partially offset by the impact of lower marginal rates for electrical power generation in the nine months ended September 30, 2013.
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 September 30, 2013 or December 31,
2012.
14
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 September 30, 2013, 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. 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Fees for operations and maintenance services (included in operating revenues)
|
|
$
|
2,800
|
|
|
$
|
2,628
|
|
|
$
|
8,399
|
|
|
$
|
7,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Receivable from our unconsolidated affiliate in Chile (included in trade receivables)
|
|
$
|
4,184
|
|
|
$
|
16,933
|
|
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 ever been paid under the guarantee.
During the quarter and nine months ended September 30, 2013, we acquired a 49% interest in a joint venture company that is fully licensed to
engineer, procure and construct process facilities in China. We paid cash consideration of approximately 72,000 CYN (approximately $11,600 based on the exchange rate in effect on the closing date). This investment is included in investments in and
advances to unconsolidated affiliates on our consolidated balance sheet.
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 September 30, 2013 and December 31, 2012. We are the primary beneficiary of the VIE, since we have 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):
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Current assets
|
|
$
|
5,425
|
|
|
$
|
15,610
|
|
|
Other assets (primarily buildings and equipment)
|
|
|
36,719
|
|
|
|
39,194
|
|
|
Current liabilities
|
|
|
2,565
|
|
|
|
4,825
|
|
|
Other liabilities
|
|
|
4,484
|
|
|
|
5,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
35,095
|
|
|
$
|
44,527
|
|
|
|
|
|
|
|
|
|
|
|
4. Goodwill and Other Intangible Assets
We have tracked accumulated goodwill impairments since the beginning of fiscal year 2002, 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
|
|
|
Geographic Regions:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
North America
|
|
$
|
85,017
|
|
|
$
|
55,962
|
|
|
$
|
4,266
|
|
|
$
|
4,266
|
|
|
Asia
|
|
|
752
|
|
|
|
858
|
|
|
|
—
|
|
|
|
—
|
|
|
Europe
|
|
|
6,627
|
|
|
|
2,568
|
|
|
|
71,490
|
|
|
|
69,864
|
|
|
Middle East
|
|
|
568
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,964
|
|
|
$
|
59,388
|
|
|
$
|
75,756
|
|
|
$
|
74,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
During the nine months ended September 30, 2013, our Global E&C Group’s goodwill balance
included increases related to our acquisitions located in the U.S. and Mexico of $10,571 and $18,143, respectively, which were included in the North America geographic region in the table above, and the U.K. of $4,465, portions of which were
included in both the Europe and Middle East geographic regions in the table above. Our Global E&C Group’s goodwill balance also includes a customary working capital adjustment of $2,026 for our 2012 acquisition, which is included in the
North America geographic region in the table above. The remaining changes in each of the regions were the result of the impact of foreign currency translation adjustments. Please see Note 2 for further information regarding these acquisitions.
The following table sets forth amounts relating to our identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
41,325
|
|
|
$
|
(33,863
|
)
|
|
$
|
7,462
|
|
|
$
|
41,103
|
|
|
$
|
(32,273
|
)
|
|
$
|
8,830
|
|
|
Trademarks
|
|
|
66,034
|
|
|
|
(33,342
|
)
|
|
|
32,692
|
|
|
|
64,582
|
|
|
|
(31,483
|
)
|
|
|
33,099
|
|
|
Customer relationships, pipeline and backlog
|
|
|
96,109
|
|
|
|
(23,091
|
)
|
|
|
73,018
|
|
|
|
72,050
|
|
|
|
(14,531
|
)
|
|
|
57,519
|
|
|
Technology
|
|
|
6,748
|
|
|
|
(1,687
|
)
|
|
|
5,061
|
|
|
|
6,594
|
|
|
|
(942
|
)
|
|
|
5,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
210,216
|
|
|
$
|
(91,983
|
)
|
|
$
|
118,233
|
|
|
$
|
184,329
|
|
|
$
|
(79,229
|
)
|
|
$
|
105,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013, the net carrying amounts of our identifiable intangible assets were $46,863 for our Global
Power Group and $71,370 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. Amortization expense related to assets
other than identifiable intangible assets was not material in the nine months ended September 30, 2013 and 2012.
The following table
details amortization expense related to identifiable intangible assets by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Amortization expense
|
|
$
|
4,291
|
|
|
$
|
2,712
|
|
|
$
|
12,330
|
|
|
$
|
8,264
|
|
|
|
|
|
|
|
|
Approximate full year amortization expense for years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,900
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,000
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,900
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,500
|
|
5. Borrowings
The following table shows the components of our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Capital Lease Obligations
|
|
$
|
2,782
|
|
|
$
|
51,946
|
|
|
$
|
54,728
|
|
|
$
|
2,545
|
|
|
$
|
53,780
|
|
|
$
|
56,325
|
|
|
Special-Purpose Limited Recourse Project Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FW Power S.r.l.
|
|
|
8,961
|
|
|
|
58,529
|
|
|
|
67,490
|
|
|
|
9,215
|
|
|
|
61,575
|
|
|
|
70,790
|
|
|
Energia Holdings, LLC at 11.443% interest, due April 15, 2015
|
|
|
2,040
|
|
|
|
5,355
|
|
|
|
7,395
|
|
|
|
1,912
|
|
|
|
7,396
|
|
|
|
9,308
|
|
|
Subordinated Robbins Facility Exit Funding Obligations: 1999C Bonds at 7.25% interest, due October 15, 2024
|
|
|
—
|
|
|
|
1,283
|
|
|
|
1,283
|
|
|
|
—
|
|
|
|
1,283
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,783
|
|
|
$
|
117,113
|
|
|
$
|
130,896
|
|
|
$
|
13,672
|
|
|
$
|
124,034
|
|
|
$
|
137,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
|
|
|
|
|
|
|
|
$
|
145,800
|
|
|
|
|
|
|
|
|
|
|
$
|
155,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Senior Credit Agreement
— On August 3, 2012, we entered into a new five-year senior
unsecured credit agreement, which replaced our amended and restated senior unsecured credit agreement from July 2010. Our new senior credit agreement provides for an unsecured revolving line of credit of $750,000 and contains an increase option
permitting us, subject to certain requirements, to arrange with existing lenders and/or new lenders to provide up to an aggregate of $300,000 in additional commitments. During the term of this senior credit agreement, we may request, subject to
certain requirements, up to two one-year extensions of the contractual termination date.
We can issue up to $750,000 under the letter of
credit portion of the facility. Letters of credit issued under our new senior credit agreement have performance pricing that is decreased (or increased) as a result of improvements (or reductions) in our corporate credit ratings, as defined in the
senior credit agreement. Based on our current credit ratings, letter of credit fees for performance and non-performance letters of credit issued under our new senior credit agreement are 0.75% and 1.50% per annum of the outstanding amount,
respectively, excluding a nominal fronting fee. We also have the option to use up to $250,000 of the $750,000 for revolving borrowings at a rate equal to adjusted LIBOR, as defined in the senior credit agreement, plus 1.50%, subject also to the
performance pricing noted above.
Fees and expenses incurred in conjunction with the execution of our new senior credit agreement were
approximately $4,000 and, along with a portion of the remaining unamortized fees from our July 2010 agreement, are being amortized to expense over the five-year term of the agreement, which commenced in the third quarter of 2012.
Our new senior credit agreement contains various customary restrictive covenants. In addition, our new senior credit agreement contains financial
covenants relating to leverage and interest coverage ratios. Our total leverage ratio compares total indebtedness to EBITDA, as defined in the credit agreement, and our total interest coverage ratio compares EBITDA, as defined in the credit
agreement, to interest expense. Both the leverage and interest coverage ratios are measured quarterly. In addition, the leverage ratio is measured as of any date of determination for certain significant events. All such terms are defined in our new
senior credit agreement. We have been in compliance with all financial covenants and other provisions of both our August 2012 and our July 2010 senior credit agreements, while the respective agreements were in effect during the nine months ended
September 30, 2013 and 2012.
We had approximately $250,900 and $250,600 of letters of credit outstanding under our senior credit
agreement as of September 30, 2013 and December 31, 2012, respectively. The letter of credit fees under our senior credit agreement as of September 30, 2013 and December 31, 2012 ranged from 0.75% to 1.50% of the outstanding
amount, excluding fronting fees. There were no funded borrowings outstanding under our senior credit agreement as of September 30, 2013 and December 31, 2012.
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.
Based on the minimum statutory funding requirements for 2013, we are not required to make any mandatory contributions to our U.S. pension plans. The following table provides details on 2013 mandatory
contribution activity for our non-U.S. pension plans:
|
|
|
|
|
|
|
Contributions in the nine months ended September 30, 2013
|
|
$
|
14,900
|
|
|
Remaining contributions expected for the year 2013
|
|
|
5,700
|
|
|
|
|
|
|
|
|
Contributions expected for the year 2013
|
|
$
|
20,600
|
|
|
|
|
|
|
|
We did not make any discretionary contributions during the first nine months of 2013; however, we may elect to make
discretionary contributions to our U.S. and/or non-U.S. pension plans during the remainder of 2013.
17
Other Postretirement Benefit Plans
— Certain employees in the U.S. and Canada may become
eligible for other postretirement benefit plans such as health care and life insurance 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, which provides coverage for an employee’s beneficiary upon the death of the employee. This plan has been closed to new entrants since 1988.
Components of net periodic benefit cost/(credit) include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
Other Postretirement Benefit Plans
|
|
|
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost/(credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
277
|
|
|
$
|
257
|
|
|
$
|
869
|
|
|
$
|
794
|
|
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
42
|
|
|
$
|
53
|
|
|
Interest cost
|
|
|
12,619
|
|
|
|
13,160
|
|
|
|
38,158
|
|
|
|
39,481
|
|
|
|
606
|
|
|
|
687
|
|
|
|
2,017
|
|
|
|
2,061
|
|
|
Expected return on plan assets
|
|
|
(16,023
|
)
|
|
|
(16,042
|
)
|
|
|
(48,411
|
)
|
|
|
(48,115
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of net actuarial loss
|
|
|
4,548
|
|
|
|
4,251
|
|
|
|
13,705
|
|
|
|
12,736
|
|
|
|
220
|
|
|
|
107
|
|
|
|
660
|
|
|
|
320
|
|
|
Amortization of prior service credit
|
|
|
(383
|
)
|
|
|
(395
|
)
|
|
|
(1,159
|
)
|
|
|
(1,184
|
)
|
|
|
(874
|
)
|
|
|
(879
|
)
|
|
|
(2,622
|
)
|
|
|
(2,636
|
)
|
|
Amortization of transition obligation
|
|
|
14
|
|
|
|
13
|
|
|
|
42
|
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost/(credit)
|
|
$
|
1,052
|
|
|
$
|
1,244
|
|
|
$
|
3,204
|
|
|
$
|
3,750
|
|
|
$
|
(34
|
)
|
|
$
|
(68
|
)
|
|
$
|
97
|
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit cost are recognized within cost of operating revenues and selling, general and
administrative expenses on our consolidated statement of operations. Please refer to Note 1 for further discussion on the timing of when items in cost of operating revenues are recognized on our consolidated statement of operations under our
accounting policy for revenue recognition on long-term contracts, which utilizes the percentage-of-completion method. The offsetting effect of the amortization components of net periodic benefit cost listed above are included in other comprehensive
income on our consolidated statement of comprehensive income along with their corresponding tax effects.
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 breach of covenants, breach of representations and warranties, as well as potential exposure for retained liabilities, environmental matters and third party claims 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; however many of our indemnification obligations, including for environmental matters, are capped. Historically, our payments under these indemnification obligations have not had a
significant effect on our business, financial condition, results of operations or cash flows. We believe that if we were to incur a loss related to any of these matters, such loss would not have a significant effect on our business, financial
condition, results of operations or cash flows.
We maintain liabilities for environmental matters for properties owned and for properties
covered under the indemnification obligations described above for businesses and/or assets that we previously owned and sold to third parties. As of September 30, 2013 and December 31, 2012, the carrying amounts of our environmental
liabilities were $7,000 and $8,500, respectively.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Warranty Liability:
|
|
2013
|
|
|
2012
|
|
|
Balance at beginning of year
|
|
$
|
90,100
|
|
|
$
|
93,000
|
|
|
Accruals
|
|
|
16,700
|
|
|
|
22,700
|
|
|
Settlements
|
|
|
(10,400
|
)
|
|
|
(11,400
|
)
|
|
Adjustments to provisions*
|
|
|
(16,000
|
)
|
|
|
(16,800
|
)
|
|
Foreign currency translation
|
|
|
(100
|
)
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
80,300
|
|
|
$
|
89,000
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Adjustments to the provisions represent reversals of warranty provisions that are no longer required.
|
18
We are contingently liable under standby letters of credit, bank guarantees and surety bonds, totaling
$945,600 and $1,015,900 as of September 30, 2013 and December 31, 2012, 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 our senior unsecured 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 located 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
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
|
Balance Sheet
Location
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other long-term liabilities
|
|
$
|
8,809
|
|
|
$
|
10,490
|
|
|
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
|
|
|
7,603
|
|
|
|
6,040
|
|
|
Contracts in process or billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
1,663
|
|
|
|
4,895
|
|
|
Foreign currency forward contracts
|
|
Other accounts receivable
|
|
|
335
|
|
|
|
1,357
|
|
|
Accounts payable
|
|
|
481
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
7,938
|
|
|
$
|
7,397
|
|
|
|
|
$
|
10,953
|
|
|
$
|
15,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange Rate Risk
We operate on a worldwide basis with operations that subject us to foreign currency exchange rate risk mainly relative to the British pound, Chinese Yuan, Euro and U.S. dollar as of September 30,
2013. Under our risk management policies, we do not hedge translation risk exposure. All activities of our affiliates are recorded in their functional currency, which is typically the local currency in the country of domicile of the affiliate. In
the ordinary course of business, our affiliates enter into transactions in currencies other than their respective functional currencies. We seek to minimize the resulting foreign currency transaction risk by contracting for the procurement of goods
and services in the same currency as the sales value of the related long-term contract. We further mitigate the risk through the use of foreign currency forward contracts to hedge the 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 September 30, 2013, we had a total gross notional amount, measured in U.S. dollar equivalent, of approximately $446,500 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 2013 through 2015.
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
19
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments
|
|
Location of Gain/(Loss)
|
|
Amount of Gain/(Loss) Recognized in Income on
Derivatives
|
|
|
|
Recognized
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
in Income on Derivatives
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Cost of operating revenues
|
|
$
|
5,616
|
|
|
$
|
1,692
|
|
|
$
|
1,700
|
|
|
$
|
1,192
|
|
|
Foreign currency forward contracts
|
|
Other deductions, net
|
|
|
121
|
|
|
|
753
|
|
|
|
(1,402
|
)
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5,737
|
|
|
$
|
2,445
|
|
|
$
|
298
|
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mark-to-market adjustments on foreign currency forward 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 nine months ended September 30, 2013 and 2012, we included net cash inflows on the settlement of derivatives of $5,179 and $1,521, 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 for our consolidated entities was $59,300 as of September 30,
2013.
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. Amounts that are reclassified from accumulated other comprehensive loss are recognized within interest expense on
the consolidated statement of operations.
The impact from interest rate swap contracts in cash flow hedging relationships for our
consolidated entities was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Unrealized loss recognized in other comprehensive income
|
|
$
|
(817
|
)
|
|
$
|
(1,766
|
)
|
|
$
|
(6
|
)
|
|
$
|
(3,551
|
)
|
|
Loss reclassified from accumulated other comprehensive loss to interest expense
|
|
|
630
|
|
|
|
572
|
|
|
|
1,885
|
|
|
|
1,507
|
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Share-based compensation
|
|
$
|
4,638
|
|
|
$
|
5,668
|
|
|
$
|
14,119
|
|
|
$
|
16,362
|
|
|
Related income tax benefit
|
|
|
153
|
|
|
|
144
|
|
|
|
599
|
|
|
|
403
|
|
As of September 30, 2013, we had total unrecognized compensation cost related to restricted share units, or RSUs,
performance-based restricted share units, or performance RSUs, and stock options of $15,545, $8,170 and $3,725, respectively. Those amounts are expected to be recognized as expense over a weighted-average period of approximately two years.
20
We estimate the fair value of RSU awards using the market price of our shares on the date of grant. We then
recognize the fair value of each RSU award as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period).
Under our performance RSU awards, the number of restricted share units that ultimately vest depend on our share price performance against specified performance goals, which are defined in our performance
RSU award agreements. We estimate the grant date fair value of each performance RSU award using a Monte Carlo valuation model. We then recognize the fair value of each performance RSU award as compensation expense ratably using the straight-line
attribution method over the service period (generally the vesting period).
We estimate 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.
|
Our share-based compensation plans include a “change in control”
provision, which provides for possible 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 nine months ended September 30, 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Balance at beginning of year
|
|
$
|
8,594
|
|
|
$
|
4,993
|
|
|
Compensation cost during the period for those equity awards with intrinsic value on the grant date
|
|
|
11,085
|
|
|
|
10,092
|
|
|
Intrinsic value of equity awards vested during the period for those equity awards with intrinsic value on the grant
date
|
|
|
(7,366
|
)
|
|
|
(5,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
12,313
|
|
|
$
|
9,645
|
|
|
|
|
|
|
|
|
|
|
|
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 awards, with an offsetting
increase to our issued and authorized share capital. As of September 30, 2013, our remaining available conditional capital was 58,874,658 shares.
10. Income Taxes
Although we are a Swiss corporation, our shares are listed on a U.S.
exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate meaningful comparison with peer companies in the U.S. capital markets. Our effective tax rate can fluctuate significantly from period to
period and may differ considerably from the U.S. federal statutory rate as a result of (i) income taxed in various non-U.S. jurisdictions with rates different from the U.S. statutory rate, (ii) our inability to recognize a tax benefit for
losses generated by certain
21
unprofitable operations and (iii) the varying mix of income earned in the jurisdictions in which we operate. In addition, our deferred tax assets are reduced by a valuation allowance when,
based upon available evidence, it is more likely than not that the tax benefit of loss carryforwards (or other deferred tax assets) will not be realized in the future. In periods when operating units subject to a valuation allowance generate 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 2013
Our effective tax rate for the first nine months of 2013 was lower than the U.S. statutory rate of 35% due principally to the net impact of the
following:
|
•
|
|
Income earned in non-U.S. jurisdictions which contributed to an approximate 17-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;
|
|
•
|
|
Discrete items, primarily relating to the reversal of a previously accrued liability for branch taxes no longer required to be paid as a result of an
exemption received from a non-U.S. tax authority, which was partially offset by the impact of a change in tax rate on net deferred assets in a non-U.S. jurisdiction, provided a net one-percentage point reduction to the effective tax rate; and
|
|
•
|
|
A valuation allowance increase because we are unable to recognize a tax benefit for year-to-date losses subject to a valuation allowance in certain
jurisdictions (primarily in the U.S.), partially offset by valuation allowance releases in certain non-U.S. jurisdictions, which contributed to an approximate three-percentage point increase in our effective tax rate.
|
Effective Tax Rate for 2012
Our
effective tax rate for the first nine 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 contributed to an approximate 15-percentage point reduction in our effective tax rate, primarily because
of tax rates lower than the U.S. statutory rate, as well as additional impacts from equity income of joint ventures, tax incentives and credits, and other items; and
|
|
•
|
|
A valuation allowance increase because we 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 two-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 2026 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 2008.
A number of tax years are under audit by the relevant tax authorities in various jurisdictions. We anticipate that several of these audits
may be concluded in the foreseeable future, including during the remainder of 2013. Based on the status of these audits, it is reasonably possible that the conclusion of the audits may result in a reduction of unrecognized tax benefits. However, it
is not possible to estimate the magnitude of any such reduction at this time. We recognize interest accrued on the unrecognized tax benefits in interest expense and penalties on the unrecognized tax benefits in other deductions, net on our
consolidated statement of operations.
11. Business Segments
We operate through two operating segments, or groups: our
Global E&C Group
and our
Global Power Group
.
22
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 minerals and metals sector. Our Global E&C Group is also involved in the design of facilities in developing market sectors, including carbon capture and storage, solid fuel-fired integrated gasification
combined-cycle power plants, coal-to-liquids, coal-to-chemicals and biofuels. Additionally, our Global E&C Group owns and operates electric power generating wind farms in Italy and also owns a noncontrolling interest in two electric power
generation projects, one waste-to-energy project and one wind farm project, all of which are located in Italy, and a noncontrolling interest in a joint venture company that is fully licensed to engineer, procure and construct process facilities in
China. Our Global E&C Group generates revenues from design, engineering, procurement, construction and project management activities pursuant to contracts which generally span up to approximately four years in duration and from returns on its
equity investments in various power production facilities.
Global Power Group
Our Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations, district heating and industrial facilities worldwide. Additionally,
our Global Power Group 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 our Global E&C Group and Global Power Group, which represent two of our operating segments for financial reporting purposes, we report the financial results associated with the management of entities which are not managed by one of our two
business groups, which include corporate center expenses, our captive insurance operation and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, which also represents an operating segment for
financial reporting purposes and which we refer to as the C&F Group.
23
Operating Revenues
We conduct our business on a global basis. Operating revenues for our continuing operations by industry, operating segment and geographic regions, based upon where our projects are being executed, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Operating Revenues (Third-Party) by Industry:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power generation
|
|
$
|
194,258
|
|
|
$
|
214,742
|
|
|
$
|
563,713
|
|
|
$
|
729,178
|
|
|
Oil refining
|
|
|
323,019
|
|
|
|
337,067
|
|
|
|
1,006,651
|
|
|
|
1,022,978
|
|
|
Pharmaceutical
|
|
|
29,308
|
|
|
|
13,606
|
|
|
|
107,706
|
|
|
|
40,199
|
|
|
Oil and gas
|
|
|
83,145
|
|
|
|
109,466
|
|
|
|
254,626
|
|
|
|
524,580
|
|
|
Chemical/petrochemical
|
|
|
124,284
|
|
|
|
80,209
|
|
|
|
360,831
|
|
|
|
225,956
|
|
|
Power plant design, operation and maintenance
|
|
|
41,773
|
|
|
|
28,248
|
|
|
|
125,282
|
|
|
|
80,371
|
|
|
Environmental
|
|
|
1,426
|
|
|
|
1,790
|
|
|
|
4,271
|
|
|
|
6,434
|
|
|
Other, net of eliminations
|
|
|
4,613
|
|
|
|
12,168
|
|
|
|
32,297
|
|
|
|
31,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
801,826
|
|
|
$
|
797,296
|
|
|
$
|
2,455,377
|
|
|
$
|
2,661,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues (Third-Party) by Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global E&C Group
|
|
$
|
615,028
|
|
|
$
|
578,072
|
|
|
$
|
1,865,721
|
|
|
$
|
1,915,087
|
|
|
Global Power Group
|
|
|
186,798
|
|
|
|
219,224
|
|
|
|
589,656
|
|
|
|
746,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
801,826
|
|
|
$
|
797,296
|
|
|
$
|
2,455,377
|
|
|
$
|
2,661,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues (Third-Party) by Geographic Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
$
|
12,694
|
|
|
$
|
22,475
|
|
|
$
|
52,341
|
|
|
$
|
70,136
|
|
|
Asia Pacific
|
|
|
208,073
|
|
|
|
231,267
|
|
|
|
612,348
|
|
|
|
947,867
|
|
|
Europe
|
|
|
192,318
|
|
|
|
189,003
|
|
|
|
596,154
|
|
|
|
647,935
|
|
|
Middle East
|
|
|
91,482
|
|
|
|
65,166
|
|
|
|
236,284
|
|
|
|
178,015
|
|
|
North America
|
|
|
205,570
|
|
|
|
211,711
|
|
|
|
729,583
|
|
|
|
572,826
|
|
|
South America
|
|
|
91,689
|
|
|
|
77,674
|
|
|
|
228,667
|
|
|
|
244,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
801,826
|
|
|
$
|
797,296
|
|
|
$
|
2,455,377
|
|
|
$
|
2,661,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and depreciation and amortization.
24
A reconciliation of EBITDA to net income attributable to Foster Wheeler AG is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global E&C Group
|
|
$
|
59,940
|
|
|
$
|
51,964
|
|
|
$
|
157,261
|
|
|
$
|
138,809
|
|
|
Global Power Group
|
|
|
45,428
|
|
|
|
64,396
|
|
|
|
115,699
|
|
|
|
158,535
|
|
|
C&F Group
*
|
|
|
(21,301
|
)
|
|
|
(25,528
|
)
|
|
|
(49,810
|
)
|
|
|
(76,398
|
)
|
|
Discontinued operations
|
|
|
1,760
|
|
|
|
752
|
|
|
|
4,184
|
|
|
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA
|
|
|
85,827
|
|
|
|
91,584
|
|
|
|
227,334
|
|
|
|
223,725
|
|
|
Less: Discontinued operations
|
|
|
1,760
|
|
|
|
752
|
|
|
|
4,184
|
|
|
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations
|
|
|
84,067
|
|
|
|
90,832
|
|
|
|
223,150
|
|
|
|
220,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Net (loss)/income attributable to noncontrolling interests
|
|
|
(467
|
)
|
|
|
4,057
|
|
|
|
3,823
|
|
|
|
10,712
|
|
|
Less: Interest expense
|
|
|
3,388
|
|
|
|
3,197
|
|
|
|
9,976
|
|
|
|
10,862
|
|
|
Less: Depreciation and amortization
|
|
|
14,032
|
|
|
|
12,178
|
|
|
|
42,828
|
|
|
|
35,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
66,180
|
|
|
|
79,514
|
|
|
|
174,169
|
|
|
|
185,255
|
|
|
Less: Provision for income taxes
|
|
|
17,794
|
|
|
|
16,790
|
|
|
|
36,273
|
|
|
|
43,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
48,386
|
|
|
|
62,724
|
|
|
|
137,896
|
|
|
|
141,290
|
|
|
Income/(loss) from discontinued operations
|
|
|
1,760
|
|
|
|
(445
|
)
|
|
|
265
|
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
50,146
|
|
|
|
62,279
|
|
|
|
138,161
|
|
|
|
140,439
|
|
|
Less: Net (loss)/income attributable to noncontrolling interests
|
|
|
(467
|
)
|
|
|
4,057
|
|
|
|
3,823
|
|
|
|
10,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Foster Wheeler AG
|
|
$
|
50,613
|
|
|
$
|
58,222
|
|
|
$
|
134,338
|
|
|
$
|
129,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Net increase in contract profit from the regular revaluation of final estimated contract profit revisions:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global E&C Group
(2)
|
|
$
|
13,800
|
|
|
$
|
7,000
|
|
|
$
|
38,200
|
|
|
$
|
12,100
|
|
|
Global Power Group
(3)
|
|
|
16,400
|
|
|
|
15,700
|
|
|
|
36,600
|
|
|
|
45,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,200
|
|
|
$
|
22,700
|
|
|
$
|
74,800
|
|
|
$
|
58,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asbestos-related provision/(gain):
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global E&C Group
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,700
|
|
|
C&F Group
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
(9,800
|
)
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
$
|
(9,800
|
)
|
|
$
|
7,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for severance-related postemployment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global E&C Group
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
3,900
|
|
|
$
|
—
|
|
|
Global Power Group
|
|
|
3,000
|
|
|
|
—
|
|
|
|
4,100
|
|
|
|
—
|
|
|
C&F Group
|
|
|
—
|
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
8,400
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 E&C Group and our financial results did not include an increase in final estimated contract
profit of approximately $5,300 during the quarter and nine months ended September 30, 2012. The correction was recorded in the quarter ended December 31, 2012 as it was not material to the financial results for the quarter and nine months
ended September 30, 2012 (the periods in which it should have been recorded), nor was it material to the financial results for the year ended December 31, 2012.
|
|
(3)
|
The changes in final estimated contract profit revisions for our Global Power Group were increased during the nine months ended September 30, 2012 for a favorable
settlement with a subcontractor of approximately $6,900.
|
|
(4)
|
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
2012 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.
25
Income/(loss) from discontinued operations included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
EBITDA from discontinued operations
|
|
$
|
1,760
|
|
|
$
|
752
|
|
|
$
|
4,184
|
|
|
$
|
2,779
|
|
|
Less: Interest expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Less: Depreciation and amortization*
|
|
|
—
|
|
|
|
1,197
|
|
|
|
3,919
|
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued operations before income taxes*
|
|
|
1,760
|
|
|
|
(445
|
)
|
|
|
265
|
|
|
|
(851
|
)
|
|
Less: Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued operations*
|
|
$
|
1,760
|
|
|
$
|
(445
|
)
|
|
$
|
265
|
|
|
$
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
During the nine months ended September 30, 2013, we recorded an impairment charge of $3,919 at our Camden, New Jersey waste-to-energy facility which was recorded
as depreciation expense within income/(loss) from discontinued operations. Please refer to Note 13 for further information.
|
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.
United States
A summary of our U.S. claim activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Number of Claims by period:
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Open claims at beginning of period
|
|
|
124,810
|
|
|
|
124,680
|
|
|
|
125,310
|
|
|
|
124,540
|
|
|
New claims
|
|
|
950
|
|
|
|
1,130
|
|
|
|
3,410
|
|
|
|
3,470
|
|
|
Claims resolved
|
|
|
(510
|
)
|
|
|
(1,210
|
)
|
|
|
(3,470
|
)
|
|
|
(3,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open claims at end of period
|
|
|
125,250
|
|
|
|
124,600
|
|
|
|
125,250
|
|
|
|
124,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 third quarter of 2028. 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.
|
|
|
|
|
|
|
|
|
|
|
U.S. Asbestos
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Asbestos-related assets recorded within:
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable-other
|
|
$
|
22,184
|
|
|
$
|
33,626
|
|
|
Asbestos-related insurance recovery receivable
|
|
|
86,195
|
|
|
|
102,751
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related assets
|
|
$
|
108,379
|
|
|
$
|
136,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related liabilities recorded within:
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
35,127
|
|
|
$
|
47,900
|
|
|
Asbestos-related liability
|
|
|
207,380
|
|
|
|
227,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related liabilities
|
|
$
|
242,507
|
|
|
$
|
275,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance by claim category:
|
|
|
|
|
|
|
|
|
|
Open claims
|
|
$
|
37,856
|
|
|
$
|
42,700
|
|
|
Future unasserted claims
|
|
|
204,651
|
|
|
|
232,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related liabilities
|
|
$
|
242,507
|
|
|
$
|
275,300
|
|
|
|
|
|
|
|
|
|
|
|
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
26
asbestos liability at a level consistent with ARPC’s reasonable best estimate. Our estimated asbestos liability decreased during the first nine months of 2013 as a result of indemnity and
defense cost payments totaling approximately $38,800, partially offset by the impact of a $6,000 increase in the liability related to 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 third quarter of 2028.
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 and 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 third quarter of 2028,
during which period the incidence of new claims is forecasted to decrease each year. We believe that it is likely that there will be new claims filed after the third quarter of 2028, but in light of uncertainties inherent in long-term forecasts, we
do not believe that we can reasonably estimate the indemnity and defense costs that might be incurred after the third quarter of 2028.
Through September 30, 2013, total cumulative indemnity costs paid, prior to insurance recoveries, were approximately $818,600 and total cumulative
defense costs paid were approximately $404,500, or approximately 33% of total defense and indemnity costs. The overall historic average combined indemnity and defense cost per resolved claim through September 30, 2013 has been approximately
$3.3. The average cost per resolved claim is increasing and we believe it will continue to increase in the future.
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. As our subsidiaries reach agreements with their insurers to settle their disputed asbestos-related insurance coverage, we increase our asbestos-related
insurance asset and record settlement gains.
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 third quarter of 2028. Our asbestos-related assets have not been discounted for the time value of money.
Our insurance recoveries may be limited by future insolvencies among our insurers. Other than receivables related to bankruptcy court-approved
settlements during liquidation proceedings, we have not assumed recovery in the estimate of our asbestos-related insurance asset from any of our currently insolvent insurers. We have considered the financial viability and legal obligations of our
subsidiaries’ insurance carriers and believe that the insurers or their guarantors will continue to reimburse a significant portion of claims and defense costs relating to asbestos litigation. As of September 30, 2013 and December 31,
2012, we have not recorded an allowance for uncollectible balances against our asbestos-related insurance assets. We write off receivables from insurers that have become insolvent; there were no such write-offs during the nine months ended
September 30, 2013 and 2012. 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. During the nine months ended September 30, 2013, we recognized a gain as the result of the
collection of a $15,750 insurance receivable related to an insolvent insurance carrier, which we had previously written-off. The proceeds were received as a result of a bankruptcy court-approved settlement during liquidation proceedings related to
the insolvent insurance carrier.
The following table summarizes our U.S. net asbestos-related (gain)/provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Provision for revaluation
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
$
|
6,000
|
|
|
$
|
5,997
|
|
|
Gain on the settlement of coverage litigation
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,750
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asbestos-related (gain)/provision
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
$
|
(9,750
|
)
|
|
$
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Our net asbestos-related gain in the nine months ended September 30, 2013 was the net result of the
favorable impact of the inclusion of a gain recognized during the nine months ended September 30, 2013 upon collection of a $15,750 insurance receivable related to an insolvent insurance carrier, which had been previously written-off, as
discussed above, partially offset by the unfavorable impact related to the provision for our rolling 15-year asbestos liability estimate, net of anticipated insurance recoveries in each respective period.
The following table summarizes our approximate U.S. asbestos-related net cash impact for indemnity and defense cost payments and collection of insurance
proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Asbestos litigation, defense and case resolution payments
|
|
$
|
12,400
|
|
|
$
|
12,100
|
|
|
$
|
38,800
|
|
|
$
|
40,700
|
|
|
Insurance proceeds
|
|
|
(15,500
|
)
|
|
|
(15,800
|
)
|
|
|
(43,800
|
)
|
|
|
(37,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asbestos-related (proceeds)/payments
|
|
$
|
(3,100
|
)
|
|
$
|
(3,700
|
)
|
|
$
|
(5,000
|
)
|
|
$
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to have net cash outflows of $1,100 during the full year 2013 as a result of asbestos liability indemnity and
defense payments in excess of insurance proceeds, which includes the impact of the cash proceeds received from the collection of an insurance receivable balance from an insolvent insurance carrier discussed above. This estimate assumes no
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.
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, 2012 liability estimate, an increase of 25% in the average per claim indemnity settlement amount would
increase the liability by $42,000 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 85% of the increase in the liability. Long-term cash flows would ultimately change by the same amount. Should there be an increase in the estimated liability in excess of 25%, the
percentage of that increase that would be expected to be funded by additional insurance recoveries will decline.
United Kingdom
Some of our subsidiaries in the U.K. have also received claims alleging personal injury arising from exposure to asbestos. To date, 1,043
claims have been brought against our U.K. subsidiaries, of which 284 remained open as of September 30, 2013. None of the settled claims have resulted in material costs to us.
28
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 third quarter of 2028:
|
|
|
|
|
|
|
|
|
|
|
U.K. Asbestos
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Asbestos-related assets:
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable-other
|
|
$
|
1,021
|
|
|
$
|
1,022
|
|
|
Asbestos-related insurance recovery receivable
|
|
|
27,993
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related assets
|
|
$
|
29,014
|
|
|
$
|
30,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,021
|
|
|
$
|
1,022
|
|
|
Asbestos-related liability
|
|
|
30,252
|
|
|
|
31,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related liabilities
|
|
$
|
31,273
|
|
|
$
|
32,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance by claim category:
|
|
|
|
|
|
|
|
|
|
Open claims
|
|
$
|
6,177
|
|
|
$
|
7,843
|
|
|
Future unasserted claims
|
|
|
25,096
|
|
|
|
25,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asbestos-related liabilities
|
|
$
|
31,273
|
|
|
$
|
32,972
|
|
|
|
|
|
|
|
|
|
|
|
The liability estimates are based on a U.K. House of Lords judgment that pleural plaque claims do not amount to a
compensable injury. If this ruling is reversed by legislation, the total asbestos liability recorded in the U.K. would increase to approximately $44,700, with a corresponding increase in the asbestos-related asset.
Project Claims
In addition to the
specific matters described below, 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.
Power Plant Arbitration – United States
In June 2011, a demand for arbitration was filed with the American Arbitration Association by our client’s erection contractor against our client and us in connection with a power plant project in
the U.S. At that time, no details of the erection contractor’s claims were included with the demand. The arbitration panel was formed on September 26, 2012 and a detailed Statement of Claim from the erection contractor was delivered
to the panel on October 24, 2012. According to the claim, the erection contractor is seeking unpaid contract amounts from our client and additional compensation from our client and us for alleged delays, disruptions, inefficiencies, and
extra work in connection with the erection of the plant. We supplied the steam generation equipment for the project under contract with our client, the power plant owner. The turbine contractor, who supplied the turbine, electricity
generator and other plant equipment under a separate contract with the power plant owner, has also been included as a party in the arbitration. The erection contractor is seeking approximately $240,000 in damages, exclusive of interest, from our
client. Of this amount, the statement of claim asserts that approximately $150,000 is related to the steam generation equipment, and alleges failure on our part in connection with our performance under our steam generation equipment supply
contract; those damages are claimed jointly against us and our client. The claims against us by the erection contractor allege negligence and, in its purported capacity as a third party beneficiary and assignee of our steam generation equipment
supply contract, breach of contract.
Responsive pleadings to the erection contractor’s pleading were filed by the other parties,
including us, on November 28, 2012. Our pleading denies the erection contractor’s claims against us and asserts cross claims against our client seeking over $14,800 in damages related to delays, out of scope work, and improperly
assessed delay liquidated damages. In its pleading, the turbine contractor asserts claims against our client for unpaid contract amounts and additional compensation for extra work and delays. In its capacity as a purported co-assignee of the steam
generation equipment supply contract, the turbine contractor joins in the erection contractor’s claims against us for delay-related damages and asserts cross claims against us seeking over $5,000 in non-delay related
damages.
29
In its pleading, our client asserts counter and cross claims for breach of contract and gross negligence against the erection contractor and the turbine contractor. Our client also asserts cross
claims against us for any damages our client has incurred, and for indemnification of any damages our client may be required to pay to the erection and turbine contractors, arising out of alleged failures of performance on our part under our steam
generation supply contract. We have denied our client’s and the turbine contractor’s cross claims against us.
On August 30,
2013, our client filed a petition with the U.S. Bankruptcy Court, for the District of Delaware, seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The filing automatically stayed all proceedings against our client, including the
four-party arbitration discussed above. Our client’s filing included a motion seeking authorization for the use of cash collateral to fund its activities during the bankruptcy proceedings. In its motion, our client indicated its intent to draw
on performance and retention letters of credit we previously issued in connection with the contract totaling approximately $59,000, contending that the funds were needed to fund the bankruptcy and make repairs to the power plant. We opposed the
motion on various grounds, including that any such draw would be unsupported and wrongful, and applied for an order temporarily restraining our client from drawing on the letters of credit, lifting the automatic stay of the arbitration proceeding
and transferring the question of our client’s right to draw on our letters of credit back to the arbitration for resolution in the context of the overall dispute. The bankruptcy court granted our application for temporary restraint and
scheduled a further hearing on the issue, which on successive applications by our client was adjourned to November 21, 2013. On November 1, 2013, our client filed a motion seeking the bankruptcy court’s approval of proposed
debtor-in-possession financing. Based upon the timetable proposed in the motion, it does not appear that the bankruptcy court will decide the question of our client’s right to draw on our letters of credit on November 21, 2013. The date for
decision on that question is at present uncertain. The court’s temporary restraint order remains in place while the court’s decision on the draw remains open.
We cannot predict the ultimate outcome of this matter at this time.
Refinery and
Petrochemicals Project Arbitration – India
In November 2012, we commenced arbitration in India against our client seeking
collection of unpaid receivables in excess of £52,000 (approximately $83,900 based on the exchange rate in effect as of September 30, 2013), arising from services performed on a reimbursable basis for our client in connection with our
client’s grass roots refinery and petrochemicals project in northeastern India. Our client rejected the claims and notified us of various potential counterclaims that it may be asserting in the arbitration, purportedly totaling in excess of
£55,000 (approximately $88,800 based on the exchange rate in effect as of September 30, 2013). In June 2013, we submitted our detailed statement of claim, and in July 2013 our client submitted its detailed statement of defense and
counterclaim. The amount of the counterclaim was increased to approximately £620,000 (approximately $1,000,800 based on the exchange rate in effect as of September 30, 2013) in damages, including among other claims a claim for lost
profits due to delay in the execution of the project. The counterclaim concerns a number of alleged issues arising in connection with our execution of the engineering, procurement, and construction management scope of our contract, from the period
from contract award until the subsequent transfer by our client of our remaining engineering, procurement and construction management scope to certain lump sum turnkey contractors hired directly by our client. Our client further contends that we are
liable for delays to the project and has withheld payment on account of delay liquidated damages and, out of the total claim of £620,000 (approximately $1,000,800 based on the exchange rate in effect as of September 30, 2013) cited above,
is seeking damages for lost profits in the amount of £555,000 (approximately $895,900 based on the exchange rate in effect as of September 30, 2013). We strongly dispute these contentions. Any liability for delay damages is capped under
the contract at a specified percentage of our contract value, currently equivalent to approximately £11,500 (approximately $18,600 based on the exchange rate in effect as of September 30, 2013), an amount already retained by our client.
The contract also excludes liability for consequential damages, including lost profits, and contains an overall cap on liability for claims in the aggregate of up to a specified percentage of our contract value, currently equivalent to approximately
£28,800 (approximately $46,500 based on the exchange rate in effect as of September 30, 2013). The unpaid amount for which we are seeking reimbursement in the arbitration may increase should our client continue to withhold amounts from
our invoices, as the project is still in execution. The arbitration panel has been formed. Our client moved to dismiss the arbitration as premature under the terms of the contract, and we opposed that motion. The motion has been denied by the panel.
Also, pursuant to our request, the panel has scheduled a hearing early in the first quarter of 2014 for our claims for unpaid receivables, along with our client’s counterclaim for a deductive change order in the amount of approximately
£21,600 (approximately $34,900 based on the exchange rate in effect as of September 30, 2013). The remaining claims and counterclaims, including our client’s counterclaim for lost profits, are scheduled to be heard late in the fourth
quarter of 2014. We cannot predict the ultimate outcome of this matter at this time.
30
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 four 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, and USEPA has provided FWEC with a certificate that FWEC has completed its obligations related to the above-described settlement agreement (as amended). FWEC 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. During the fourth quarter of 2012, FWEC received a USEPA demand under the foregoing agreement for payment of $1,040 of response costs USEPA claims it incurred from the commencement of the
RI/FS in April 2009 through February 2012. FWEC questioned the amount of the invoice and based upon discussions with the USEPA, a revised invoice was received on June 17, 2013 for the reduced amount of $1,004. During the third quarter of 2013,
FWEC received a USEPA invoice under the foregoing agreement for payment of $258 of response costs USEPA claims it incurred from March 2012 to February 2013. 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 all 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.
13. Discontinued Operations
During the first quarter of 2013, we recorded an impairment charge of $3,919 at our waste-to-energy facility in Camden, New Jersey
within our Global Power Group business segment. This charge was in addition to an impairment charge of $11,455 recorded during the fourth quarter of 2012. The impairment charges in both periods included estimates related to the continued operation
of the facility and potential sale of the facility. The charge in the first quarter of 2013 was the result of updating our estimate related to the potential sale of the facility and the impairment charge was recorded within income from discontinued
operations on our consolidated statement of operations. After recording the impairment charge and after approval of the plan to sell the facility, discussed below, the carrying value of the facility’s fixed assets approximated fair value less
estimated costs to sell the facility.
On April 17, 2013, our Board of Directors approved a plan to sell our Camden facility and we
completed the sale of the facility in August 2013. The presentation of the financial results and asset and liability balances of this business for the periods prior to the completion of the sale have been reclassified on our consolidated statement
of operations, consolidated balance sheet and consolidated statement of cash flows under the respective captions related to discontinued operations, and these reclassifications have been made in the notes to our consolidated financial statements.
Prior to the sale, the business had been classified on our consolidated balance sheet as of June 30, 2013 under the respective current and non-current captions of assets held for sale and liabilities held for sale as a result of our Board of
Directors’ approval of our plan to sell the facility, which met the accounting criteria as a business held for sale and the criteria for classification as a discontinued operation. We did not recognize depreciation on long-lived assets while
held for sale. Our Camden facility was formerly included in our Global Power Group business segment.
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We completed the sale of our Camden facility in August 2013. Based on the proceeds received and costs of
disposal, we recognized a gain of $300 within income/(loss) from discontinued operations before income taxes on the consolidated statement of operations during the quarter and nine months ended September 30, 2013.
The following are the main classes of assets and liabilities that were associated with our discontinued operations as of December 31, 2012:
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December 31, 2012
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Assets:
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Trade accounts and notes receivable, net
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$
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1,482
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Other current assets
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23
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Current assets of discontinued operations
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1,505
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Land, buildings and equipment, net
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48,739
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Restricted cash
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840
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Long-term assets of discontinued operations
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$
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49,579
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Liabilities:
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Accounts payable
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$
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1,814
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Accrued expenses
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595
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Advance payments
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745
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Liabilities of discontinued operations
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$
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3,154
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Operating revenues related to our discontinued operations, which were exclusively in the U.S., were $3,991 and $5,936
during the third quarter of 2013 and 2012, respectively, and $17,053 and $18,006 during the nine months ended September 30, 2013 and 2012, respectively.
33