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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

or

 

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

For the transition period from                      to                     

Commission File Number 001-31305

 

 

FOSTER WHEELER AG

(Exact name of registrant as specified in its charter)

 

 

 

Switzerland   98-0607469

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Shinfield Park

Reading Berkshire RG2 9FW, United Kingdom

  RG2 9FW
(Address of principal executive offices)   (Zip Code)

44 118 913 1234

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 100,126,791 registered shares were outstanding as of October 24, 2014.

 

 

 


Table of Contents

FOSTER WHEELER AG

INDEX

 

Part I FINANCIAL INFORMATION

  3

Item 1

     Financial Statements (Unaudited):   3
     Consolidated Statement of Operations for the Quarters and Nine Months Ended September 30, 2014 and 2013   3
    

Consolidated Statement of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2014 and 2013

 

4

     Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013   5
     Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2014 and 2013   6
     Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2014 and 2013   7
     Notes to Consolidated Financial Statements   8

Item 2

     Management’s Discussion and Analysis of Financial Condition and Results of Operations   40

Item 3

     Quantitative and Qualitative Disclosures about Market Risk   66

Item 4

     Controls and Procedures   66

Part II OTHER INFORMATION

  67

Item 1

     Legal Proceedings   67

Item 1A

     Risk Factors   67

Item 2

     Unregistered Sales of Equity Securities and Use of Proceeds   68

Item 3

     Defaults Upon Senior Securities   68

Item 4

     Mine Safety Disclosures   68

Item 5

     Other Information   68

Item 6

     Exhibits   69

Signatures

       70


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands of dollars, except per share amounts)

(unaudited)

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Operating revenues

   $ 859,721     $ 801,826     $ 2,445,187     $ 2,455,377  

Cost of operating revenues

     728,969       648,360       2,063,855       2,028,858  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contract profit

     130,752       153,466       381,332       426,519  

Selling, general and administrative expenses

     80,118       85,521       245,312       265,654  

Other income, net

     (7,684     (9,873     (54,234     (32,638

Other deductions, net

     13,384       7,557       25,613       23,359  

Interest income

     (1,207     (1,307     (4,120     (4,251

Interest expense

     2,669       3,388       4,485       9,976  

Net asbestos-related provision/(gain)

     1,956       2,000       5,173       (9,750
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     41,516       66,180       159,103       174,169  

Provision for income taxes

     15,753       17,794       31,826       36,273  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     25,763       48,386       127,277       137,896  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Income from discontinued operations before income taxes

     —         1,760       —         265  

Provision for income taxes from discontinued operations

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —         1,760       —         265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     25,763       50,146       127,277       138,161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income/(loss) attributable to noncontrolling interests

     323       (467     (824     3,823  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 25,440     $ 50,613     $ 128,101     $ 134,338  
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Foster Wheeler AG:

        

Income from continuing operations

   $ 25,440     $ 48,853     $ 128,101     $ 134,073  

Income from discontinued operations

     —         1,760       —         265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 25,440     $ 50,613     $ 128,101     $ 134,338  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to Foster Wheeler AG:

        

Income from continuing operations (see Note 1)

   $ 0.25     $ 0.50     $ 1.28     $ 1.33  

Income from discontinued operations

     —         0.02       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 0.25     $ 0.52     $ 1.28     $ 1.33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to Foster Wheeler AG:

        

Income from continuing operations (see Note 1)

   $ 0.25     $ 0.50     $ 1.27     $ 1.32  

Income from discontinued operations

     —         0.01       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 0.25     $ 0.51     $ 1.27     $ 1.32  
  

 

 

   

 

 

   

 

 

   

 

 

 

Return of capital distribution per share

   $ —       $ —       $ 0.40     $ —    

See notes to consolidated financial statements.

 

3


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands of dollars)

(unaudited)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net income

   $ 25,763     $ 50,146     $ 127,277     $ 138,161  

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

        

Foreign currency translation adjustments:

        

Foreign currency translation adjustments

     (36,649     12,126       (36,383     (7,588

Tax impact

     11       —         20       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax

     (36,638     12,126       (36,363     (7,588
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow hedges adjustments:

        

Unrealized loss

     (1,859     (1,456     (4,567     (148

Tax impact

     645       495       1,595       (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized loss, net of tax

     (1,214     (961     (2,972     (149
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification for losses included in net income (see Note 8 for further information)

     983       1,123       3,047       3,407  

Tax impact

     (334     (382     (1,036     (1,051
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification for losses included in net income, net of tax

     649       741       2,011       2,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedges adjustments, net of tax

     (565     (220     (961     2,207  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other postretirement benefits adjustments, net of tax:

        

Net actuarial loss

     (880     —         (4,860     —    

Tax impact

     107       —         605       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net actuarial loss, net of tax

     (773     —         (4,255     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Net actuarial loss

     4,274       4,768       12,726       14,365  

Tax impact

     (466     (298     (1,386     (1,303
  

 

 

   

 

 

   

 

 

   

 

 

 

Net actuarial loss, net of tax

     3,808       4,470       11,340       13,062  
  

 

 

   

 

 

   

 

 

   

 

 

 

Prior service credit

     (1,463     (1,257     (4,364     (3,781

Tax impact

     117       50       348       232  
  

 

 

   

 

 

   

 

 

   

 

 

 

Prior service credit, net of tax

     (1,346     (1,207     (4,016     (3,549
  

 

 

   

 

 

   

 

 

   

 

 

 

Transition obligation

     5       14       14       42  

Tax impact

     —         (15     (2     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Transition obligation, net of tax

     5       (1     12       33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pension and other postretirement benefits adjustments, net of tax

     1,694       3,262       3,081       9,546  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)/income, net of tax

     (35,509     15,168       (34,243     4,165  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

     (9,746     65,314       93,034       142,326  

Less: Comprehensive (loss)/income attributable to noncontrolling interests

     (211     11       (1,894     3,151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to Foster Wheeler AG

   $ (9,535   $ 65,303     $ 94,928     $ 139,175  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

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

(unaudited)

 

     September 30, 2014     December 31, 2013  
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 447,658     $ 556,190  

Accounts and notes receivable, net:

    

Trade

     620,866       671,770  

Other

     73,771       57,262  

Contracts in process

     237,249       197,232  

Prepaid, deferred and refundable income taxes

     51,513       62,856  

Other current assets

     38,079       38,431  
  

 

 

   

 

 

 

Total current assets

     1,469,136       1,583,741  
  

 

 

   

 

 

 

Land, buildings and equipment, net

     253,537       279,981  

Restricted cash

     60,417       82,867  

Notes and accounts receivable - long-term

     13,627       15,060  

Investments in and advances to unconsolidated affiliates

     165,846       181,315  

Goodwill

     164,650       169,801  

Other intangible assets, net

     100,235       113,463  

Asbestos-related insurance recovery receivable

     102,926       120,489  

Other assets

     147,341       143,848  

Deferred tax assets

     43,200       49,707  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,520,915     $ 2,740,272  
  

 

 

   

 

 

 
LIABILITIES, TEMPORARY EQUITY AND EQUITY     

Current Liabilities:

    

Current installments on long-term debt

   $ 15,867     $ 12,513  

Accounts payable

     243,589       282,403  

Accrued expenses

     255,035       304,312  

Billings in excess of costs and estimated earnings on uncompleted contracts

     481,211       569,652  

Income taxes payable

     38,536       39,078  
  

 

 

   

 

 

 

Total current liabilities

     1,034,238       1,207,958  
  

 

 

   

 

 

 

Long-term debt

     96,479       113,719  

Deferred tax liabilities

     41,448       39,714  

Pension, postretirement and other employee benefits

     101,281       111,221  

Asbestos-related liability

     232,823       257,180  

Other long-term liabilities

     138,264       210,651  

Commitments and contingencies

    
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,644,533       1,940,443  
  

 

 

   

 

 

 

Temporary Equity:

    

Non-vested share-based compensation awards subject to redemption

     18,072       15,664  
  

 

 

   

 

 

 

TOTAL TEMPORARY EQUITY

     18,072       15,664  
  

 

 

   

 

 

 

Equity:

    

Registered shares:

    

CHF 3.00 par value; authorized: 158,939,285 shares and 157,863,694 shares;

    

conditionally authorized: 57,092,821 shares and 58,168,412 shares;

    

issued: 106,718,491 shares and 105,642,900 shares;

    

outstanding: 100,126,791 shares and 99,051,200 shares.

     263,568       259,937  

Paid-in capital

     203,359       216,450  

Retained earnings

     1,061,261       933,160  

Accumulated other comprehensive loss

     (542,490     (509,317

Treasury shares (outstanding: 6,591,700 shares and 6,591,700 shares)

     (150,131     (150,131
  

 

 

   

 

 

 

TOTAL FOSTER WHEELER AG SHAREHOLDERS’ EQUITY

     835,567       750,099  
  

 

 

   

 

 

 

Noncontrolling interests

     22,743       34,066  
  

 

 

   

 

 

 

TOTAL EQUITY

     858,310       784,165  
  

 

 

   

 

 

 

TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY

   $ 2,520,915     $ 2,740,272  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands of dollars)

(unaudited)

 

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

Nine Months Ended September 30, 2013

               

Balance at December 31,
2012

  $ 269,633     $ 266,943     $ 835,993     $ (567,603   $ (90,976   $ 713,990     $ 43,403     $ 757,393  

Net income

    —         —         134,338       —         —         134,338       3,823       138,161  

Other comprehensive (loss)/income, net of tax

    —         —         —         4,837       —         4,837       (672     4,165  

Issuance of registered shares upon exercise of stock options

    637       3,656       —         —         —         4,293       —         4,293  

Issuance of registered shares upon vesting of restricted awards

    952       (952     —         —         —         —         —         —    

Distributions to noncontrolling interests

    —         —         —         —         —         —         (12,579     (12,579

Share-based compensation expense

    —         10,400       —         —         —         10,400       —         10,400  

Excess tax shortfall related to share-based compensation

    —         (123     —         —         —         (123     —         (123

Repurchase of registered shares

    —         —         —         —         (150,131     (150,131     —         (150,131

Retirement of registered shares

    (13,608     (77,368     —         —         90,976       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ 257,614     $ 202,556     $ 970,331     $ (562,766   $ (150,131   $ 717,604     $ 33,975     $ 751,579  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

               

Balance at December 31,
2013

  $ 259,937     $ 216,450     $ 933,160     $ (509,317   $ (150,131   $ 750,099     $ 34,066     $ 784,165  

Net income/(loss)

    —         —         128,101       —         —         128,101       (824     127,277  

Other comprehensive (loss)/income, net of tax

    —         —         —         (33,173     —         (33,173     (1,070     (34,243

Issuance of registered shares upon exercise of stock options

    2,376       15,962       —         —         —         18,338       —         18,338  

Issuance of registered shares upon vesting of restricted awards

    1,255       (1,255     —         —         —         —         —         —    

Distributions to noncontrolling interests

    —         —         —         —         —         —         (9,429     (9,429

Share-based compensation expense

    —         11,933       —         —         —         11,933       —         11,933  

Excess tax benefit related to share-based compensation

    —         162       —         —         —         162       —         162  

Return of capital distribution

    —         (39,893     —         —         —         (39,893     —         (39,893
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ 263,568     $ 203,359     $ 1,061,261     $ (542,490   $ (150,131   $ 835,567     $ 22,743     $ 858,310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

 

6


Table of Contents

FOSTER WHEELER AG AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 127,277     $ 138,161  

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

    

Depreciation and amortization

     44,535       42,828  

Reversal of previously accrued unrecognized tax benefits

     (22,339     —    

Net non-cash asbestos-related provision

     6,000       6,000  

Share-based compensation expense

     14,341       14,119  

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

     (162     123  

Deferred income tax provision

     16,199       62  

Dividends, net of equity in earnings of unconsolidated affiliates

     3,793       28,744  

Other noncash items, net

     (462     86  

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

    

Decrease in receivables

     8,817       4,833  

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

     (118,908     (17,463

Decrease in accounts payable and accrued expenses

     (89,667     (45,316

Net change in other current assets and liabilities

     (4,520     (31,296

Net change in other long-term assets and liabilities

     (36,160     (26,799
  

 

 

   

 

 

 

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

     (51,256     114,082  
  

 

 

   

 

 

 

Net cash used in operating activities — discontinued operations

     —         (385
  

 

 

   

 

 

 

Net cash (used in)/provided by operating activities

     (51,256     113,697  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Payments related to acquisition of businesses, net of cash acquired

     (2,000     (52,770

Proceeds from disposition of business

     —         48,600  

Change in restricted cash

     18,848       9,249  

Capital expenditures

     (17,826     (21,810

Investments in and advances to unconsolidated affiliates

     —         (11,591

Other investing activities

     534       40  
  

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     (444     (28,282
  

 

 

   

 

 

 

Net cash provided by investing activities — discontinued operations

     —         385  
  

 

 

   

 

 

 

Net cash used in investing activities

     (444     (27,897
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repurchase of shares

     —         (150,131

Return of capital distribution

     (39,893     —    

Distributions to noncontrolling interests

     (9,429     (12,579

Proceeds from stock options exercised

     18,338       4,293  

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

     162       (123

Repayment of debt and capital lease obligations

     (7,693     (8,627
  

 

 

   

 

 

 

Net cash used in financing activities

     (38,515     (167,167
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (18,317     (3,826
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (108,532     (85,193
  

 

 

   

 

 

 

Less: Increase/(decrease) in cash and cash equivalents — discontinued operations

     —         —    
  

 

 

   

 

 

 

Decrease in cash and cash equivalents — continuing operations

     (108,532     (85,193
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of year

     556,190       582,322  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 447,658     $ 497,129  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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FOSTER WHEELER AG AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1. Summary of Significant Accounting Policies

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

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

The consolidated financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”), filed with the Securities and Exchange Commission on February 27, 2014. The consolidated balance sheet as of December 31, 2013 was derived from the audited financial statements included in our 2013 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.

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 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.

 

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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:

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Number of separate projects

     5        10        23        28  

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

   $ 6,200      $ 30,200      $ 36,600      $ 74,800  

Please see Note 12 for further information related to changes in final estimated contract profit and the impact on business segment results.

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, disputed or unapproved change orders as to both scope and price or other causes of unanticipated additional costs. We record claims as additional contract revenue if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. These two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in our performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim may be recorded only to the extent that contract costs relating to the claim have been incurred, 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 $26,500 and $4,500 as of September 30, 2014 and December 31, 2013, respectively, of which substantially all costs had been incurred as of September 30, 2014 and December 31, 2013.

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, 2014 and December 31, 2013.

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

 

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Trade Accounts Receivable — Trade accounts receivable represent amounts billed to customers. 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, 2014 or December 31, 2013.

Trade accounts receivable are continually evaluated for collectability. Provisions are established on a project-specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues.

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, 2014 and December 31, 2013, we participated in certain entities determined to be VIEs, including a gas-fired cogeneration facility in Martinez, California and a refinery/electric power generation project in Chile. We consolidate the operations of the Martinez project while we record our participation in the project in Chile on the equity method of accounting.

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

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

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

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

Financial instruments valued independent of the fair value hierarchy:

 

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

 

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Financial instruments valued within the fair value hierarchy:

 

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

 

  Foreign Currency Forward Contracts — We estimate the fair value of foreign currency forward contracts by obtaining quotes from financial institutions or market transactions in either the listed or over-the-counter markets. 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.

 

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

 

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

 

     September 30, 2014      December 31, 2013  
     Level 1      Level 2      Level 3      Level 1      Level 2      Level 3  

Fair value measurements:

                 

Assets:

                 

Assets measured at fair value on a recurring basis:

                 

Foreign currency forward contracts

   $ —        $ 4,736      $ —        $ —        $ 7,361      $ —    

Assets measured at fair value on a non-recurring basis:

                 

Investment in an unconsolidated affiliate

   $ —        $ —        $ —        $ —        $ —        $ 35,096  

Liabilities:

                 

Liabilities measured at fair value on a recurring basis:

                 

Foreign currency forward contracts

   $ —        $ 9,625      $ —        $ —        $ 2,405      $ —    

Interest rate swap contracts

     —          8,255        —          —          7,866        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ —        $ 17,880      $ —        $ —        $ 10,271      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

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.

 

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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 from continuing operations were as follows:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Income from continuing operations attributable to Foster Wheeler AG

   $ 25,440      $ 48,853      $ 128,101      $ 134,073  

Basic weighted-average number of shares outstanding

     100,081,772        98,172,200        99,691,325        100,830,719  

Effect of dilutive securities

     1,093,835        431,386        1,255,861        495,874  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average number of shares outstanding

     101,175,607        98,603,586        100,947,186        101,326,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share:

           

Basic

   $ 0.25      $ 0.50      $ 1.28      $ 1.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.25      $ 0.50      $ 1.27      $ 1.32  
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Stock options

     236,034        1,356,167        346,604        1,393,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Performance-based restricted share units

     422,757        1,144,694        —          1,144,694  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pending Exchange Offer and Our Acquisition by AMEC plc – On February 13, 2014, we entered into an Implementation Agreement (as amended from time to time, including by the letter agreement dated March 28, 2014, the deed of amendment dated May 28, 2014 and the deed of amendment dated October 2, 2014, “Implementation Agreement”) with AMEC plc (“AMEC”) relating to the pending acquisition of all of the issued and to be issued registered shares, par value CHF 3.00 per share, of Foster Wheeler AG (the “FW shares”) by AMEC. On the terms and subject to the conditions of the Implementation Agreement, on October 7, 2014, AMEC International Investments B.V. (a direct, wholly owned subsidiary of AMEC) commenced an exchange offer (the “Offer”) to acquire all of the FW shares, pursuant to which each validly tendered FW share will be exchanged for a combination (subject to election by each Foster Wheeler shareholder as described in our Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 13, 2014) of (a) $16.00 in cash plus (b) 0.8998 ordinary shares, par value £0.50 per share, of AMEC (“AMEC shares”) or, at the election of such holder, American Depositary Shares representing such number of AMEC shares.

The Offer will expire at 11:59 p.m. New York City time on November 4, 2014, unless the expiration date of the Offer is extended by AMEC.

For a full description of the Offer, see our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2014 and our Solicitation/Recommendation Statement on Schedule 14D-9, or Schedule 14D-9, filed with the Securities and Exchange Commission on October 7, 2014.

Dividend Distribution – On February 26, 2014, our Board of Directors approved a proposal to our shareholders for a one-time dividend distribution of $0.40 per share. Our shareholders approved the distribution at our Annual General Meeting on May 7, 2014 and the distribution was paid on May 21, 2014 to the shareholders listed on our share register as of May 7, 2014. The distribution was paid out of qualifying capital contribution reserves and was not subject to Swiss withholding tax. The distribution resulted in a reduction of paid-in capital and is presented on the consolidated statements of operations, changes in equity and cash flows as a return of capital.

This distribution was not linked to, and not conditional on, the closing of the Offer. The covenants of our senior unsecured credit agreement did not limit our ability to pay this dividend.

 

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Recent Accounting Developments – In April 2014, the Financial Accounting Standards Board, or “FASB”, issued Accounting Standards Update, or “ASU”, No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides guidance that limits the requirement to report discontinued operations to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity’s operations and financial results. The amendments also require expanded disclosures concerning discontinued operations, disclosures of certain financial results attributable to a disposal of a significant component of an entity that does not qualify for discontinued operations reporting and expanded disclosures for long-lived assets classified as held for sale or disposed of. The new standard is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals or assets classified as held for sale that have not been reported in financial statements previously issued or available for issuance. We do not expect our adoption of this new standard to have a material impact on our consolidated financial statements and notes.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and notes.

In June 2014, the FASB issued ASU No. 2014-12 “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, as of the grant date an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under the ASU. The ASU’s guidance is effective for all entities for reporting periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. In addition, all entities will have the option of applying the guidance either prospectively, only to awards granted or modified on or after the effective date, or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented, the earliest presented comparative period. We do not expect our adoption of this new standard to have a material impact on our consolidated financial statements and notes.

2. Business Combinations

2014 Acquisition Activity

In April 2014, we acquired certain assets of the Siemens Environmental Systems and Services (“SESS”) business from Siemens Energy, Inc. in a cash transaction for approximately $2,000. The SESS business supplies and services clean air technologies for use in power plants and industrial facilities with locations in Pittsburgh, Pennsylvania and Branchburg, New Jersey. The assets, liabilities and results of operations from this acquisition are included within our Global Power Group business segment.

In October 2014, we acquired all of the ordinary shares and options of MDM Engineering Group Limited (“MDM Engineering”) in a cash transaction for approximately $109,000. MDM Engineering is operationally located in South Africa and is a minerals process and project management company focused on the mining industry. The company provides a wide range of services from preliminary and final feasibility studies, through to plant design, construction and commissioning. The preliminary purchase price allocation and pro forma information for this acquisition will be included in our fourth quarter 2014 consolidated financial statements. During the fourth quarter of 2014, we expect to record an aggregate increase of goodwill and other intangible assets of approximately $89,000 in connection with this acquisition. The assets, liabilities and results of operations of this business will be included within our Global Engineering and Construction Group (“Global E&C Group”) business segment.

 

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2013 Acquisition Activity

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. We paid cash consideration net of cash acquired of £6,000 (approximately $9,300 based on the exchange rates in effect on the payment dates). The sale and purchase agreement also included an earnout provision for additional consideration with an estimated maximum of £3,000 (approximately $5,100 based on the exchange rate in effect on June 30, 2014), 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. 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 $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 E&C Group business segment.

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. We paid cash consideration net of cash acquired of approximately $15,700. 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 $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 business partnership. We paid cash consideration net of cash acquired of approximately $25,100, which includes a working capital adjustment paid subsequent to the six months ended June 30, 2013. 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. During the second quarter of 2014, we renegotiated the terms of the earnout provision with the former owner and settled the earnout in full for a cash payment of approximately $3,500. The cash payment of approximately $3,500 consisted of approximately $1,300 which we had accrued as of December 31, 2013 and during the quarter and six months ended June 30, 2014, we recognized compensation expense, within selling, general and administrative expenses, of approximately $1,900 and $2,200, respectively. 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.

 

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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.

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:

 

     September 30, 2014      December 31, 2013  
     Italy      Chile      Italy      Chile  

Balance Sheet Data:

           

Current assets

   $ 130,960      $ 63,660      $ 156,844      $ 66,867  

Other assets (primarily buildings and equipment)

     233,054        81,725        259,392        88,936  

Current liabilities

     103,562        20,172        108,769        25,643  

Other liabilities (primarily long-term debt)

     122,660        14,482        149,578        14,482  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets

   $ 137,792      $ 110,731      $ 157,889      $ 115,678  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     Italy      Chile      Italy      Chile      Italy      Chile      Italy      Chile  

Income Statement Data:

                       

Total revenues

   $ 31,043      $ 18,360      $ 30,570      $ 18,065      $ 96,530      $ 60,594      $ 97,585      $ 59,394  

Gross profit

     9,565        8,637        6,700        12,539        39,158        28,442        20,702        36,097  

Income before taxes

     5,894        8,086        5,125        11,928        10,602        24,692        15,478        34,066  

Net earnings

     676        6,469        3,180        9,303        1,666        19,754        9,919        26,535  

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,  
     2014      2013      2014      2013  

Equity in the net earnings of unconsolidated affiliates

   $ 4,753      $ 6,943      $ 14,550      $ 27,381  

Distributions from equity affiliates

   $ —        $ —        $ 19,813      $ 55,933  

 

     September 30, 2014      December 31, 2013  

Investments in unconsolidated affiliates

   $ 139,230      $ 150,558  

Our projects in Italy recognized equity earnings of $378 and $1,530 in the third quarter of 2014 and 2013, respectively, and recognized equity earnings of $1,188 and $4,914 in the first nine months of 2014 and 2013, respectively. Our equity earnings were unfavorably impacted in the quarter and nine months ended September 30, 2014, compared to the corresponding periods in 2013, due to the expiration of a royalty agreement at our project that

 

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generated earnings from royalty payments linked to the price of natural gas. This project experienced decreased equity earnings in the quarter and nine months ended September 30, 2014, compared to the corresponding periods in 2013, of $1,000 and $2,300, respectively. Additionally, our equity earnings from our projects in Italy, during the nine months ended September 30, 2014, were unfavorably impacted by a provision for a tariff related to the net power supplied to the electrical grid at our waste-to-energy project. The impact of this provision decreased our equity earnings by $1,300, of which $1,100 related to the impact of the tariff for years prior to 2014. Our waste-to-energy project experienced a decrease in equity earnings in the nine months ended September 30, 2014, compared to the corresponding period in 2013, of $700.

Our equity earnings from our project in Chile were $4,375 and $5,413 in the third quarter of 2014 and 2013, respectively, and were $13,362 and $22,467 in the first nine months of 2014 and 2013, respectively. Our equity earnings in the quarter and nine months September 30, 2014 were unfavorably impacted by a decrease in the average electric tariff rates in 2014, as compared to the average electric tariff rates in the corresponding periods in 2013, which resulted in decreased equity earnings of $1,600 and $2,600, respectively. The decrease in equity earnings in the nine months ended September 30, 2014, compared to the same period in 2013, was primarily driven by three additional items: a $3,200 increase in our share of the project’s 2012 earnings recognized in the nine months ended September 30, 2013 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; a $3,000 increase from the reversal of an insurance-related contingency during the second quarter of 2013; and the unfavorable impact of a reversal of a risk contingency in the first quarter of 2013 associated with the insurance proceeds received by our project in Chile in connection with its 2010 earthquake loss. Excluding the above items, equity earnings would have shown an increase when comparing the nine months ended September 30, 2014 to the same period in 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, 2014 or December 31, 2013.

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,  
     2014      2013      2014      2013  

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

   $ 2,731      $ 2,800      $ 8,193      $ 8,399  

 

     September 30, 2014      December 31, 2013  

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

   $ 14,378      $ 7,866  

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 within our Global E&C Group and included in investments in and advances to unconsolidated affiliates on our consolidated balance sheet.

 

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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, 2014 and December 31, 2013. 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, 2014      December 31, 2013  

Current assets

   $ 5,226      $ 5,897  

Other assets (primarily buildings and equipment)

     33,006        36,118  

Current liabilities

     2,036        3,024  

Other liabilities

     4,327        4,819  
  

 

 

    

 

 

 

Net assets

   $ 31,869      $ 34,172  
  

 

 

    

 

 

 

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 since 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, 2014      December 31, 2013      September 30, 2014      December 31, 2013  

North America

   $ 83,110      $ 84,447      $ 6,792      $ 4,266  

Asia

     761        761        —          —    

Europe

     6,645        6,787        66,773        72,959  

Middle East

     569        581        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 91,085      $ 92,576      $ 73,565      $ 77,225  
  

 

 

    

 

 

    

 

 

    

 

 

 

Our Global Power Group’s goodwill in North America increased for the SESS business acquisition described in Note 2. All other changes in each of the regions during the nine months ended September 30, 2014 were the result of the impact of foreign currency translation adjustments.

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

 

     September 30, 2014      December 31, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Patents

   $ 41,996      $ (35,447   $ 6,549      $ 41,526      $ (34,477   $ 7,049  

Trademarks

     65,012        (34,801     30,211        66,320        (34,113     32,207  

Customer relationships, pipeline and backlog

     93,028        (33,374     59,654        95,199        (25,911     69,288  

Technology

     6,294        (2,473     3,821        6,887        (1,968     4,919  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 206,330      $ (106,095   $ 100,235      $ 209,932      $ (96,469   $ 113,463  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2014, the net carrying amounts of our identifiable intangible assets were $41,823 for our Global Power Group and $58,412 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, 2014 and 2013.

 

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

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Amortization expense

   $ 4,192      $ 4,291      $ 12,454      $ 12,330  

 

Approximate full year amortization expense for years:       

2014

   $ 16,500  

2015

     11,400  

2016

     9,900  

2017

     9,500  

2018

     9,200  

5. Borrowings

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

 

     September 30, 2014      December 31, 2013  
     Current      Long-term      Total      Current      Long-term      Total  

Capital Lease Obligations

   $ 3,439      $ 47,674      $ 51,113      $ 3,040      $ 51,359      $ 54,399  

Special-Purpose Limited Recourse Project Debt:

                 

FW Power S.r.l.

     7,073        47,522        54,595        7,433        55,722        63,155  

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

     5,355        —          5,355        2,040        5,355        7,395  

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

   $ 15,867      $ 96,479      $ 112,346      $ 12,513      $ 113,719      $ 126,232  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated fair value

         $ 122,500            $ 139,912  
        

 

 

          

 

 

 

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 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 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 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 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 senior credit agreement contains various customary restrictive covenants. In addition, our 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 senior credit agreement. We have been in compliance with all financial covenants and other provisions of our senior credit agreement during the nine months ended September 30, 2014 and 2013.

 

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As described in Note 1 to the consolidated financial statements in this quarterly report on Form 10-Q, on October 7, 2014, AMEC commenced the Offer to acquire all of the FW shares. The Offer will expire at 11:59 p.m. New York City time on November 4, 2014, unless the expiration date of the Offer is extended by AMEC. If the conditions to the Offer are satisfied or waived and the Offer is consummated, we will be in default under our senior credit agreement if such agreement is not amended or terminated. We are currently in discussion with the administrative agent targeting the cancellation of the credit facility concurrently with the change of control event.

We had approximately $290,600 and $253,900 of letters of credit outstanding under our senior credit agreement as of September 30, 2014 and December 31, 2013, respectively. The letter of credit fees under our senior credit agreement as of September 30, 2014 and December 31, 2013 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, 2014 and December 31, 2013.

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, which we refer to as OPEB 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 2014, we are not required to make any mandatory contributions to our U.S. pension plans. The following table provides details on 2014 mandatory contribution activity for our non-U.S. pension plans:

 

Contributions in the nine months ended September 30, 2014

   $ 7,400  

Remaining contributions expected for the year 2014

     800  
  

 

 

 

Contributions expected for the year 2014

   $ 8,200  
  

 

 

 

We did not make any discretionary contributions during the first nine months of 2014; however, we may elect to make discretionary contributions to our U.S. and/or non-U.S. pension plans during the remainder of 2014.

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 (credit)/cost 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,
 
     2014     2013     2014     2013     2014     2013     2014     2013  

Net periodic benefit (credit)/cost:

                

Service cost

   $ 313     $ 277     $ 814     $ 869     $ 7     $ 14     $ 20     $ 42  

Interest cost

     14,258       12,619       42,308       38,158       570       606       1,710       2,017  

Expected return on plan assets

     (18,790     (16,023     (55,810     (48,411     —         —         —         —    

Amortization of net actuarial loss/(gain)

     4,303       4,548       12,814       13,705       (29     220       (88     660  

Amortization of prior service credit

     (589     (383     (1,742     (1,159     (874     (874     (2,622     (2,622

Amortization of transition obligation

     5       14       14       42       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (credit)/cost

   $ (500   $ 1,052     $ (1,602   $ 3,204     $ (326   $ (34   $ (980   $ 97  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The components of net periodic benefit (credit)/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. Also refer to Note 10 for the related tax effect on pension and other postretirement benefit adjustments that are recognized in other comprehensive loss.

 

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7. Guarantees and Warranties

We have agreed to indemnify certain third parties relating to businesses and/or assets that we previously owned and sold to such third parties. Such indemnifications relate primarily to 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, 2014 and December 31, 2013, the carrying amounts of our environmental liabilities were $6,400 and $6,800, 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:    2014     2013  

Balance at beginning of year

   $ 73,500     $ 90,100  

Accruals

     16,700       16,700  

Settlements

     (3,800     (10,400

Adjustments to provisions*

     (15,100     (16,000

Foreign currency translation

     (2,500     (100
  

 

 

   

 

 

 

Balance at end of period

   $ 68,800     $ 80,300  
  

 

 

   

 

 

 

 

* Adjustments to the provisions represent reversals of warranty provisions that are no longer required.

We are contingently liable under standby letters of credit, bank guarantees and surety bonds, totaling $887,500 and $960,500 as of September 30, 2014 and December 31, 2013, 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.

 

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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,
2014
     December 31,
2013
    Balance Sheet Location    September 30,
2014
     December 31,
2013
 

Derivatives designated as hedging instruments:

               

Interest rate swap contracts

 

Other assets

   $ —         $ —      

Other long-term liabilities

   $ 8,255       $ 7,866   

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

     4,575         7,157     

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

     8,938         2,018  

Foreign currency forward contracts

 

Other accounts receivable

     161         204     

Accounts payable

     687         387  
    

 

 

    

 

 

      

 

 

    

 

 

 

Total derivatives

     $ 4,736      $ 7,361        $ 17,880      $ 10,271  
    

 

 

    

 

 

      

 

 

    

 

 

 

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, 2014. 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, 2014, we had a total gross notional amount, measured in U.S. dollar equivalent, of approximately $582,500 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 2014 through 2016.

We are exposed to credit loss in the event of non-performance by the counterparties. These counterparties are commercial banks that are primarily rated “BBB+” or better by S&P (or the equivalent by other recognized credit rating agencies).

Increases in the fair value of the currencies sold forward result in losses while increases in the fair value of the currencies bought forward result in gains. For foreign currency forward contracts used to mitigate currency risk on our projects, the gain or loss from the portion of the mark-to-market adjustment related to the completed portion of the underlying project is included in cost of operating revenues at the same time as the underlying foreign currency exposure occurs. The gain or loss from the remaining portion of the mark-to-market adjustment, specifically the portion relating to the uncompleted portion of the underlying project is reflected directly in cost of operating revenues in the period in which the mark-to-market adjustment occurs. We also utilize foreign currency forward contracts to mitigate non-project related currency risks, which are recorded in other deductions, net.

 

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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)

Recognized

in Income on Derivatives

   Amount of Gain/(Loss) Recognized in
Income on Derivatives
 
      Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
      2014     2013      2014     2013  

Foreign currency forward contracts

   Cost of operating revenues    $ (4,825   $ 5,616      $ (4,925   $ 1,700  

Foreign currency forward contracts

   Other deductions, net      916       121        (238     (1,402
     

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ (3,909   $ 5,737      $ (5,163   $ 298  
     

 

 

   

 

 

    

 

 

   

 

 

 

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

During the nine months ended September 30, 2014 and 2013, we included net cash inflows on the settlement of derivatives of $2,841 and $5,179, 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 approximately $49,100 as of September 30, 2014.

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,
 
     2014     2013     2014     2013  

Unrealized loss recognized in other comprehensive income

   $ (1,164   $ (817   $ (2,908   $ (6

Loss reclassified from accumulated other comprehensive loss to interest expense

     578       630       1,755       1,885  

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. See Note 10 for the related tax effect on cash flow hedges that are recognized in other comprehensive income.

9. Share-Based Compensation

Our share-based compensation plan includes 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,
 
     2014      2013      2014      2013  

Share-based compensation

   $ 4,777      $ 4,638      $ 14,341      $ 14,119  

Related income tax benefit

     350        153        999        599  

As of September 30, 2014, 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 $15,425, $10,869 and $843, respectively. Those amounts are expected to be recognized as expense over a weighted-average period of approximately two years.

 

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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 did not grant any stock options during the nine months ended September 30, 2014 or 2013.

Our share-based compensation plan includes 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, 2014 and 2013 were as follows:

 

     Nine Months Ended
September 30,
 
     2014     2013  

Balance at beginning of year

   $ 15,664     $ 8,594  

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

     12,486       11,085  

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

     (10,078     (7,366
  

 

 

   

 

 

 

Balance at end of period

   $ 18,072     $ 12,313  
  

 

 

   

 

 

 

Our articles of association provide for conditional capital for the issuance of shares under our share-based compensation plan 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, 2014, our remaining available conditional capital was 57,092,821 shares.

 

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10. Accumulated Other Comprehensive Loss

Below are the adjustments included in other comprehensive loss related to foreign currency translation, cash flow hedges and pension and other postretirement benefits and their related tax provision/(benefit) and balances attributable to noncontrolling interests and Foster Wheeler AG:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Foreign currency translation

   $ (36,649   $ 12,126      $ (36,383   $ (7,588

Tax impact

     11       —         20       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation, net of tax

     (36,638     12,126       (36,363     (7,588

Less: Attributable to noncontrolling interests

     (537     476       (1,081     (678
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to Foster Wheeler AG

   $ (36,101   $ 11,650     $ (35,282   $ (6,910
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow hedges*

   $ (876   $ (333   $ (1,520   $ 3,259  

Tax impact

     311       113       559       (1,052
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to Foster Wheeler AG

   $ (565   $ (220   $ (961   $ 2,207  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other postretirement benefits

   $ 1,936     $ 3,525     $ 3,516     $ 10,626  

Tax impact

     (242     (263     (435     (1,080
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other postretirement benefits, net of tax

   $ 1,694     $ 3,262     $ 3,081     $ 9,546  

Less: Attributable to noncontrolling interests

     3       2       11       6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to Foster Wheeler AG

   $ 1,691     $ 3,260     $ 3,070     $ 9,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)/income attributable to Foster Wheeler AG

   $ (34,975   $ 14,690     $ (33,173   $ 4,837  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Cash flow hedges include the impact of our proportionate share from unconsolidated affiliates accounted for under the equity method of accounting.

No tax is provided on foreign currency translation adjustments in comprehensive income to the extent the related earnings are indefinitely reinvested in each subsidiary’s country of domicile.

Reclassifications from accumulated other comprehensive loss related to cash flow hedges 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.

 

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Below is a rollforward of accumulated other comprehensive loss adjusted for other comprehensive income/(loss) items attributable to Foster Wheeler AG (all amounts net of tax):

 

     Accumulated Other Comprehensive Loss  
     Accumulated
Foreign
Currency
Translation
    Cash
Flow
Hedges
    Pension and
Other
Postretirement
Benefits
    Total
Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2012

   $ (86,729   $ (12,412   $ (468,462   $ (567,603

Other comprehensive (loss)/income

     (6,910     2,207       9,540       4,837  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (93,639   $ (10,205   $ (458,922   $ (562,766
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ (92,017   $ (8,845   $ (408,455   $ (509,317

Other comprehensive (loss)/income

     (35,282     (961     3,070       (33,173
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (127,299   $ (9,806   $ (405,385   $ (542,490
  

 

 

   

 

 

   

 

 

   

 

 

 

11. 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 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 2014

Our effective tax rate for the first nine months of 2014 was lower than the U.S. statutory rate of 35% primarily because of the net impact of the following:

 

  Income earned in non-U.S. jurisdictions contributed to an approximate nine-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 which occurred during the first nine months of 2014, primarily relating to the net reversal of previously accrued liabilities for uncertain tax positions, which were released as a result of tax examination settlements and reassessments of future liabilities in non-U.S. jurisdictions, provided a seven-percentage point reduction to the effective tax rate for the first nine months of 2014; and

 

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

 

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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% primarily because of 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 which occurred in the first nine months of 2013, 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 the tax rate on net deferred tax assets in a non-U.S. jurisdiction, provided a net one-percentage point reduction to the effective tax rate for the first nine months of 2013; 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 three-percentage point increase in our effective tax rate.

We monitor on a quarterly basis the need for valuation allowances against the deferred tax assets that have been established in all taxing jurisdictions. In determining whether a valuation allowance is necessary, we evaluate all available evidence, both positive and negative, including a review of both historical performance and expected future profitability. We rely on forecasted future income based on management’s judgment to determine the recoverability of our deferred tax assets and review such forecasts on an ongoing basis. If future results are less than projected and if tax planning alternatives do not offset those effects, a valuation allowance may be required to reduce the deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.

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

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

A number of tax years are under audit by the relevant tax authorities in certain U.S. and non-U.S. jurisdictions. We anticipate that several of these audits may be concluded in the foreseeable future, including during the remainder of 2014. 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. During the nine months ended September 30, 2014, we settled audits with non-U.S. tax authorities which resulted in the release of previously recorded liabilities for unrecognized tax benefits. These releases resulted in reductions to our tax provision, interest expense and penalties on our consolidated statement of operations of $10,800, $3,400, and $8,100, respectively. Other than these releases for audit settlements, 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.

 

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12. Business Segments

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

Global E&C Group

Our Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction export 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 processing 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 installs 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; and owns a noncontrolling interest in a petcoke-fired circulating fluidized-bed facility for refinery steam and power 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.

 

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Operating Revenues from Continuing Operations

We conduct our business on a global basis. Operating revenues for our continuing operations by industry, business segment and geographic region, based upon where our projects are being executed, were as follows:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Operating Revenues (Third-Party) by Industry:

           

Power generation

   $ 185,649      $ 194,258      $ 582,144      $ 563,713  

Oil refining

     252,752        323,019        711,354        1,006,651  

Pharmaceutical

     20,873        29,308        63,562        107,706  

Oil and gas

     121,440        83,145        343,889        254,626  

Chemical/petrochemical

     201,441        124,284        520,687        360,831  

Power plant design, operation and maintenance

     55,796        41,773        166,126        125,282  

Environmental

     3,539        1,426        7,459        4,271  

Other, net of eliminations

     18,231        4,613        49,966        32,297  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 859,721      $ 801,826      $ 2,445,187      $ 2,455,377  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Revenues (Third-Party) by Business Segment:

           

Global E&C Group

   $ 693,726      $ 615,028      $ 1,892,460      $ 1,865,721  

Global Power Group

     165,995        186,798        552,727        589,656  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 859,721      $ 801,826      $ 2,445,187      $ 2,455,377  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Revenues (Third-Party) by Geographic Region:

           

Africa

   $ 17,074      $ 12,694      $ 44,558      $ 52,341  

Asia Pacific

     206,395        208,073        652,952        612,348  

Europe

     197,138        192,318        542,920        596,154  

Middle East

     135,609        91,482        398,467        236,284  

North America

     255,079        205,570        626,939        729,583  

South America

     48,426        91,689        179,351        228,667  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 859,721      $ 801,826      $ 2,445,187      $ 2,455,377  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

EBITDA:

        

Global E&C Group

   $ 62,903     $ 59,940     $ 159,366     $ 157,261  

Global Power Group

     20,724       45,428       113,544       115,699  

C&F Group (1)

     (24,368     (21,301     (63,963     (49,810

Discontinued operations

     —         1,760       —         4,184  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

     59,259       85,827       208,947       227,334  

Less: Discontinued operations

     —         1,760       —         4,184  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations

     59,259       84,067       208,947       223,150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Add: Net income/(loss) attributable to noncontrolling interests

     323       (467     (824     3,823  

Less: Interest expense(2)

     2,669       3,388       4,485       9,976  

Less: Depreciation and amortization

     15,397       14,032       44,535       42,828  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     41,516       66,180       159,103       174,169  

Less: Provision for income taxes

     15,753       17,794       31,826       36,273  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     25,763       48,386       127,277       137,896  

Income from discontinued operations(3)

     —         1,760       —         265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     25,763       50,146       127,277       138,161  

Less: Net income/(loss) attributable to noncontrolling interests

     323       (467     (824     3,823  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 25,440     $ 50,613     $ 128,101     $ 134,338  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes general corporate income and expense, our captive insurance operation and the elimination of transactions and balances related to intercompany interest.
(2) Interest expense during the nine months ended September 30, 2014 included a credit of $3,400 related to the reversal of previously accrued interest expense on unrecognized tax benefits which were released as a result of settlements with non-U.S. tax authorities.
(3) Income from discontinued operations for the nine months ended September 30, 2013 included an impairment charge of $3,919 recognized in connection with our Camden, New Jersey waste-to-energy facility. Please refer to Note 14 for further information.

 

EBITDA in the above table includes the following:    Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

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

           

Global E&C Group

   $ 2,400      $ 13,800      $ 13,600      $ 38,200  

Global Power Group

     3,800        16,400        23,000        36,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,200      $ 30,200      $ 36,600      $ 74,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

License settlement in our Global Power Group(2)

   $ —        $ —        $ 32,500      $ —    

Litigation settlement in our E&C Group(3)

     —          —          3,000        —    

Reversal of previously accrued penalties on unrecognized tax benefits in our C&F Group(4)

     —          —          8,100        —    

Net asbestos-related provision/(gain) in our C&F Group(5)

   $ 2,000      $ 2,000      $ 5,200      $ (9,800

Charges for severance-related postemployment benefits:

           

Global E&C Group

   $ 800      $ 1,000      $ 2,800      $ 3,900  

Global Power Group

     600        3,000        700        4,100  

C&F Group

     —          —          —          400  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,400      $ 4,000      $ 3,500      $ 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) During the nine months ended September 30, 2014, our Global Power Group received a cash payment as a result of a favorable settlement in connection with the terms related to the expiration of a steam generator technology license, which was recognized in other income, net.
(3) During the nine months ended September 30, 2014, our Global E&C Group recognized a favorable impact to EBITDA of $3,000 related to a post judgment settlement of a lawsuit for less than the previously accrued amount, which was recognized in other deductions, net.
(4) During the nine months ended September 30, 2014, other deductions, net included a credit of $8,100 related to the reversal of previously accrued penalties on unrecognized tax benefits which were released as a result of settlements with non-U.S. tax authorities.
(5) Please refer to Note 13 for further information regarding the revaluation of our asbestos liability and related asset.

 

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During 2013, we initiated restructuring actions relating to ongoing cost reduction efforts within our Global Power Group, including severance-related postemployment benefits and consolidation of manufacturing operations. We recorded net pre-tax restructuring costs totaling $19,100 for restructuring actions initiated in 2013.

We are expecting to complete the severance-related postemployment benefits activities in 2014 and the majority of facility-related cost reduction actions in 2015. No specific plans for significant other actions have been finalized at this time. The following table summarizes the liability balances and utilization by cost type related to the 2013 restructuring actions:

 

Net pre-tax restructuring costs

   Severance     Facility exit, lease
termination & other
costs
    Total  

Balance as of December 31, 2013

   $ 11,400     $ 2,100     $ 13,500  

2014 charge

     865       932       1,797  

Utilization and foreign exchange

     (5,511     (373     (5,884

Adjustments to provisions*

     (1,263     (56     (1,319
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

   $ 5,491     $ 2,603     $ 8,094  
  

 

 

   

 

 

   

 

 

 

 

* Adjustments to the provisions represent reversals of the restructuring provisions that are no longer required.

The accounting policies of our business segments are the same as those described in our summary of significant accounting policies as disclosed in our 2013 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.

Income from discontinued operations included the following:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

EBITDA from discontinued operations

   $ —        $ 1,760      $ —        $ 4,184  

Less: Interest expense

     —          —          —          —    

Less: Depreciation and amortization*

     —          —          —          3,919  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations before income taxes*

     —          1,760        —          265  

Less: Provision for income taxes

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations*

   $ —        $ 1,760      $ —        $ 265  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* During 2013, we recorded an impairment charge of $3,919 in connection with our Camden, New Jersey waste-to-energy facility which was recorded as depreciation expense within income from discontinued operations. Please refer to Note 14 for further information.

13. 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:    2014     2013     2014     2013  

Open claims at beginning of period

     124,380       124,810       125,240       125,310  

New claims

     910       950       2,780       3,410  

Claims resolved

     (6,530     (510     (9,260     (3,470
  

 

 

   

 

 

   

 

 

   

 

 

 

Open claims at end of period

     118,760       125,250       118,760       125,250  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 2029. 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, 2014      December 31, 2013  

Asbestos-related assets recorded within:

     

Accounts and notes receivable-other

   $ 16,909      $ 20,256  

Asbestos-related insurance recovery receivable

     76,272        91,225  
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 93,181      $ 111,481  
  

 

 

    

 

 

 

Asbestos-related liabilities recorded within:

     

Accrued expenses

   $ 39,400      $ 52,600  

Asbestos-related liability

     203,903        225,600  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 243,303      $ 278,200  
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 50,403      $ 46,800  

Future unasserted claims

     192,900        231,400  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 243,303      $ 278,200  
  

 

 

    

 

 

 

We have worked with Analysis, Research & Planning Corporation, or ARPC, nationally recognized consultants in the U.S. with respect to projecting asbestos liabilities, to estimate the amount of asbestos-related indemnity and defense costs at each year-end based on a forecast for the next 15 years. Each year we have recorded our estimated asbestos liability at a level consistent with ARPC’s reasonable best estimate. Our estimated asbestos liability decreased during the first nine months of 2014 as a result of indemnity and defense cost payments totaling approximately $40,900, partially offset by the impact of an increase in the liability related to our rolling 15-year asbestos-related liability estimate of approximately $6,000. 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 2029.

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 2029, 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 2029, 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 2029.

Through September 30, 2014, total cumulative indemnity costs paid, prior to insurance recoveries, were approximately $851,100 and total cumulative defense costs paid were approximately $425,400, or approximately 33% of total defense and indemnity costs. The overall historic average combined indemnity and defense cost per resolved claim through September 30, 2014 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 2029. Our asbestos-related assets have not been discounted for the time value of money.

 

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Our insurance recoveries may be limited by future insolvencies among our insurers. We have not assumed recovery in the estimate of our asbestos-related insurance 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, 2014 and December 31, 2013, 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, 2014 or 2013. Insurers may become insolvent in the future and our insurers may fail to reimburse amounts owed to us on a timely basis. If we fail to realize the expected insurance recoveries, or experience delays in receiving material amounts from our insurers, our business, financial condition, results of operations and cash flows could be materially adversely affected.

The following table summarizes our 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,  
     2014      2013      2014     2013  

Provision for revaluation

   $ 1,956      $ 2,000      $ 5,956     $ 6,000  

Gain on the settlement of coverage litigation

     —          —          (783     (15,750
  

 

 

    

 

 

    

 

 

   

 

 

 

Net asbestos-related provision/(gain)

   $ 1,956      $ 2,000      $ 5,173     $ (9,750
  

 

 

    

 

 

    

 

 

   

 

 

 

The provision for revaluation in each period was the result of the accrual of our rolling 15-year asbestos liability estimate.

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Asbestos litigation, defense and case resolution payments

   $ 11,800     $ 12,400     $ 40,900     $ 38,800  

Insurance proceeds

     (15,500     (15,500     (19,100     (43,800
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asbestos-related payments/(proceeds)

   $ (3,700   $ (3,100   $ 21,800     $ (5,000
  

 

 

   

 

 

   

 

 

   

 

 

 

We expect to have net cash outflows of $31,700 during the full year 2014 as a result of asbestos liability indemnity and defense payments in excess of insurance proceeds. 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, 2013 liability estimate, an increase of 25% in the average per claim indemnity settlement amount would increase the liability by $40,300 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, 1,072 claims have been brought against our U.K. subsidiaries, of which 276 remained open as of September 30, 2014. None of the settled claims have resulted in material costs to us.

 

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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 2029:

 

U.K. Asbestos

   September 30,
2014
     December 31,
2013
 

Asbestos-related assets recorded within:

     

Accounts and notes receivable-other

   $ 1,452      $ 1,483  

Asbestos-related insurance recovery receivable

     26,654        29,264  
  

 

 

    

 

 

 

Total asbestos-related assets

   $ 28,106      $ 30,747  
  

 

 

    

 

 

 

Asbestos-related liabilities recorded within:

     

Accrued expenses

   $ 1,452      $ 1,483  

Asbestos-related liability

     28,920        31,580  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 30,372      $ 33,063  
  

 

 

    

 

 

 

Liability balance by claim category:

     

Open claims

   $ 6,312      $ 8,487  

Future unasserted claims

     24,060        24,576  
  

 

 

    

 

 

 

Total asbestos-related liabilities

   $ 30,372      $ 33,063  
  

 

 

    

 

 

 

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 $49,300, 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. 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, and has asserted a cross claim against us. Our client has asserted counter and cross claims for breach of contract and gross negligence against the erection contractor and the turbine contractor. Our client also asserted 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. Responsive pleadings to the erection contractor’s pleading were filed by the other parties, including us, on November 28, 2012. Our responsive pleading denied the erection contractor’s claims against us and asserted cross claims against our client seeking damages related to delays, out of scope work, and improperly assessed delay liquidated damages.

The claims against us by the erection contractor alleged negligence and, in its purported capacity as a third party beneficiary and assignee of our steam generation equipment supply contract, breach of contract. The erection contractor contends that it incurred substantial delays and cost overruns due to performance failures on the part of our client and us. The erection contractor is seeking an equitable extension of the project schedule, plus $222,000 in damages, plus attorneys’ and expert fees and the cost of the arbitration. Of this amount, $63,000 is for claims solely against our client. The remaining $159,000 purportedly relates to our alleged failures and is being claimed jointly against our client and us. The erection contractor also contends that, as an assignee of the steam generation equipment supply contract, it has a right to draw on our letters of credit. The turbine contractor’s submission largely

 

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reiterates the erection contractor’s allegations related to our and our client’s performance failures. The turbine contractor’s claims against our client total approximately $88,000. The turbine contractor also seeks a declaration that it did not cause any delay to the critical path of the construction and commissioning schedule and that it is not liable for any delay liquidated damages to our client. The turbine contractor’s claims against us total approximately $5,300. Our client’s submission asserts claims for delay liquidated damages as well as defective equipment damages against the turbine contractor and the erection contractor, jointly and severally, totaling in excess of $400,000. Of this amount, $318,000 relates to delay liquidated damages, which includes $242,000 in liquidated damages accruing since our client’s grant of Substantial Completion on December 15, 2011, because the turbine and erection contractors did not complete certain outstanding requirements and because the turbine contractor allegedly concealed unresolved deficiencies in the equipment it supplied. In February 2014, we entered into a partial settlement agreement with our client where we agreed to perform certain new work on the steam generation equipment in exchange for an assignment of our client’s rights to seek indemnification for our project claims and the cost of the new work from the erection and turbine contractors. The partial settlement agreement is described more fully below. Accordingly, we are seeking $37,000 in damages from the turbine and erection contractors. Of this amount, $14,400 relates to our existing project claims previously asserted against our client and $22,600 relates to our claims for the new work that we are performing under the partial settlement agreement.

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 operations during 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. On November 13, 2013, our client filed its plan of reorganization. On November 15, 2013, our client signed a stipulation to modify and lift the automatic stay of the arbitration proceedings by the bankruptcy filing to permit the arbitration to proceed as to all issues other than issues related to our letters of credit, which stipulation was approved by the bankruptcy court. The court-approved stipulation also provided for the withdrawal of our client’s motion to draw on our letters of credit.

The debtor-in-possession financing facility was approved by the bankruptcy court on November 21, 2013. The plan of reorganization contemplated, and any funding from the debtor-in-possession financing was conditioned upon, the achievement of various milestones by specified dates. One of the milestones was the reduction to zero by the bankruptcy court of the value of our mechanics lien and the mechanics liens of the turbine and erection contractors through a “claims estimation” proceeding. Our client moved to compel claims estimation on December 11, 2013. We and the turbine and erection contractors opposed the motion on various grounds. The motion was set to be heard on February 7, 2014 but adjourned at the request of our client to February 12, 2014.

On February 10, 2014, we agreed to a partial settlement of the outstanding claims under our supply contract with our client. Under the agreement, we will perform certain new work on the steam generation equipment in exchange for (i) a release from our client of liability for alleged defects in the steam generation equipment, (ii) restriction of our client’s right to draw on our letters of credit to disputes involving the new work, and (iii) a court-approved assignment of our client’s right to seek indemnification for the cost of the new work from the erection and turbine contractors. Also, under the agreement we will release our client from liability for our $14,800 in project claims related to delays, out of scope work, and improperly assessed delay liquidated damages in exchange for a court-approved assignment of our client’s right to seek indemnification for these claims from the turbine and erection contractors. The settlement agreement was subject to bankruptcy court approval, which approval was granted on March 7, 2014. The erection contractor has appealed the approval order, but has not applied to stay its enforcement during the pendency of the appeal. Accordingly, we are proceeding with the new work. Our client’s claims estimation motion, which was adjourned pending approval by the agreement of the bankruptcy court, has now been withdrawn as against us.

On May 28, 2014, our client filed an Amended Plan of Reorganization and Plan Confirmation Schedule. Pursuant to the Amended Plan, our client’s claims estimation motion against the turbine and erection contractors mechanics lien claims has been put on hold and our client has commenced an adversary proceeding in the bankruptcy court against

 

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their title company, seeking to declare that the title company is liable under its $825,000 policy in the event that the turbine and erection contractors’ mechanics liens are determined to have priority over the liens securing our client’s credit facility. That proceeding is set to be tried on November 17, 2014. On July 8, 2014, our client adjourned the Plan Confirmation hearing to a date to be determined, pending the outcome of the adversary proceeding against the title company. On October 1, 2014, the title company commenced its own adversary proceeding in the bankruptcy court, seeking a declaratory judgment to determine the priority, validity, and extent of the mechanics’ liens filed by us, the turbine contractor and the erection contractor. We have answered the complaint, denying the claims and asserting various meritorious affirmative defenses.

On October 15, 2014, the parties exchanged submissions in the arbitration in response to the affirmative claims asserted against them. Any reply submissions are due in mid-November, 2014. The hearing is scheduled for the first and second quarters of 2015.

On October 21, 2014, the erection contractor filed a motion in the bankruptcy proceeding seeking to have the court lift the automatic stay that is still in place with respect to our letters of credit in order to permit the arbitration panel to decide the erection contractor’s claim of entitlement to the letters of credit as an alleged assignee of the steam generation equipment supply contract. We intend to oppose the motion.

We intend to vigorously defend the claims against us in the arbitration and pursue in the arbitration our claims against the turbine and erection contractors for the project claims and for the cost of the new work.

Our letters of credit remain in place and we will vigorously oppose any attempt to draw down on them.

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 $84,200 based on the exchange rate in effect as of September 30, 2014), 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 $89,000 based on the exchange rate in effect as of September 30, 2014). 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 $1,003,400 based on the exchange rate in effect as of September 30, 2014) in damages, including among other claims a claim for lost revenue due to delay in the execution of the project in the amount of £555,000 (approximately $898,200 based on the exchange rate in effect as of September 30, 2014). 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. 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, 2014), 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 $46,600 based on the exchange rate in effect as of September 30, 2014). 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 was denied by the panel. Also, pursuant to our request, the panel 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 $35,000 based on the exchange rate in effect as of September 30, 2014). An initial session of that hearing took place in January 2014 and on March 25, 2014 the panel issued a declaratory award in our favor on the contractual interpretation pertaining to two of our claims for unpaid receivables. The remaining unpaid receivable claims and our client’s counterclaim for a deductive change order were heard by the panel at sessions in May, June and July 2014, and an award on these claims is pending. On June 30, 2014, our client filed a petition in Delhi High Court challenging both the jurisdiction of the panel and the legality, propriety and validity of the March 25, 2014 declaratory award. Along with the petition, our client also filed an application seeking to stay the ongoing arbitration proceedings pending the outcome of the challenge. On September 17, 2014, the Delhi High Court denied our client’s motion to stay the arbitration. As for our client’s challenge of the March 25, 2014 declaratory award, the court adjourned the matter for a further hearing to be held at the end of January 2015.

 

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In the interim, the arbitration proceedings continue and the hearing on the remaining claims and counterclaims, including our client’s counterclaim for lost revenue, is scheduled for the first quarter of 2015. In connection with such remaining claims and counterclaims, the parties exchanged detailed submissions in late August 2014. In its submission, our client increased the amount of its claim for lost revenue due to delay from £555,000 to £701,000 (approximately $1,134,500 based on the exchange rate in effect as of September 30, 2014), which therefore increased our client’s total counterclaim from £620,000 to £766,000 (approximately $1,239,700 based on the exchange rate in effect as of September 30, 2014). Our subsidiary’s previously-stated defenses to this counterclaim remain applicable. Reply submissions on the remaining claims and counterclaims, which were due on October 30, 2014, have not yet been exchanged due to our client’s request for additional time for its submission. We await the panel’s decision on the request. We cannot predict the ultimate outcome of this matter at this time.

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 three 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.

 

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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.

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. During the second quarter of 2014, FWEC received a USEPA invoice under the foregoing agreement for payment of $99 of response costs USEPA claims it incurred from March 2013 to February 2014. 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.

Shareholder Class Action Lawsuits

Four putative class action lawsuits have been filed on behalf of Foster Wheeler AG shareholders against Foster Wheeler AG, or the Company, and the Board of Directors of Foster Wheeler AG, or the Board, seeking to enjoin the proposed acquisition of the Company by AMEC from proceeding. The first of such lawsuits was filed on March 4, 2014. Two of the lawsuits are pending in Texas state court and the other two lawsuits are pending in the United States District Court for the District of New Jersey. AMEC is named as a co-defendant in the two Texas state court lawsuits. The complaints contain similar, standardized allegations. Plaintiffs allege that the directors breached fiduciary duties owed to plaintiff and the Company’s other shareholders in pursuing the plan to sell the Company,

 

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and that the Company aided and abetted the defendant directors in committing such breach. In particular, plaintiffs allege that AMEC’s per share exchange offer to acquire all of the Company’s shares does not adequately compensate the Company’s shareholders for their investment and significantly undervalues the Company’s prospects as a standalone entity, that the consideration fails to take into account the value expected to be realized by AMEC as a result of the proposed acquisition, that the Board permitted Company management to lead the negotiations with AMEC when management was improperly incentivized to pursue the proposed acquisition, and that the Implementation Agreement improperly contains a number of deal protection devices designed to preclude any competing bids from emerging during the period following the announcement of the proposed acquisition in the Company’s Form 8-K filing. A stipulation has been entered into in the Texas state court actions consolidating the cases (“Texas Consolidated Action”) and permitting plaintiffs to serve a consolidated complaint following the issuance of the Company’s Schedule 14D-9 with the U.S. Securities and Exchange Commission regarding the Offer. A similar stipulation has been entered into in the two actions pending before the U.S. District Court for the District of New Jersey (“New Jersey Consolidated Action”). No class has been constituted yet.

In connection with the Texas Consolidated Action, the Company agreed to make a limited document production to counsel for the Texas plaintiffs and thereafter engaged in settlement negotiations with counsel for the Texas plaintiffs concerning certain additional disclosures in the Company’s Schedule 14D-9. On October 1, 2014, the parties to the Texas Consolidated Action entered into a Stipulation of Settlement (the “Settlement Agreement”) reflecting the terms of an agreement, subject to final approval by the Texas state court and closing of the Offer, to settle the Texas Consolidated Action. Pursuant to the Settlement Agreement, the Company agreed to make certain of the supplemental disclosures proposed by counsel for the Texas plaintiffs (the “Additional Disclosure”) in the Company’s Schedule 14D-9. The Company agreed to make the Additional Disclosure at the request of counsel for the Texas plaintiffs and solely for settlement purposes. The Company, AMEC and the Company’s Board of Directors have denied, and continue to deny, all allegations of wrongdoing, fault, liability or damages to the Texas plaintiffs, the Company or its shareholders; deny that they breached any fiduciary duties or aided and abetted any such breaches, or engaged in any wrongdoing or violation of law; deny that they acted improperly in any way; and maintain that they have committed no disclosure violations or any other breaches of duty whatsoever in connection with the Offer or any public disclosures. The Settlement Agreement further provides for, among other things: (a) the dismissal with prejudice of the Texas Consolidated Action; (b) the complete discharge, dismissal with prejudice on the merits, release, and/or settlement, to the fullest extent permitted by law, of all known and unknown claims, demands, rights, liabilities, losses, obligations, duties, damages, costs, debts, expenses, interest, penalties, sanctions, fees, attorneys’ fees, actions, potential actions, causes of action, suits, agreements, judgments, decrees, matters, issues and controversies of any kind, nature and description whatsoever arising from or relating to the Offer that have been or could have been asserted against the Company, AMEC, the Company’s Board of Directors and/or related parties; (c) certification of the Texas Consolidated Action as a class action for settlement purposes only; and (d) payment of fees and expenses by the Company to counsel for the Texas plaintiffs in the form of AMEC Shares with a fair market value of $650 (plus up to the value of a single AMEC Share), to be measured by the aggregate purchase price of such AMEC Shares at the time of the purchase (the “Settlement Shares”). The Settlement Shares shall be placed in escrow, and released to counsel for the Texas plaintiffs within ten days after entry of a judgment and order by the Texas state court dismissing the Texas Consolidated Action with prejudice.

The Texas state court granted preliminary approval of the Settlement Agreement on October 2, 2014, on the condition that the Company provide notice, at its own expense, of the pendency and proposed settlement of the Texas Consolidated Action (the “Notice”) to members of the proposed class. Such Notice was annexed as Exhibit (a)(24) to the Company’s Schedule 14D-9. The settlement contemplated by the Settlement Agreement is also contingent upon, among other things, the closing of the Offer. In the event that the settlement does not become effective, the Company, AMEC and the Company’s Board of Directors will continue to vigorously defend themselves against the claims asserted in the Texas Consolidated Action.

If and when the settlement contemplated by the Settlement Agreement is finalized and approved, the Company believes that the New Jersey Consolidated Action will be barred by the release and that the action should be dismissed. Plaintiffs in the Texas Consolidated Action agreed in the Settlement Agreement to cooperate in connection with any efforts by the Company and the Company’s Board of Directors to secure the dismissal of the New Jersey Consolidated Action. In the event that the New Jersey Consolidated Action is allowed to proceed, the Company and the Company’s Board of Directors intend to vigorously defend themselves against the claims asserted in the New Jersey Consolidated Action.

14. 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

 

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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.

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 from discontinued operations before income taxes on the consolidated statement of operations during the quarter and nine months ended September 30, 2013.

Operating revenues related to our discontinued operations, which were exclusively in the U.S., were $3,991 and $17,053 during the quarter and nine months ended September 30, 2013.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition and results of operations for the periods indicated below. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2013, which we refer to as our 2013 Form 10-K.

Safe Harbor Statement

This management’s discussion and analysis of financial condition and results of operations, other sections of this quarterly report on Form 10-Q and other reports and oral statements made by our representatives from time to time may contain forward-looking statements that are based on our assumptions, expectations and projections about Foster Wheeler AG and the various industries within which we operate. These include statements regarding our expectations about revenues (including as expressed by our backlog), our liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of related insurance recoveries. Such forward-looking statements by their nature involve a degree of risk and uncertainty. We caution that a variety of factors, including but not limited to the factors described in Part I, Item 1A, “Risk Factors,” in our 2013 Form 10-K, which we filed with the Securities and Exchange Commission, or SEC, on February 27, 2014, and the following, could cause business conditions and our results to differ materially from what is contained in forward-looking statements:

 

    the timing and success of the pending offer and acquisition of us by AMEC plc;

 

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

 

    benefits, effects or results of our redomestication to Switzerland;

 

    deterioration in global economic conditions;

 

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

 

    changes in the financial condition of our customers;

 

    changes in regulatory environments;

 

    changes in project design or schedules;

 

    contract cancellations;

 

    changes in our estimates of costs to complete projects;

 

    changes in trade, monetary and fiscal policies worldwide;

 

    compliance with laws and regulations relating to our global operations;

 

    currency fluctuations;

 

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

 

    interruptions to shipping lanes or other methods of transit;

 

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

 

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

 

    increasing global competition;

 

    compliance with our debt covenants;

 

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

 

    changes in estimates used in our critical accounting policies.

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

 

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In addition, this management’s discussion and analysis of financial condition and results of operations contains several statements regarding current and future general global economic conditions. These statements are based on our compilation of economic data and analyses from a variety of external sources. While we believe these statements to be reasonably accurate, global economic conditions are difficult to analyze and predict and are subject to significant uncertainty and as a result, these statements may prove to be wrong. The challenges and drivers for each of our business segments are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments,” within this Item 2.

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

Overview

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

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

The above acquisitions have been included in our consolidated financial results as of their respective acquisition dates and all of the acquisitions are included in our results of operation for the three and nine months ended September 30, 2014. Throughout this Item 2, where period-to-period financial results have been impacted by these acquisitions, we have referred to these acquisitions as “businesses acquired subsequent to the nine months ended September 30, 2013.”

In October 2014, we acquired all of the ordinary shares and options of MDM Engineering Group Limited (“MDM Engineering”), which is based in South Africa and is a minerals process and project management company focused on the mining industry. MDM Engineering provides a wide range of services from preliminary and final feasibility studies, through to plant design, construction and commissioning. The results of operations of this business will be included within our Global E&C Group business segment.

We have also made and continue to explore acquisitions within the power generation industry to complement the products which our Global Power Group offers. During April 2014, we acquired certain assets of the Siemens Environmental Systems and Services business from Siemens Energy, Inc. This business supplies and services clean air technologies for use in power plants and industrial facilities. The results of operations of this business are included within our Global Power Group business segment.

There is no assurance that we will consummate any acquisitions in the future. Please refer to Note 2 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our acquisition activities in 2014 and 2013.

On April 17, 2013, our Board of Directors approved a plan to sell our waste-to-energy facility in Camden, New Jersey and we completed the sale of the facility in August 2013. The presentation of the financial results and asset and liability balances of this business for the periods prior to the completion of the sale have been reclassified on our consolidated statement of operations, consolidated balance sheet and consolidated statement of cash flows under the respective captions related to discontinued operations. These reclassifications have also been made in the notes to our consolidated financial statements and in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section. Prior to the sale, the business had been classified on our consolidated balance sheet under the respective current and non-current captions of assets held for sale and liabilities held for sale and we did not recognize depreciation on long-lived assets while held for sale. Our Camden facility was formerly included in

 

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our Global Power Group business segment. We completed the sale of our Camden facility in August 2013 for a minimal gain. Please refer to Note 14 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our discontinued operations.

On February 13, 2014, we entered into an Implementation Agreement with AMEC plc (“AMEC”) relating to the pending acquisition of all of the issued and to be issued registered shares, par value CHF 3.00 per share, of Foster Wheeler AG (the “FW shares”) by AMEC. On the terms and subject to the conditions of the Implementation Agreement, on October 7, 2014, AMEC commenced an exchange offer (the “Offer”) to acquire all of the FW shares. The Offer will expire at 11:59 p.m. New York City time on November 4, 2014, unless the expiration time of the Offer is extended by AMEC. Please refer to Note 1 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding the AMEC Offer.

On February 26, 2014, our Board of Directors approved a proposal to our shareholders for a one-time dividend of $0.40 per share, which was approved by our shareholders and paid in May 2014. Please refer to Note 1 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our dividend.

Summary Financial Results for the Quarter and Nine Months Ended September 30, 2014

Continuing Operations

Our summary financial results for the quarters and nine months ended September 30, 2014 and 2013 from continuing operations are as follows:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014     2013  

Consolidated Statement of Operations:

          

Operating revenues(1)

   $ 859,721      $ 801,826      $ 2,445,187     $ 2,455,377  

Contract profit(1)

     130,752        153,466        381,332       426,519  

Selling, general and administrative expenses(1)

     80,118        85,521        245,312       265,654  

Income from continuing operations attributable to Foster Wheeler AG

   $ 25,440      $ 48,853      $ 128,101     $ 134,073  

Earnings per share:

          

Basic

   $ 0.25      $ 0.50      $ 1.28     $ 1.33  

Diluted

   $ 0.25      $ 0.50      $ 1.27     $ 1.32  

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

         $ (51,256   $ 114,082  

 

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

Cash and cash equivalents totaled $447,658 and $556,190 as of September 30, 2014 and December 31, 2013, respectively.

EBITDA, as discussed and defined within the section entitled “—Results of Operations–Continuing Operations-EBITDA” within this Item 2, is used to measure the operating performance of our operating groups and is referred to below in our discussion of income from continuing operations attributable to Foster Wheeler AG.

Income from continuing operations attributable to Foster Wheeler AG decreased in the third quarter of 2014, compared to the same period of 2013. This decrease was primarily driven by the pre-tax net decrease in EBITDA of $21,700 from our operating groups. Our Global Power Group experienced a decrease in EBITDA of $24,700 during the third quarter of 2014, compared to the same period of 2013, whereas our Global E&C Group experienced a slight increase in EBITDA of $3,000 when comparing the same two periods. The decrease in EBITDA also included the unfavorable impact related to third-party transaction fees during the third quarter of 2014 in connection with the Offer by AMEC of $3,500. Please refer to Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information related to the Offer by AMEC. Additionally, our results in the third quarter of 2014 were unfavorably impacted by a higher effective tax rate of 37.9%, compared to an effective tax rate of 26.9% during the same period in 2013.

 

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Income from continuing operations attributable to Foster Wheeler AG decreased in the first nine months of 2014, compared to the same period of 2013. This decrease was primarily driven by pre-tax items which included the unfavorable impact related to the inclusion of an asbestos-related insurance recovery gain of $15,800 recognized in the first nine months of 2013 and the unfavorable impact related to third-party transaction fees during the first nine months of 2014 in connection with the Offer by AMEC of $11,200, partially offset by a credit relating to the reversal of interest and penalties on unrecognized tax benefits totalling approximately $11,500 recognized in the first nine months of 2014. During the first nine months of 2014, we settled audits with non-U.S. tax authorities which resulted in the release of previously recorded liabilities for unrecognized tax benefits of approximately $11,500, which included the reversal of interest expense of $3,400 and the reversal of penalties within our C&F Group of $8,100. EBITDA from our operating groups was relatively unchanged during first nine months of 2014, compared to the same period of 2013. Our Global Power Group experienced a decrease in EBITDA of $2,200 during the first nine months of 2014, compared to the same period of 2013, whereas our Global E&C Group experienced an increase in EBITDA of $2,100 when comparing the same two periods. Please refer to the section entitled “—Results of Operations–Continuing Operations-EBITDA” within this Item 2 for EBITDA and the impact of the reversal of penalties by business segment and please refer to Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information related to the Offer by AMEC.

Please refer to the section entitled “—Results of Operations-Continuing Operations-Business Segments,” within this Item 2, for further discussion related to EBITDA results for both of our operating groups.

Discontinued Operations

Income from discontinued operations attributable to Foster Wheeler AG during the quarter and nine months ended September 30, 2013 was $1,800 and $300, respectively. During the quarter and nine months ended September 30, 2013, the financial results of our Camden, New Jersey facility were favorably impacted by not recognizing depreciation expense, while the facility was held as a business available for sale, which resulted in a favorable impact on our results of $1,200 and $3,600, respectively. This business was sold in the third quarter of 2013 for a gain of $300. Income from discontinued operations attributable to Foster Wheeler AG during the first nine months of 2013 also included the impact of an impairment charge of $3,900 related to our waste-to-energy facility in Camden, New Jersey.

Please refer to Note 14 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our discontinued operations.

New Orders and Backlog of Unfilled Orders

The tables below summarize our new orders and backlog of unfilled orders by period and include balances for discontinued operations for the quarter ended September 30, 2013, which were insignificant based on our consolidated and business group balances:

 

     Quarter Ended  
     September 30, 2014      June 30, 2014      September 30, 2013  

New orders, measured in terms of future revenues:

        

Global E&C Group*

   $ 472,400      $ 1,106,600      $ 1,498,400  

Global Power Group

     147,300        91,900        177,900  
  

 

 

    

 

 

    

 

 

 

Total*

   $ 619,700      $ 1,198,500      $ 1,676,300  
  

 

 

    

 

 

    

 

 

 

 

* Amounts for the Global E&C Group include flow-through revenues, as defined in the section entitled —“Results of Operations-Continuing Operations-Operating Revenues” within this Item 2, of $44,600, $562,000, and $194,600 for the quarters ended September 30, 2014, June 30, 2014 and September 30, 2013, respectively.

 

     As of  
     September 30, 2014      June 30, 2014      December 31, 2013  

Backlog of unfilled orders, measured in terms of future revenues

   $ 4,119,600      $ 4,547,700      $ 4,004,600  

Backlog, measured in terms of Foster Wheeler scope*

   $ 3,409,800      $ 3,737,100      $ 3,578,400  

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

     20,000        21,400        21,400  

 

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

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

 

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Challenges and Drivers

Our primary operating focus continues to be booking quality new business and effectively and efficiently executing our contracts. The global markets in which we operate are largely dependent on overall economic conditions and global or regional economic growth rates and the resultant demand for oil and gas, electric power, petrochemicals, refined products and minerals and metals. Both of our business groups have been impacted by unfavorable economic growth rates in most of their respective global markets in recent years, with global economic activity having improved only slightly since the latter portion of 2013. Expectations of stronger global economic growth for the remainder of 2014 and for 2015 have recently become somewhat weaker than what they had been earlier in 2014. These expectations have been impacted by several increasing downside risks related to: slower growth than anticipated in the emerging market economies; risk of lower-than-expected inflation in advanced economies, particularly the Eurozone, where persistent low inflation could harm the fragile economic recovery by reducing consumer spending and impacting the ability of governments and businesses to repay debt; and increasing geopolitical risks. Geopolitical issues are already negatively impacting project investment in the affected and surrounding countries, with delays or cancellations of planned investments becoming more widespread. These geopolitical developments include the security situation in Iraq and Syria, which has deteriorated further in recent weeks, the political and civil situation in Ukraine along with the tightening of sanctions against Russia, and the political unrest earlier this year in Thailand. Additionally, in Venezuela, the economic crisis continues to impact timely payment by the national oil company to contractors, including us, for work executed under contract. If any of these risks materialize and/or intensify, the ability of both of our business groups to book work could be negatively impacted, which could have a material negative impact on our business.

In the engineering and construction industry, we expect long-term demand to be strong for the end products produced by our clients, and we believe that this long-term demand will continue to stimulate investment by our clients in new, expanded and upgraded facilities. Our clients plan their investments based on long-term time horizons. We believe that global demand for energy, chemicals, minerals and pharmaceuticals will continue to grow over the long-term and that clients will continue to invest in new and upgraded capacity to meet that demand. Global markets in the engineering and construction industry are experiencing intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Client companies are placing planned investments under significantly greater scrutiny and planned projects are facing greater internal competition for available capital expenditure within their organizations. This is leading to protracted decision-making prior to making final investment decisions, as well as project postponement, cancellation, piecemeal release of work or significant scope reduction. This is evident in all regions, including North America, where final investment decisions by clients for projects relating to the monetization of shale gas are proceeding more slowly than expected. However, we are still seeing clients continuing to develop new projects and, after making final investment decisions, moving forward with planned projects. The challenges and drivers for our Global E&C Group are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments-Global E&C Group-Overview of Segment,” within this Item 2.

Global gross domestic product, or GDP, growth is a key driver of demand for power. The slow economic growth in recent years has negatively impacted the demand for our products and services. However, we believe that a gradual upturn in global economic growth will continue to strengthen during the remainder of 2014 and as we progress into 2015, which we further believe will improve demand for the products and services of our Global Power Group, compared to recent years. However, a number of constraining market factors continue to impact the markets that we serve. These factors include political and environmental sensitivity regarding coal-fired steam generators in certain geographies and the outlook for continued lower natural gas pricing over the next three to five years in North America, driven by an increasing supply of natural gas, which has increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. In addition, the constraints on the global credit market may continue to impact some of our clients’ investment plans as these clients are affected by the availability and cost of financing, as well as their own financial strategies, which could include cash conservation. These factors could negatively impact investment in the power sector, which in turn could negatively impact our Global Power Group’s ability to book work and which could have a material negative impact on our Global Power Group’s business. The challenges and drivers for our Global Power Group are discussed in more detail in the section entitled “—Results of Operations-Continuing Operations-Business Segments-Global Power Group-Overview of Segment,” within this Item 2.

 

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Results of Operations – Continuing Operations

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

Operating Revenues

Our operating revenues by geographic region, based upon where our projects are being executed, for the quarters and nine months ended September 30, 2014 and 2013, were as follows:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014      2013      $ Change     % Change     2014      2013      $ Change     % Change  

Africa

   $ 17,074      $ 12,694      $ 4,380       34.5   $ 44,558      $ 52,341      $ (7,783     (14.9 )% 

Asia Pacific

     206,395        208,073        (1,678     (0.8 )%      652,952        612,348        40,604       6.6

Europe

     197,138        192,318        4,820       2.5     542,920        596,154        (53,234     (8.9 )% 

Middle East

     135,609        91,482        44,127       48.2     398,467        236,284        162,183       68.6

North America

     255,079        205,570        49,509       24.1     626,939        729,583        (102,644     (14.1 )% 

South America

     48,426        91,689        (43,263     (47.2 )%      179,351        228,667        (49,316     (21.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 859,721      $ 801,826      $ 57,895       7.2   $ 2,445,187      $ 2,455,377      $ (10,190     (0.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

We operate through two business groups: our Global E&C Group and our Global Power Group. The composition of our operating revenues varies from period to period based on the portfolio of contracts in execution during any given period. Our operating revenues are further dependent upon the strength of the various geographic markets and industries we serve and our ability to address those markets and industries. Please refer to the section entitled “—Business Segments,” within this Item 2, for a discussion of the products and services, geographic markets and industries of our business groups.

Our operating revenues for each of our business groups for the quarters and nine months ended September 30, 2014 and 2013 were as follows:

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended:

          

Global E&C Group

   $ 693,726      $ 615,028      $ 78,698       12.8

Global Power Group

     165,995        186,798        (20,803     (11.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 859,721      $ 801,826      $ 57,895       7.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended:

          

Global E&C Group

   $ 1,892,460      $ 1,865,721      $ 26,739       1.4

Global Power Group

     552,727        589,656        (36,929     (6.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,445,187      $ 2,455,377      $ (10,190     (0.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Our operating revenues increased in the quarter ended September 30, 2014, compared to the same period in 2013, which included the impact of decreased flow-through revenues of $86,800, as described below. Excluding the impact of the change in flow-through revenues and currency impacts, our operating revenues during the quarter ended September 30, 2014 increased 20% compared to the same period in 2013. The increase in operating revenues, excluding flow-through revenues and currency impacts, in the quarter ended September 30, 2014 was the net result of increased operating revenues in our Global E&C Group, partially offset by decreased operating revenues in our Global Power Group.

Our operating revenues decreased in the nine months ended September 30, 2014, compared to the same period in 2013, which included the impact of decreased flow-through revenues of $235,500, as described below. Excluding the impact of the change in flow-through revenues and currency impacts, our operating revenues during the nine months ended September 30, 2014 increased 11%, compared to the same period in 2013. This increase was the net result of increased operating revenues, excluding flow-through revenues, in our Global E&C Group, partially offset by decreased operating revenues in our Global Power Group.

 

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

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

Contract Profit

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 130,752      $ 153,466      $ (22,714     (14.8 )% 

Nine Months Ended

   $ 381,332      $ 426,519      $ (45,187     (10.6 )% 

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

Contract profit decreased during the quarter and nine months ended September 30, 2014, compared to the same periods in 2013. The decrease in contract profit during the quarter ended September 30, 2014 was the net result of decreased contract profit in our Global Power Group, partially offset by increased contract profit in our Global E&C Group, whereas the decrease in contract profit during the nine months ended September 30, 2014 was the result of decreased contract profit in both operating groups.

Please refer to the section entitled “—Business Segments,” within this Item 2, for further information related to contract profit and contract profit margins for both of our operating groups.

Selling, General and Administrative (SG&A) Expenses

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 80,118      $ 85,521      $ (5,403     (6.3 )% 

Nine Months Ended

   $ 245,312      $ 265,654      $ (20,342     (7.7 )% 

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

SG&A expenses decreased in the third quarter of 2014, compared to the same period in 2013, primarily as a result of the favorable impact of a decreased charge for severance-related postemployment benefits of $2,100, decreased sales pursuit costs of $1,800 and decreased general and administrative expenses of $1,400.

SG&A expenses decreased in the first nine months of 2014, compared to the same period in 2013, primarily as a result of decreased sales pursuit costs of $12,300, decreased general and administrative expenses of $6,100 and the favorable impact of a decreased charge for severance-related postemployment benefits of $4,300, partially offset by increased SG&A expenses of $2,200 related to the settlement of an earnout provision in connection with a prior business combination.

Please refer to Note 2 to the consolidated financial statements in this quarterly report on Form 10-Q for further information related to the settlement of an earnout provision in connection with a prior business combination discussed above.

Other Income, net

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 7,684      $ 9,873      $ (2,189     (22.2 )% 

Nine Months Ended

   $ 54,234      $ 32,638      $ 21,596       66.2

 

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Other income, net during the quarter and nine months ended September 30, 2014 included equity earnings of $6,100 and $16,000, respectively. Our equity earnings were primarily generated from our ownership interests in build, own and operate projects in Chile and Italy. During the quarter and nine months ended September 30, 2014, our equity earnings from our Global Power Group’s project in Chile were $4,400 and $13,400, respectively, while our equity earnings from our Global E&C Group’s projects in Italy were $400 and $1,200, respectively.

Other income, net during the nine months ended September 30, 2014 also included income recognized by our Global Power Group related to a cash payment as a result of a favorable settlement in connection with the terms related to the expiration of a steam generator technology license of $32,500.

Other income, net decreased in the third quarter of 2014, compared to the same period in 2013. This decrease was primarily driven by the decreased equity earnings from our Global E&C Group’s projects in Italy of $1,100 and decreased equity earnings from our Global Power Group’s project in Chile of $1,000.

Other income, net increased in the first nine months of 2014, compared to the same period in 2013. This increase was primarily driven by the favorable licensing settlement of $32,500 discussed above, partially offset by the decreased equity earnings from our Global Power Group’s project in Chile of $9,100 and decreased equity earnings from our Global E&C Group’s projects in Italy of $3,700.

For further information related to our equity earnings, please refer to the sections within this Item 2 entitled “—Business Segments-Global Power Group” for our Global Power Group’s project in Chile and “—Business Segments-Global E&C Group” for our Global E&C Group’s projects in Italy, as well as Note 3 to the consolidated financial statements included in this quarterly report on Form 10-Q.

Other Deductions, net

 

     September 30, 2014      September 30, 2013      $ Change      % Change  

Quarter Ended

   $ 13,384      $ 7,557      $ 5,827        77.1

Nine Months Ended

   $ 25,613      $ 23,359      $ 2,254        9.6

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

Other deductions, net in the third quarter of 2014 consisted primarily of non-transaction-related legal fees of $6,600, third-party transaction fees in connection with the Offer by AMEC of $3,500 and bank fees of $1,000.

Other deductions, net increased in the third quarter of 2014, compared to the same period in 2013. This increase was primarily driven by third-party transaction fees in connection with the Offer by AMEC of $3,500 and non-transaction-related legal fees of $1,200.

Other deductions, net in the first nine months of 2014 consisted primarily of non-transaction-related legal fees of $14,200, third-party transaction fees in connection with the Offer by AMEC of $11,200, bank fees of $2,200 and consulting fees of $1,400, partially offset by a credit related to the reversal of previously accrued penalties on unrecognized tax benefits of $8,100, which was recognized in our C&F Group. During the first nine months of 2014, we settled audits with non-U.S. tax authorities which resulted in the release of previously recorded liabilities for penalties on unrecognized tax benefits of $8,100.

Other deductions, net increased in the first nine months of 2014, compared to the same period in 2013. This increase was primarily the net result of third-party transaction fees in connection with the Offer by AMEC of $11,200 offset by decreased net penalties on unrecognized tax benefits of $8,500, which included the credit relating to the reversal of previously accrued penalties on unrecognized tax benefits of $8,100 recognized during the first nine months of 2014 as discussed above.

Net foreign currency exchange transaction gains and losses were primarily driven by exchange rate fluctuations on cash balances held by certain of our subsidiaries that were denominated in a currency other than the functional currency of those subsidiaries.

 

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Interest Income

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 1,207      $ 1,307      $ (100     (7.7 )% 

Nine Months Ended

   $ 4,120      $ 4,251      $ (131     (3.1 )% 

Interest income was relatively unchanged in the quarter and nine months ended September 30, 2014, compared to the same periods in 2013, which was the net result of lower investment yields on cash and cash equivalents balances, substantially offset by higher average cash and cash equivalents balances.

Interest Expense

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 2,669      $ 3,388      $ (719     (21.2 )% 

Nine Months Ended

   $ 4,485      $ 9,976      $ (5,491     (55.0 )% 

Interest expense decreased in the quarter ended September 30, 2014, compared to the same period in 2013, which was the result of the favorable impact from decreased average borrowings, excluding foreign currency translation effects.

Interest expense decreased in the nine months ended September 30, 2014, compared to the same period in 2013, which was the result of a credit related to the reversal of previously accrued interest on unrecognized tax benefits of $3,400 recognized in the nine months ended September 30, 2014, and the favorable impact from decreased average borrowings, excluding foreign currency translation effects. During the nine months ended September 30, 2014, we settled audits with non-U.S. tax authorities which resulted in the release of previously recorded liabilities for interest expense on unrecognized tax benefits of $3,400.

Net Asbestos-Related Provision/(Gain)

 

     September 30, 2014      September 30, 2013     $ Change     % Change  

Quarter Ended

   $ 1,956      $ 2,000     $ (44     (2.2 )% 

Nine Months Ended

   $ 5,173      $ (9,750   $ 14,923       (153.1 )% 

The net asbestos-related provision was relatively unchanged during the third quarter of 2014, compared to the same period in 2013.

The increase in the net asbestos-related provision in the nine months ended September 30, 2014, compared to the same period in 2013, was primarily the result of the unfavorable impact of the inclusion of an insurance recovery gain recognized during the nine months ended September 30, 2013 upon collection of a $15,800 insurance receivable related to an insolvent insurance carrier, which we had previously written-off. Please refer to Note 12 to the consolidated financial statements included in this quarterly report on Form 10-Q for additional information.

Provision for Income Taxes

 

     September 30, 2014     September 30, 2013     $ Change     % Change  

Quarter Ended

   $ 15,753     $ 17,794     $ (2,041     (11.5 )% 

Effective tax rate

     37.9     26.9    

Nine Months Ended

   $ 31,826     $ 36,273     $ (4,447     (12.3 )% 

Effective tax rate

     20.0     20.8    

Although we are a Swiss corporation, our shares are listed on a U.S. exchange; therefore, we reconcile our effective tax rate to the U.S. federal statutory rate of 35% to facilitate meaningful comparison with peer companies in the U.S. capital markets. Our effective tax rate can fluctuate significantly from period to period and may differ considerably from the U.S. federal statutory rate as a result of (i) income taxed in various non-U.S. jurisdictions with rates different from the U.S. statutory rate, (ii) our inability to recognize a tax benefit for losses generated by certain unprofitable operations and (iii) the varying mix of income earned in the jurisdictions in which we operate. In addition, our deferred tax assets are reduced by a valuation allowance when, based upon available evidence, it is

 

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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 2014

Our effective tax rate for the first nine months of 2014 was lower than the U.S. statutory rate of 35% primarily because of the net impact of the following:

 

  Income earned in non-U.S. jurisdictions contributed to an approximate nine-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 which occurred during the first nine months of 2014, primarily relating to the net reversal of previously accrued liabilities for uncertain tax positions, which were released as a result of tax examination settlements and reassessments of future liabilities in non-U.S. jurisdictions, provided a seven-percentage point reduction to the effective tax rate for the first nine months of 2014; and

 

  A valuation allowance increase because we were unable to recognize a tax benefit for losses subject to a valuation allowance in certain jurisdictions (primarily in the U.S.), which contributed to an approximate one-percentage point increase in 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% primarily because of 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 which occurred in the first nine months of 2013, 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 the tax rate on net deferred tax assets in a non-U.S. jurisdiction, provided a net one-percentage point reduction to the effective tax rate for the first nine months of 2013; 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 three-percentage point increase in our effective tax rate.

We monitor on a quarterly basis the need for valuation allowances against the deferred tax assets that have been established in all taxing jurisdictions. In determining whether a valuation allowance is necessary, we evaluate all available evidence, both positive and negative, including a review of both historical performance and expected future profitability. We rely on forecasted future income based on management’s judgment to determine the recoverability of our deferred tax assets and review such forecasts on an ongoing basis. If future results are less than projected and if tax planning alternatives do not offset those effects, a valuation allowance may be required to reduce the deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.

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

Net Income/(Loss) Attributable to Noncontrolling Interests

 

     September 30, 2014     September 30, 2013     $ Change     % Change  

Quarter Ended

   $ 323     $ (467   $ 790       (169.2 )% 

Nine Months Ended

   $ (824   $ 3,823     $ (4,647     (121.6 )% 

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

 

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Net income/(loss) attributable to noncontrolling interests experienced net income in the third quarter of 2014, compared to a net loss in the same period in 2013. This variance was the net result of a favorable change from our operations in Malaysia, which experienced a net loss in both quarters, partially offset by decreased net income at our subsidiary in China.

Net income/(loss) attributable to noncontrolling interests experienced a net loss in the first nine months of 2014, compared to net income in the same period in 2013. This variance was the net result of decreased net income at our subsidiary in Martinez, California due to a change in the project’s fee structure and allocation of earnings to our noncontrolling interest and, to a lesser extent, decreased net income from our operations in Poland and South Africa.

Please refer to the section entitled “—Business Segments-Global Power Group,” within this Item 2, for further discussion related to a change in the allocation of earnings to our noncontrolling interest at our subsidiary in Martinez, California.

EBITDA

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

In addition to our two business groups, which also represent operating segments for financial reporting purposes, we report 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 our C&F Group, which also represents an operating segment for financial reporting purposes.

 

     September 30, 2014      September 30, 2013      $ Change     % Change  

Quarter Ended

   $ 59,259      $ 84,067      $ (24,808     (29.5 )% 

Nine Months Ended

   $ 208,947      $ 223,150      $ (14,203     (6.4 )% 

EBITDA decreased in the third quarter of 2014, compared to the same period in 2013. This decrease was primarily driven by the net decrease in EBITDA of $21,700 from our operating groups. Our Global Power Group experienced a decrease in EBITDA of $24,700 during the third quarter of 2014, compared to the same period of 2013, whereas our Global E&C Group experienced a slight increase in EBITDA of $3,000 when comparing the same two periods. The decrease in EBITDA also included the unfavorable impact related to third-party transaction fees during the third quarter of 2014 in connection with the Offer by AMEC of $3,500. Please refer to Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information related to the Offer by AMEC.

EBITDA decreased in the first nine months of 2014, compared to the same period in 2013. This decrease was primarily driven by the unfavorable impact related to the inclusion of an asbestos-related insurance recovery gain of $15,800 recognized in the first nine months of 2013 and the unfavorable impact related to third-party transaction fees during the first nine months of 2014 in connection with the Offer by AMEC of $11,200, partially offset by a credit relating to the reversal of previously accrued penalties on unrecognized tax benefits of $8,100 recognized in our C&F Group during the first nine months of 2014. During the first nine months of 2014, we settled audits with non-U.S. tax authorities which resulted in the release of previously recorded liabilities for penalties on unrecognized tax benefits of approximately $8,100, which were recorded in other deductions, net on the consolidated statement of operations. EBITDA from our operating groups was relatively unchanged during first nine months of 2014, compared to the same period of 2013. Our Global Power Group experienced a decrease in EBITDA of $2,200 during the first nine months of 2014, compared to the same period of 2013, whereas our Global E&C Group experienced an increase in EBITDA of $2,100 when comparing the same two periods.

Please refer to the section below entitled “—Business Segments,” for further discussion related to EBITDA results for both of our operating groups.

 

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

 

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

 

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

 

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

 

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

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

EBITDA from continuing operations:

        

Global E&C Group

   $ 62,903     $ 59,940     $ 159,366     $ 157,261  

Global Power Group

     20,724       45,428       113,544       115,699  

C&F Group(1)

     (24,368     (21,301     (63,963     (49,810
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations

     59,259       84,067       208,947       223,150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Interest expense(2)

     2,669       3,388       4,485       9,976  

Less: Depreciation and amortization

     15,397       14,032       44,535       42,828  

Less: Provision for income taxes

     15,753       17,794       31,826       36,273  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to Foster Wheeler AG

     25,440       48,853       128,101       134,073  

Income from discontinued operations attributable (3) to Foster Wheeler AG

     —         1,760       —         265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Foster Wheeler AG

   $ 25,440     $ 50,613     $ 128,101     $ 134,338  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes general corporate income and expense, our captive insurance operation and the elimination of transactions and balances related to intercompany interest.
(2) Interest expense during the nine months ended September 30, 2014 included a credit of $3,400 related to the reversal of previously accrued interest expense on unrecognized tax benefits which were released as a result of settlements with non-U.S. tax authorities.
(3) Income from discontinued operations for the nine months ended September 30, 2013 included an impairment charge of $3,900 recognized in connection with our Camden, New Jersey waste-to-energy facility. Please refer to Note 14 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information.

 

EBITDA in the above table includes the following:    Quarter Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

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

           

Global E&C Group

   $ 2,400      $ 13,800      $ 13,600      $ 38,200  

Global Power Group

     3,800        16,400        23,000        36,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,200      $ 30,200      $ 36,600      $ 74,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

License settlement in our Global Power Group(2)

   $ —        $ —        $ 32,500      $ —    

Litigation settlement in our E&C Group(3)

     —          —          3,000        —    

Reversal of previously accrued penalties on unrecognized tax benefits in our C&F Group(4)

        —          8,100     

Net asbestos-related provision/(gain) in our C&F Group(5)

   $ 2,000      $ 2,000      $ 5,200      $ (9,800

Charges for severance-related postemployment benefits:

           

Global E&C Group

   $ 800      $ 1,000      $ 2,800      $ 3,900  

Global Power Group

     600        3,000        700        4,100  

C&F Group

     —          —          —          400  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,400      $ 4,000      $ 3,500      $ 8,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Please refer to “Revenue Recognition on Long-Term Contracts” in Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information regarding changes in our final estimated contract profit.
(2) During the nine months ended September 30, 2014, our Global Power Group received a cash payment as a result of a favorable settlement in connection with the terms related to the expiration of a steam generator technology license, which was recognized in other income, net.
(3) During the nine months ended September 30, 2014, our Global E&C Group recognized a favorable impact to EBITDA of $3,000 related to a post judgment settlement of a lawsuit for less than the previously accrued amount, which was recognized in other deductions, net.
(4) During the nine months ended September 30, 2014, other deductions, net included a credit of $8,100 related to the reversal of previously accrued penalties on unrecognized tax benefits which were released as a result of settlements with non-U.S. tax authorities.
(5) Please refer to Note 13 to the consolidated financial statements included in this quarterly report on Form 10-Q for further information regarding the revaluation of our asbestos liability and related asset.

The accounting policies of our business segments are the same as those described in our summary of significant accounting policies as disclosed in our 2013 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.

 

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Business Segments

Global E&C Group

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014      2013      $ Change      % Change     2014      2013      $ Change      % Change  

Operating revenues

   $ 693,726      $ 615,028      $ 78,698        12.8   $ 1,892,460      $ 1,865,721      $ 26,739        1.4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 62,903      $ 59,940      $ 2,963        4.9   $ 159,366      $ 157,261      $ 2,105        1.3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Results

Our Global E&C Group’s operating revenues by geographic region for the quarter and nine months ended September 30, 2014 and 2013, based upon where our projects are being executed, were as follows:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014      2013      $ Change     % Change     2014      2013      $ Change     % Change  

Africa

   $ 17,061      $ 12,639      $ 4,422       35.0   $ 44,542      $ 52,259      $ (7,717     (14.8 )% 

Asia Pacific

     133,781        115,028        18,753       16.3     385,217        369,897        15,320       4.1

Europe

     155,339        130,874        24,465       18.7     441,427        408,172        33,255       8.1

Middle East

     129,980        91,099        38,881       42.7     383,261        231,764        151,497       65.4

North America

     214,847        180,860        33,987       18.8     482,499        592,512        (110,013     (18.6 )% 

South America

     42,718        84,528        (41,810     (49.5 )%      155,514        211,117        (55,603     (26.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 693,726      $ 615,028      $ 78,698       12.8   $ 1,892,460      $ 1,865,721      $ 26,739       1.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Please refer to the “—Overview of Segment” section below for a discussion of our Global E&C Group’s market outlook.

Quarter Ended September 30, 2014

Our Global E&C Group experienced an increase in operating revenues of 13% in the third quarter of 2014, compared to the same period in 2013. This change included decreased flow-through revenues of $85,100. Excluding flow-through revenues and currency impacts, our Global E&C Group’s operating revenues increased 33% in the third quarter of 2014, compared to the same period in 2013.

Our Global E&C Group’s EBITDA increased in the third quarter of 2014, compared to the same period in 2013. This increase was primarily driven by an increase in contract profit of $4,300, partially offset by decreased equity earnings from our Global E&C Group’s projects in Italy of $1,100, as described below. The contract profit increase was driven by increased volume of operating revenues, excluding flow-through revenues, partially offset by decreased contract profit margin.

Nine Months Ended September 30, 2014

Our Global E&C Group experienced an increase in operating revenues of 1% in the first nine months of 2014, compared to the same period in 2013. This change included decreased flow-through revenues of $234,000. Excluding flow-through revenues and currency impacts, our Global E&C Group’s operating revenues increased 19% in the first nine months of 2014, compared to the same period in 2013.

Our Global E&C Group’s EBITDA increased in the first nine months of 2014, compared to the same period in 2013. The increase in EBITDA was primarily driven by decreased sales pursuit costs of $8,100, a favorable impact of $3,000 related to a post judgment settlement of a lawsuit during the first nine months of 2014 for less than the previously accrued amount and the favorable impact of a decreased charge for severance-related postemployment benefits recognized in SG&A on our consolidated statement of operations of $1,700. These increases were partially offset by decreased contract profit of $7,600 and decreased equity earnings from our Global E&C Group’s projects in Italy of $3,700, described below, and increased SG&A expenses of $2,200 related to the settlement of an earnout provision in connection with a prior business combination. The remaining variance compared to the first nine months of 2013 was comprised of several smaller movements from multiple categories within EBITDA. The contract profit decrease was driven by decreased contract profit margin, partially offset by increased volume of operating revenues, excluding flow-through revenues.

Please refer to Note 2 to the consolidated financial statements in this quarterly report on Form 10-Q for further information related to the settlement of an earnout provision in connection with a prior business combination discussed above.

 

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Equity Earnings from Projects in Italy

Our projects in Italy recognized net equity earnings of $400 and $1,500 in the third quarter of 2014 and 2013, respectively, and recognized net equity earnings of $1,200 and $4,900 in the first nine months of 2014 and 2013, respectively. Our equity earnings were unfavorably impacted in the quarter and nine months ended September 30, 2014, compared to the corresponding periods in 2013, by the expiration of a royalty agreement at our project that generated earnings from royalty payments linked to the price of natural gas. This project experienced decreased equity earnings in the quarter and nine months ended September 30, 2014, compared to the corresponding periods in 2013, of $1,000 and $2,300, respectively. Additionally, our equity earnings from our projects in Italy, during the nine months ended September 30, 2014, were unfavorably impacted by a provision for a tariff related to the net power supplied to the electrical grid at our waste-to-energy project. The impact of this provision decreased our equity earnings by $1,300, of which $1,100 related to the impact of the tariff for years prior to 2014. Our waste-to-energy project experienced a decrease in equity earnings in the nine months ended September 30, 2014, compared to the corresponding period in 2013, of $700.

Overview of Segment

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

Our Global E&C Group provides the following services:

 

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

 

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

 

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

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

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

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

Our primary operating focus continues to be booking quality new business and effectively and efficiently executing our contracts. The global markets in which we operate are largely dependent on overall economic conditions and global or regional economic growth rates and the resultant demand for oil and gas, electric power, petrochemicals, refined products and minerals and metals. Our Global E&C Group has been impacted by unfavorable economic growth rates in most of its global markets in recent years, with global economic activity having improved only slightly since the latter portion of 2013. Expectations of stronger global economic growth for the remainder of 2014 and for 2015 have recently become somewhat weaker than what they had been earlier in 2014. These expectations have been impacted by several increasing downside risks related to: slower growth than anticipated in the emerging market economies; risk of lower-than-expected inflation in advanced economies, particularly the Eurozone, where

 

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persistent low inflation could harm the fragile economic recovery by reducing consumer spending and impacting the ability of governments and businesses to repay debt; and increasing geopolitical risks. Geopolitical issues are already negatively impacting project investment in the affected and surrounding countries, with delays or cancellations of planned investments becoming more widespread. These geopolitical developments include the security situation in Iraq and Syria, which has deteriorated further in recent weeks, the political and civil situation in Ukraine along with the tightening of sanctions against Russia and the political unrest earlier this year in Thailand. Additionally, in Venezuela, the economic crisis continues to impact timely payment by the national oil company to contractors, including us, for work executed under contract. If any of these risks materialize and/or intensify, the ability of our Global E&C Group to book work could be negatively impacted, which could have a material negative impact on our business.

In the engineering and construction industry, we expect long-term demand to be strong for the end products produced by our clients, and we believe that this long-term demand will continue to stimulate investment by our clients in new, expanded and upgraded facilities. Our clients plan their investments based on long-term time horizons. We believe that global demand for energy, chemicals, minerals and pharmaceuticals will continue to grow over the long-term and that clients will continue to invest in new and upgraded capacity to meet that demand. Global markets in the engineering and construction industry are experiencing intense competition among engineering and construction contractors and pricing pressure for contracts awarded. Client companies are placing planned investments under significantly greater scrutiny and planned projects are facing greater internal competition for available capital expenditure within their organizations. This is leading to protracted decision-making prior to making final investment decisions, as well as project postponement, cancellation, piecemeal release of work or significant scope reduction. This is evident in all regions, including North America, where final investment decisions by clients for projects relating to the monetization of shale gas are proceeding more slowly than expected. However, we are still seeing clients continuing to develop new projects and, after making final investment decisions, moving forward with planned projects.

Although bookings in the third quarter of 2014 were below our expectations, we continue to be successful in booking contracts of varying types and sizes in our key end markets, including two project management consultancy awards and a detailed design and procurement award for upgrade projects at three refineries in South America, a front-end engineering design award for a new petrochemicals facility in Asia, an engineering, procurement and construction management contract for a gas turbine generator project in Africa, the release of the balance of construction and commissioning work for an industrial facility in North America, engineering and material supply for six fired heaters for a refinery in Eastern Europe, an engineering, procurement and construction, or EPC, award for a midstream facility in North America, owner’s engineer work for an LNG facility in North America, an EPC award for auxiliary heaters for a midstream client in North America, an award for engineering of a minerals processing facility for a minerals and mining client in South America, an EPC award for a chemicals facility in China, a further release of EPC work for a refinery upgrade in Europe, a construction management award for a pharmaceuticals facility in North America, an engineering, procurement and fabrication award for delayed coker heaters at a European refinery and an engineering and procurement award for a hot oil heater in South America.

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

Global Power Group

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014      2013      $ Change     % Change     2014      2013      $ Change     % Change  

Operating revenues

   $ 165,995      $ 186,798      $ (20,803     (11.1 )%    $ 552,727      $ 589,656      $ (36,929     (6.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

   $ 20,724      $ 45,428      $ (24,704     (54.4 )%    $ 113,544      $ 115,699      $ (2,155     (1.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Results

Our Global Power Group’s operating revenues by geographic region for the quarter and nine months ended September 30, 2014 and 2013, based upon where our projects are being executed, were as follows:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2014      2013      $ Change     % Change     2014      2013      $ Change     % Change  

Africa

   $ 13      $ 55      $ (42     (76.4 )%    $ 16      $ 82      $ (66     (80.5 )% 

Asia Pacific

     72,614        93,045        (20,431     (22.0 )%      267,735        242,451        25,284       10.4

Europe

     41,799        61,444        (19,645     (32.0 )%      101,493        187,982        (86,489     (46.0 )% 

Middle East

     5,629        383        5,246       1369.7     15,206        4,520        10,686       236.4

North America

     40,232        24,710        15,522       62.8     144,440        137,071        7,369       5.4

South America

     5,708        7,161        (1,453     (20.3 )%      23,837        17,550        6,287       35.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 165,995      $ 186,798      $ (20,803     (11.1 )%    $ 552,727      $ 589,656      $ (36,929     (6.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Please refer to the “— Overview of Segment” section below for a discussion of our Global Power Group’s market outlook.

Quarter Ended September 30, 2014

Our Global Power Group experienced a decrease in operating revenues of 11% in the third quarter of 2014, compared to the same period in 2013. This decrease was primarily driven by decreased volume of business. Excluding the impact from currency fluctuations, our Global Power Group’s operating revenues decreased 12% in the third quarter of 2014, compared to the same period in 2013.

Our Global Power Group’s EBITDA decreased in the third quarter of 2014, compared to the same period in 2013. The decrease in EBITDA was primarily driven by the impact of decreased contract profit, excluding the change related to our U.S. build, own and operate project described below, which contributed a decrease in EBITDA of $27,300 and decreased equity earnings from our Global Power Group’s project in Chile of $1,000, described below, partially offset by decreased SG&A expenses of $2,700. The decrease in contract profit was the result of decreased contract profit margins and, to a lesser extent, decreased volume of operating revenues.

Nine Months Ended September 30, 2014

Our Global Power Group experienced a decrease in operating revenues of 6% in the nine months ended September 30, 2014, compared to the same period in 2013. This decrease was primarily driven by decreased volume of business and a decrease in operating revenues of $13,400 resulting from a change in the operations and maintenance fee structure at one of our build, own and operate projects in the U.S. Please see the section below entitled “U.S. Build, Own and Operate Project” for additional information. Excluding the impacts from the U.S. build, own and operate project and currency fluctuations, our Global Power Group’s operating revenues decreased 5% in the nine months ended September 30, 2014, compared to the same period in 2013.

Our Global Power Group’s EBITDA decreased in the first nine months of 2014, compared to the same period in 2013. The decrease in EBITDA was primarily driven by decreased contract profit, excluding the change related to our U.S. build, own and operate project described below, which contributed a decrease in EBITDA of $36,200, decreased equity earnings from our Global Power Group’s project in Chile of $9,100, described below, and increased non-transaction-related legal fees of $4,800. The above items which decreased EBITDA were partially offset by income recognized during the first nine months of 2014 related to a cash payment received as a result of a favorable settlement in connection with the terms related to the expiration of a steam generator technology license of $32,500, the impact of decreased SG&A expenses of $8,300, the favorable impact of a decreased charge for severance-related postemployment benefits recognized in SG&A on our consolidated statement of operations of $2,200 and the favorable impact of increased net foreign exchange transactions gains of $2,500. The remaining variance compared to the nine months ended September 30, 2013 was comprised of several smaller movements from multiple categories within EBITDA. The decrease in contract profit was the result of decreased contract profit margins and, to a lesser extent, decreased volume of operating revenues.

 

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Equity Earnings from Project in Chile

Our equity earnings from our project in Chile were $4,400 and $5,400 in the third quarter of 2014 and 2013, respectively, and $13,400 and $22,500 in the nine months ended September 30, 2014 and 2013, respectively. Our equity earnings in the quarter and nine months September 30, 2014 were unfavorably impacted by a decrease in the average electric tariff rates in 2014, as compared to the average electric tariff rates in the corresponding periods in 2013, which resulted in decreased equity earnings of $1,600 and $2,600, respectively. The decrease in equity earnings in the nine months ended September 30, 2014, compared to the same period in 2013, was primarily driven by three additional items: a $3,200 increase in our share of the project’s 2012 earnings recognized in the nine months ended September 30, 2013 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, a $3,000 increase from the reversal of an insurance-related contingency during the second quarter of 2013 and the unfavorable impact of a reversal of a risk contingency in the first quarter of 2013 associated with the insurance proceeds received by our project in Chile in connection with its 2010 earthquake loss. Excluding the above items, equity earnings would have shown an increase when comparing the nine months ended September 30, 2014 to the same period in 2013.

U.S. Build, Own and Operate Project

Martinez Cogen Limited Partnership, or MCLP, a limited liability partnership which is a majority-owned subsidiary of our Global Power Group, owns and operates a combined-cycle gas turbine facility located in Martinez, California. MCLP produces electric power and steam, and its primary customer is a refinery. During the first five months of 2013, MCLP earned revenues from the sale of power and steam to the refinery and of electric power to the grid. Pursuant to a new agreement effective in May 2013 between MCLP and the refinery, in lieu of product sales, all costs of operation are passed through to the refinery and MCLP receives a management fee. This change in fee structure resulted in a decrease in operating revenues in the first nine months of 2014 of $13,400 compared to the same period in 2013, and a corresponding decrease in contract profit of $1,600.

In 2013, pursuant to the partnership agreement between the MCLP partners, our Global Power Group’s ownership interest in MCLP increased to 99%. Our Global Power Group’s financial results for its interest in MCLP reflect this change in ownership percentage. The change in ownership interests resulted in decreased earnings to the noncontrolling interest. The foregoing changes to the project’s fee structure and allocation of earnings resulted in a minimal impact to our Global Power Group’s EBITDA during the quarter and nine months ended September 30, 2014, compared to the same periods in 2013.

Overview of Segment

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

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

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

 

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

 

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

 

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

 

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

 

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

 

  Technology licenses to other steam generator suppliers in select countries.

Our primary operating focus continues to be booking quality new business and effectively and efficiently executing our contracts. The global markets in which we operate are largely dependent on overall economic conditions and global or regional economic growth rates and the resultant demand for oil and gas, electric power, petrochemicals, refined products and minerals and metals. Our Global Power Group has been impacted by unfavorable economic growth rates in most of its global markets in recent years, with global economic activity having improved only slightly since the latter portion of 2013. Expectations of stronger global economic growth for the remainder of 2014 and for 2015 have recently become somewhat weaker than what they had been earlier in 2014. These expectations have been impacted by several increasing downside risks related to: slower growth than anticipated in the emerging market economies; risk of lower-than-expected inflation in advanced economies, particularly the Eurozone, where persistent low inflation could harm the fragile economic recovery by reducing consumer spending and impacting the ability of governments and businesses to repay debt; and increasing geopolitical risks. Geopolitical issues are already negatively impacting project investment in the affected and surrounding countries, with delays or cancellations of planned investments becoming more widespread. These geopolitical developments include the security situation in Iraq and Syria, which has deteriorated further in recent weeks, the political and civil situation in Ukraine along with the tightening of sanctions against Russia and the political unrest earlier this year in Thailand. If any of these risks materialize and/or intensify, the ability of our Global Power Group to book work could be negatively impacted, which could have a material negative impact on our business.

There are also a number of other constraining market factors that continue to impact the power markets that we serve. Political and environmental sensitivity regarding coal-fired steam generators continues to cause prospective projects utilizing coal as their primary fuel to be postponed or cancelled as clients experience difficulty in obtaining the required environmental permits or decide to wait for additional clarity regarding governmental regulations. The sensitivity has been especially pronounced in the U.S. and Western Europe due to the concern that coal-fired steam generators, relative to alternative fuel sources, contribute more toward global warming through the discharge of greenhouse gas emissions into the atmosphere. The outlook for continued lower natural gas pricing over the next three to five years in North America, driven by increasing supply of natural gas, has increased the attractiveness of natural gas, in relation to coal, for the generation of electricity. In addition, the constraints on the global credit market may continue to impact some of our clients’ investment plans as these clients are affected by the availability and cost of financing, as well as their own financial strategies, which could include cash conservation. These factors could negatively impact investment in the power sector, which in turn could negatively impact our Global Power Group’s ability to book work and which could have a material negative impact on our Global Power Group’s business.

We believe opportunities will continue in Asia, the Middle East and South America driven by growing electricity demand as a result of the economic growth rates in those regions. Longer-term, we believe that global demand for electrical energy will continue to grow. We believe that the majority of the growth will be driven by emerging economies and that solid-fuel-fired steam generators will continue to fill a significant portion of the incremental growth in new generating capacity in the emerging economies.

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

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

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

 

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Recently we were awarded a contract for the design and supply of four vertical heat recovery steam generators, or HRSGs, for a conversion to combined cycle project in Saudi Arabia. We also received another award for an HRSG in Mexico. In addition, we were awarded a contract to rehabilitate and optimize the wet flue gas desulfurization system for a large pulverized coal unit in West Virginia.

Liquidity and Capital Resources

Cash Flows Activities

Our cash and cash equivalents and restricted cash balances were:

 

     As of               
     September 30, 2014      December 31, 2013      $ Change     % Change  

Cash and cash equivalents

   $ 447,658      $ 556,190      $ (108,532     (19.5 )% 

Restricted cash

     60,417        82,867        (22,450     (27.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 508,075      $ 639,057      $ (130,982     (20.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash and cash equivalents and restricted cash held by our non-U.S. entities as of September 30, 2014 and December 31, 2013 were $414,900 and $493,000, respectively.

During the first nine months of 2014, we experienced a decrease in cash and cash equivalents of $108,500. The decrease in cash and cash equivalents primarily reflected cash used in operating activities of $51,300, a return of capital payment to our shareholders of $39,900, capital expenditures of $17,800, distributions to noncontrolling interests of $9,400 and repayment of debt and capital lease obligations of $7,700. The above use of cash was partially offset by a decrease in restricted cash, excluding foreign currency translation effects, of $18,800 and proceeds received from the exercise of stock options of $18,300.

Cash Flows from Operating Activities

 

     Nine Months Ended September 30,  
     2014     2013      $ Change  

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

   $ (51,256   $ 114,082      $ (165,338

Net cash used in operating activities in the first nine months of 2014 primarily resulted from cash used for working capital of $204,300, cash used for net asbestos-related payments of $22,600, which excluded a gain and related cash receipts of $800 of an insurance receivable related to an insolvent insurance carrier as the gain was recognized in net income, and mandatory contributions to our non-U.S. pension plans of $7,400, partially offset by cash provided by net income of $189,200, which excluded non-cash charges of $61,900 and included the above gain and related cash receipts of $800 of an insurance receivable.

The increase in net cash used in operating activities of $165,300 in the first nine months of 2014, compared to the same period of 2013, resulted primarily from an increase in cash used to fund working capital that resulted in a decrease in cash of $115,000 and, to a lesser extent, decreased cash provided by net income excluding non-cash charges of $40,900, which included gains and related cash receipts of $800 and $15,800 in the first nine months of 2014 and 2013, respectively, increased cash used for net asbestos-related payments of $11,900, which excluded gains and related cash receipts of $800 and $15,800 in the first nine months of 2014 and 2013, respectively, as the gains were recognized in net income.

Working capital varies from period to period depending on the mix, stage of completion and commercial terms and conditions of our contracts and the timing of the related cash receipts. During the first nine months of 2014 and 2013, we used cash to fund working capital, as cash used for services rendered and purchases of materials and equipment exceeded cash receipts from client billings, which included the impact of delayed project payments and contributed to our receivables balance. Project payments can be delayed, particularly on contracts involving national oil companies, due to those customers’ internal processes for approval of invoices and release of funds.

 

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In particular, we had $47,000 and $54,400, as of September 30, 2014 and December 31, 2013, respectively, of accounts receivable due from the national oil company in Venezuela. The payment history of this client continues to be good; however, some of the payments continue to be significantly delayed and should oil prices remain at or below the current levels, the national oil company in Venezuela could face difficulties in servicing its foreign debt, including our receivables. In general, a delay in payment by our customers is not indicative of customer credit risk. In other cases where payments are delayed due to disagreements between us and our clients regarding the level of or quality of work performed or regarding billing terms, we assess our contractual right to invoice the client and, if we believe there is a probable commercial risk to collection of contract revenues, we provide an allowance against the valuation of contract work in progress at the individual contract level.

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

Cash Flows from Investing Activities

 

     Nine Months Ended September 30,  
     2014     2013     $ Change  

Net cash used in investing activities — continuing operations

   $ (444   $ (28,282   $ 27,838  

The net cash used in investing activities in the first nine months of 2014 was attributable primarily to capital expenditures of $17,800 and cash used for a business acquisition, net of cash acquired, of $2,000, partially offset by a decrease in restricted cash, excluding foreign currency translation effects, of $18,800, which was primarily driven by decreased client dedicated funds.

The net cash used in investing activities in the first nine months of 2013 was attributable primarily to cash used for a business acquisition, net of cash acquired, of $52,800, capital expenditures of $21,800 and cash used for investments in and advances to unconsolidated affiliates of $11,600, partially offset by proceeds received from the disposition of a business of $48,600 and cash provided by a decrease in restricted cash, excluding foreign currency translation effects, of $9,200.

The capital expenditures in the first nine months of 2014 and 2013 related primarily to leasehold improvements, information technology equipment and office equipment.

Cash Flows from Financing Activities

 

     Nine Months Ended September 30,  
     2014     2013     $ Change  

Net cash used in financing activities

   $ (38,515   $ (167,167   $ 128,652  

The net cash used in financing activities in the first nine months of 2014 was attributable primarily to cash used for a return of capital payment to our shareholders of $39,900 and, to a lesser extent, payment of distributions to noncontrolling interests of $9,400 and repayment of debt and capital lease obligations of $7,700, partially offset by cash received from the exercise of stock options of $18,300.

The net cash used in financing activities in the first nine months of 2013 was attributable primarily to cash used to repurchase shares and to pay related commissions under our share repurchase program of $150,100. Other financing activities included distributions to noncontrolling interests of $12,600 and repayment of debt and capital lease obligations of $8,600, partially offset by cash received from the exercise of stock options of $4,300.

Outlook

Our liquidity forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations, changes in working capital activities, unused credit line availability and claim recoveries and proceeds from asset sales, if any. These forecasts extend over a rolling twelve-month period. Based on these forecasts, we believe our existing cash balances and forecasted net cash provided by operating activities will be sufficient to fund our operations throughout the next twelve months. Based on these forecasts, our primary cash needs will be working capital, our 2014 acquisition activity, as described below, capital expenditures, net asbestos-related payments and mandatory pension contributions. We may also use cash at our discretion for additional acquisitions or discretionary pension plan contributions. The majority of our cash balances are invested in short-term interest

 

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bearing accounts with maturities of less than three months at creditworthy financial institutions around the world. Further significant deterioration of the current global economic and credit market environment could challenge our efforts to maintain our well-diversified asset allocation with creditworthy financial institutions and/or unfavorably impact our liquidity and financial statements. We will continue to monitor the global economic environment, particularly in those countries where we have operations or assets.

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

We are dependent on cash repatriations from our subsidiaries to cover payments and expenses of our parent holding company in Switzerland, to cover cash needs related to our asbestos-related liability and other overhead expenses in the U.S. and, at our discretion, specific liquidity needs, such as funding acquisitions and our dividend distribution. Consequently, we require cash repatriations to Switzerland and the U.S. from our entities located in other countries in the normal course of our operations to meet our Swiss and U.S. cash needs and have successfully repatriated cash for many years. We believe that we can repatriate the required amount of cash to Switzerland and the U.S. Additionally, we continue to have access to the revolving credit portion of our senior credit facility, if needed.

Our net asbestos-related cash payments are predominately related to our U.S. subsidiaries and include indemnity and defense costs, net of insurance proceeds. During the first nine months of 2014, we had net asbestos-related cash outflows of approximately $21,800. We expect our U.S. net cash outflows for the full year 2014 to be approximately $31,700. This estimate assumes no settlements with insurance companies or elections by us to fund additional payments. As we continue to collect cash from insurance settlements and assuming no increase in our asbestos-related insurance liability or any future insurance settlements, the asbestos-related insurance receivable recorded on our balance sheet will continue to decrease.

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

We can issue up to $750,000 under the letter of credit portion of the facility. Letters of credit issued under our 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 senior credit agreement are 0.75% and 1.50% per annum of the outstanding amount, respectively, excluding a nominal fronting fee. We also have the option to use up to $250,000 of the $750,000 for revolving borrowings at a rate equal to adjusted LIBOR, as defined in the senior credit agreement, plus 1.50%, subject also to the performance pricing noted above.

We had approximately $290,600 and $253,900 of letters of credit outstanding under our senior credit agreement as of September 30, 2014 and December 31, 2013, respectively. There were no funded borrowings under our senior credit agreement as of September 30, 2014 and December 31, 2013. Based on our current operating plans and cash forecasts, we do not intend to borrow under our senior credit agreement to meet our non-discretionary liquidity needs over the next twelve months. Please refer to Note 5 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding our debt obligations. In addition, as described in Note 1 to the consolidated financial statements in this quarterly report on Form 10-Q, on October 7, 2014, AMEC commenced the Offer to acquire all of the FW shares. The Offer will expire at 11:59 p.m. New York City time on November 4, 2014, unless the expiration date of the Offer is extended by AMEC. If the conditions to the Offer are satisfied or waived and the Offer is consummated, we will be in default under our senior credit agreement if such agreement is not amended or terminated. We are currently in discussion with the administrative agent targeting the cancellation of the credit facility concurrently with the change of control event.

We are not required to make any mandatory contributions to our U.S. pension plans in 2014 based on the minimum statutory funding requirements. We made mandatory contributions totaling approximately $7,400 to our non-U.S. pension plans during the first nine months of 2014. Based on the minimum statutory funding requirements for 2014, we expect to make mandatory contributions totaling approximately $8,200 to our non-U.S. pension plans for the full year. Additionally, we may elect to make discretionary contributions to our U.S. and/or non-U.S. pension plans during 2014.

On September 12, 2008, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $750,000 of our outstanding shares and the designation of the repurchased shares

 

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for cancellation. On November 4, 2010, our Board of Directors proposed an increase to our share repurchase program of $335,000, which was approved by our shareholders at an extraordinary general meeting on February 24, 2011. On February 22, 2012, our Board of Directors proposed an additional increase to our share repurchase program of approximately $419,398, which was approved by our shareholders at our 2012 annual general meeting on May 1, 2012.

Based on the aggregate share repurchases under our program through September 30, 2014, we were authorized to repurchase up to an additional $270,054 of our outstanding shares as of such date. Any repurchases will be made at our discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and will depend on a variety of factors, including market conditions, share price and other factors. The program does not obligate us to acquire any particular number of shares. The program has no expiration date and may be suspended or discontinued at any time. Any repurchases made pursuant to the share repurchase program will be funded using our cash on hand. Through September 30, 2014, we have repurchased 50,502,778 shares for an aggregate cost of approximately $1,234,344 since the inception of the repurchase program announced on September 12, 2008. We have executed the repurchases in accordance with 10b5-1 repurchase plans as well as other privately negotiated transactions pursuant to our share repurchase program. The 10b5-1 repurchase plans allow us to purchase shares at times when we may not otherwise do so due to regulatory or internal restrictions. Purchases under the 10b5-1 repurchase plans are based on parameters set forth in the plans. For further information, please refer to Part II, Item 2 of this quarterly report on Form 10-Q.

In October 2014, we acquired all of the ordinary shares and options of MDM Engineering. Our aggregate cash needs related to this acquisition were approximately $109,000. Please refer to Note 2 to the consolidated financial statements in this quarterly report on Form 10-Q for further information regarding this agreement.

Off-Balance Sheet Arrangements

We own several noncontrolling interests in power projects in Chile and Italy. Certain of the projects have third-party debt that is not consolidated in our balance sheet. We have also issued certain guarantees for our project in Chile. Please refer to Note 3 to the consolidated financial statements in this quarterly report on Form 10-Q for further information related to these projects.

 

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New Orders and Backlog

New orders are recorded and added to the backlog of unfilled orders based on signed contracts as well as agreed letters of intent, which we have determined are legally binding and likely to proceed.

Backlog can fluctuate from one reporting period to the next due to the timing of new awards and when the contract revenue is recognized in our consolidated financial statements. The timing and duration of backlog execution is dependent upon the scope and type (or nature) of the work being executed. The elapsed time from the award of a contract to completion of performance can be as short as several quarters and may be up to approximately four years. At any point in time, our backlog contains a portfolio of contracts at various stages of completion and that will be executed at varying rates over varying durations. We cannot predict with certainty the portion of backlog to be performed in a given year.

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

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

 

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The tables below detail our new orders and backlog of unfilled orders by period and include balances for discontinued operations for the quarter and nine months ended September 30, 2013 which were insignificant based on our consolidated and business group balances:

New Orders, Measured in Terms of Future Revenues

 

     September 30, 2014      September 30, 2013  
     Global
E&C
Group
     Global
Power
Group
     Total      Global
E&C
Group
     Global
Power
Group
     Total  

By Project Location:

                 

Quarter Ended

                 

Africa

   $ 10,300      $ —        $ 10,300      $ 4,900      $ —        $ 4,900  

Asia Pacific

     65,900        7,400        73,300        97,200        38,500        135,700  

Europe

     109,200        24,100        133,300        117,300        71,300        188,600  

Middle East

     68,300        31,800        100,100        120,400        1,500        121,900  

North America

     205,600        71,700        277,300        1,114,900        59,600        1,174,500  

South America

     13,100        12,300        25,400        43,700        7,000        50,700  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472,400      $ 147,300      $ 619,700      $ 1,498,400      $ 177,900      $ 1,676,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended

                 

Africa

   $ 35,800      $ —        $ 35,800      $ 43,200      $ 100      $ 43,300  

Asia Pacific

     325,800        365,300        691,100        281,100        162,500        443,600  

Europe

     852,500        79,600        932,100        370,100        142,000        512,100  

Middle East

     252,400        70,100        322,500        249,600        2,000        251,600  

North America

     549,100        180,400        729,500        1,536,400        140,400        1,676,800  

South America

     124,100        25,800        149,900        146,700        20,100        166,800  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,139,700      $ 721,200      $ 2,860,900      $ 2,627,100      $ 467,100      $ 3,094,200  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Industry:

                 

Quarter Ended

                 

Power generation

   $ 54,500      $ 138,600      $ 193,100      $ 43,700      $ 164,500      $ 208,200  

Oil refining

     232,900        —          232,900        264,600        —          264,600  

Pharmaceutical

     15,800        —          15,800        194,900        —          194,900  

Oil and gas

     66,800        —          66,800        79,300        —          79,300  

Chemical/petrochemical

     74,700        —          74,700        896,600        —          896,600  

Power plant design, operation and maintenance

     11,400        8,700        20,100        14,500        13,400        27,900  

Environmental

     2,900        —          2,900        1,400        —          1,400  

Other, net of eliminations

     13,400        —          13,400        3,400        —          3,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472,400      $ 147,300      $ 619,700      $ 1,498,400      $ 177,900      $ 1,676,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended

                 

Power generation

   $ 123,300      $ 687,800      $ 811,100      $ 46,400      $ 406,000      $ 452,400  

Oil refining

     1,136,800        —          1,136,800        850,400        —          850,400  

Pharmaceutical

     96,800        —          96,800        235,000        —          235,000  

Oil and gas

     321,400        —          321,400        273,000        —          273,000  

Chemical/petrochemical

     371,100        —          371,100        1,104,400        —          1,104,400  

Power plant design, operation and maintenance

     43,000        33,400        76,400        36,300        61,100        97,400  

Environmental

     9,300        —          9,300        5,000        —          5,000  

Other, net of eliminations

     38,000        —          38,000        76,600        —          76,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,139,700      $ 721,200      $ 2,860,900      $ 2,627,100      $ 467,100      $ 3,094,200  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Backlog, Measured in Terms of Future Revenues

 

     As of September 30, 2014      As of December 31, 2013  
     Global
E&C
Group
     Global
Power
Group
     Total      Global
E&C
Group
     Global
Power
Group
     Total  

By Contract Type:

                 

Lump-sum turnkey

   $ 5,800      $ 32,800      $ 38,600      $ 22,300      $ 7,200      $ 29,500  

Other fixed-price

     476,400        660,800        1,137,200        484,600        581,900        1,066,500  

Reimbursable

     2,921,000        22,800        2,943,800        2,889,600        19,000        2,908,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,403,200      $ 716,400      $ 4,119,600      $ 3,396,500      $ 608,100      $ 4,004,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Project Location:

                 

Africa

   $ 26,000      $ —        $ 26,000      $ 36,700      $ 100      $ 36,800  

Asia Pacific

     479,500        370,200        849,700        579,700        342,800        922,500  

Europe

     793,500        81,500        875,000        462,300        114,000        576,300  

Middle East

     670,200        52,400        722,600        837,500        1,700        839,200  

North America

     1,185,200        185,500        1,370,700        1,177,100        124,300        1,301,400  

South America

     248,800        26,800        275,600        303,200        25,200        328,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,403,200      $ 716,400      $ 4,119,600      $ 3,396,500      $ 608,100      $ 4,004,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Industry:

                 

Power generation

   $ 79,400      $ 682,700      $ 762,100      $ 27,800      $ 572,000      $ 599,800  

Oil refining

     1,880,700        —          1,880,700        1,562,100        —           1,562,100  

Pharmaceutical

     59,000        —          59,000        44,500        —           44,500  

Oil and gas

     245,400        —          245,400        302,800        —           302,800  

Chemical/petrochemical

     1,027,600        —          1,027,600        1,247,400        —           1,247,400  

Power plant design, operation and maintenance

     62,000        33,700        95,700        152,000        36,100        188,100  

Environmental

     5,800        —          5,800        5,400        —           5,400  

Other, net of eliminations

     43,300        —          43,300        54,500        —           54,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,403,200      $ 716,400      $ 4,119,600      $ 3,396,500      $ 608,100      $ 4,004,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Backlog, measured in terms of Foster Wheeler Scope

   $ 2,694,100      $ 715,700      $ 3,409,800      $ 2,973,200      $ 605,200      $ 3,578,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     20,000           20,000        21,400           21,400  
  

 

 

       

 

 

    

 

 

       

 

 

 

The foreign currency translation impact as of September 30, 2014 compared to December 31, 2013 resulted in decreases on backlog and Foster Wheeler scope backlog of $151,300 and $79,000, respectively.

Inflation

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

Application of Critical Accounting Estimates

Our consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. Management and the Audit Committee of our Board of Directors approve the critical accounting policies. A full discussion of our critical accounting policies and estimates is included in our 2013 Form 10-K. We did not have a significant change to the application of our critical accounting policies and estimates during the first nine months of 2014.

 

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Recent Accounting Developments

In April 2014, the Financial Accounting Standards Board, or “FASB”, issued Accounting Standards Update, or “ASU”, No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides guidance that limits the requirement to report discontinued operations to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity’s operations and financial results. The amendments also require expanded disclosures concerning discontinued operations, disclosures of certain financial results attributable to a disposal of a significant component of an entity that does not qualify for discontinued operations reporting and expanded disclosures for long-lived assets classified as held for sale or disposed of. The new standard is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals or assets classified as held for sale that have not been reported in financial statements previously issued or available for issuance. We do not expect our adoption of this new standard to have a material impact on our consolidated financial statements and notes.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and notes.

In June 2014, the FASB issued ASU No. 2014-12 “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, as of the grant date an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under the ASU. The ASU’s guidance is effective for all entities for reporting periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. In addition, all entities will have the option of applying the guidance either prospectively, only to awards granted or modified on or after the effective date, or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented, the earliest presented comparative period. We do not expect our adoption of this new standard to have a material impact on our consolidated financial statements and notes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the first nine months of 2014, there were no material changes in the market risks as described in our annual report on Form 10-K for the year ended December 31, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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As of the end of the period covered by this report, our chief executive officer and our chief financial officer carried out an evaluation, with the participation of our Disclosure Committee and management, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) pursuant to Exchange Act Rule 13a-15. Based on this evaluation, our chief executive officer and our chief financial officer concluded, at the reasonable assurance level, that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting in the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please refer to Note 13 to the consolidated financial statements in this quarterly report on Form 10-Q for a discussion of legal proceedings, which is incorporated by reference in this Part II.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks and uncertainties, including those disclosed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2013. No material changes to the risk factors disclosed in such annual report on Form 10-K have been identified during the first nine months of 2014.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers (amounts in thousands of dollars, except share data and per share amounts).

On September 12, 2008, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $750,000 of our outstanding shares and the designation of the repurchased shares for cancellation. On November 4, 2010, our Board of Directors proposed an increase to our share repurchase program of $335,000, which was approved by our shareholders at an extraordinary general meeting on February 24, 2011. On February 22, 2012, our Board of Directors proposed an additional increase to our share repurchase program of approximately $419,398, which was approved by our shareholders at our 2012 annual general meeting on May 1, 2012. Under Swiss law, the repurchase of shares in excess of 10% of the company’s share capital must be approved in advance by the company’s shareholders.

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

The following table provides information with respect to purchases under our share repurchase program during the third quarter of 2014.

 

Fiscal Month

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

July 1, 2014 through July 31, 2014

    —        $ —          —       

August 1, 2014 through August 31, 2014

    —          —          —       

September 1, 2014 through September 30, 2014

    —          —          —       
 

 

 

   

 

 

   

 

 

   

Total

    —       $ —          —        $ 270,054   
 

 

 

   

 

 

   

 

 

   

 

(1)  No shares were repurchased pursuant to our share repurchase program during the third quarter of 2014. As of September 30, 2014, we were authorized to spend up to an additional $270,054 to repurchase our outstanding shares. The repurchase program has no expiration date and may be suspended for periods or discontinued at any time. We did not repurchase any shares other than through our publicly announced repurchase program.
(2)  As of September 30, 2014, an aggregate of 50,502,778 shares were purchased for a total of $1,234,344 since the inception of the repurchase program announced on September 12, 2008.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit
No.

  

Exhibits

  2.1    Second Deed of Amendment, dated October 2, 2014, to the Implementation Agreement, dated February 13, 2014 (as amended from time to time), by and between AMEC plc and Foster Wheeler AG. (Filed as Exhibit 2.1 to Foster Wheeler AG’s Form 8-K, filed on October 2, 2014, and incorporated herein by reference.)
23.1    Consent of Analysis, Research & Planning Corporation.
31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J. Kent Masters.
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Franco Baseotto.
32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of J. Kent Masters.
32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Franco Baseotto.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
101.DEF    XBRL Taxonomy Extension Definition Linkbase.
101.LAB    XBRL Taxonomy Extension Label Linkbase.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

          FOSTER WHEELER AG
          (Registrant)
Date: November 3, 2014  

/S/ J. KENT MASTERS

  J. KENT MASTERS
  PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 3, 2014  

/S/ FRANCO BASEOTTO

  FRANCO BASEOTTO
  EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
  OFFICER AND TREASURER

 

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