Foster Wheeler Ltd. Business Information, Profile, and History

Company Perspectives:

We will create value for our stakeholders by: safely delivering cost- effective, technically-advanced equipment, facilities and services th at meet or exceed our clients' expectations; offering a safe workplac e which attracts, retains and motivates high performers by stimulatin g innovation, rewarding excellence and treating people with respect; acting professionally, responsibly and with integrity in everything w e do; and providing superior returns and rewards to our shareholders and stakeholders.

History of Foster Wheeler Ltd.

Foster Wheeler Ltd. is an international company overseeing a wide ran ge of engineering and construction enterprises in more than 30 countr ies across the globe. The company is organized into two business grou ps: The Global Engineering & Construction (E&C) Group and The Global Power Group. Through its subsidiaries, Foster Wheeler offers design, engineering, construction, manufacturing, project development and management, research, and plant operations services. The company serves the refining, upstream oil and gas, Liquefied Natural Gas and gas-to-liquids, petrochemicals, chemicals, power, pharmaceuticals, b iotechnology, and healthcare industries. With nearly 70 percent of re venues stemming from operations outside of the United States, Foster Wheeler moved its legal headquarters to Bermuda in 2001; operational headquarters remained in New Jersey.

Company Origins

Although Foster Wheeler was incorporated in 1927, the origins of the enterprise date several decades earlier to the founding of two manufa cturing companies: Wheeler Condenser & Engineering Company and Po wer Specialty Company. In 1891, Wheeler Condenser and Engineering Com pany was created with offices in New York City and a plant in Cartere t, New Jersey. Its steam condensers, pumps, and heat exchangers were bought primarily by the power and marine industries. During the Spani sh-American War the U.S. Navy contracted with the company for condens ers for a number of vessels, beginning what would later be a long and important relationship for Foster Wheeler with the armed forces. In the ensuing years, the Wheeler Condenser & Engineering Company be came a primary equipment supplier to the growing electrical utility i ndustry.

Power Specialty Company, founded in New York City in 1900, followed a pattern of growth similar to that of Wheeler Condenser & Enginee ring. The company began by marketing waterworks equipment but was soo n designing and manufacturing boiler components in its Dansville, New York, plant. Primarily building superheaters, Power Specialty also e xpanded to serve the new electrical power industry.

Like Wheeler Condenser & Engineering, Power Specialty developed a n affiliation with the armed forces early in the company's history. D uring World War I, the company used its engineering expertise to desi gn an advanced marine boiler for the U.S. Merchant Marines. In the 19 20s Power Specialty diversified its operations by entering the indust ry of petroleum refinery equipment--designing and manufacturing--incl uding crude oil distillation units and fired heaters.

In 1927 the two companies merged, forming the Foster Wheeler Corporat ion, and established their headquarters in New York City. The same ye ar, a former Power Specialty office in London was incorporated as a F oster Wheeler subsidiary. In 1928, Foster Wheeler Limited (Canada), a nother former Power Specialty office, was incorporated, with a manufa cturing plant and offices in Ontario, Canada. Two years after the mer ger, the New York Stock Exchange offered Foster Wheeler common and pr eferred stock.

Early Expansion

The new corporation's first goal was expanding its product line, whic h was initiated through the production of feedwater heaters, evaporat ors, and cooling towers. The company also acquired the D. Connelly Bo iler Company in 1931, enabling them to design and produce all steam g enerator system components. Foster Wheeler had another burst of expan sion during World War II, when engineering expertise and manufacturin g were in demand from the armed forces.

The establishment of Foster Wheeler France, S.A. in 1949 opened an er a of international expansion for Foster Wheeler. Operations were begu n in Milan in 1957 with the organization of Foster Wheeler Italiana, S.p.A., Foster Wheeler Iberia was established in Madrid in 1965, and Foster Wheeler Australia Pty. Ltd. was established in Victoria, Austr alia, in 1967. The company also created a subsidiary to handle intern ational construction.

Challenges in the Late 1950s

Although the company was expanding internationally, several engineeri ng crises hurt Foster Wheeler's reputation and bottom line in the lat e 1950s and early 1960s. Former corporation president Frank A. Lee to ld Forbes writer Geoffrey Smith, "When you're talking about a 600-megawatt boiler that looks like a 14-story apartment house, and s ome tubes begin to rupture, you're talking about a tremendous amount of money. A couple of those a year and you're going to be in a loss p osition. And that's what happened. We had quite a few engineering pro blems in our boiler business--and an image problem in the market." Fo ster Wheeler's revenues dropped, and the company even operated at a l oss in 1957 and 1963.

Over the next several years, the company gradually regained a good re putation in the boiler manufacturing business. Those earlier setbacks , however, caused Foster Wheeler to adopt a conservative attitude tow ard growth. Rather than expand into new business areas where the comp any lacked expertise, such as the growing field of nuclear energy, Fo ster Wheeler expanded geographically, selling products and services i n regions where it could confidently establish a foothold.

Although Foster Wheeler was more cautious in buying out companies in the late 1960s and 1970s than many competitors, the corporation did a cquire several subsidiaries that eventually composed the core of its industrial and environmental group. The first, Fritz W. Glitsch and S ons, Inc. (renamed Glitsch International, Inc.), manufactured fractio nating equipment and pressure vessels and was obtained in 1967. In 19 73, the company acquired Ullrich Copper, Inc. This subsidiary produce d bus bar and copper extrusions used in electrical switch gear and mo tor-control centers, and specialty copper components used in rapid-tr ansit systems and computers. In 1976, another major subsidiary was ob tained: Thermacote Welco Company, a distributor of welding supplies, including welding rod and wire, connectors, electrode holders, safety goggles, and brazing materials.

Reorganization and Profitability in the 1970s

Beginning in 1974, the company embarked on a significant reorganizati on plan. Foster Wheeler Corporation became a holding company, and Fos ter Wheeler Energy Corporation became the major operating company in the United States. Its responsibilities were later divided, with Fost er Wheeler USA Corporation handling the process plants and project di rection duties, and Foster Wheeler Energy Corporation the energy equi pment operations. Other subsidiaries were created to improve the oper ating efficiency of the company's engineering and construction group, including Foster Wheeler Constructors, Inc., which handled project c onstruction; FW Management Operations, Ltd., which provided managemen t and plant operating services and trained staff for industry; Foster Wheeler Development Corporation, which provided contract research an d development services; and Foster Wheeler Petroleum Development Ltd. , which provided storage and shipping terminals, equipment for offsho re gas and oil drilling, wellhead recovery and piping systems, and fi eld development services.

Foster Wheeler's conservative strategy apparently paid off. Despite t he drop in refinery construction after the oil embargo of 1974, the c ompany's share price quadrupled from 1974 to 1979 and the return on e quity steadily increased; while other companies were hard pressed to keep up with rampant inflation, Foster Wheeler was earning 19.3 perce nt.

Foster Wheeler's large backlogs and substantial cash reserves made th e corporation a prime target for takeover. In 1979, McDonnell Douglas seemed poised to attempt a takeover, having bought 4.9 percent of Fo ster Wheeler's common stock. Corporation president Frank Lee, however , was adamant in his refusal to consider a takeover.

Foster Wheeler developed several technological advances that contribu ted to the company's high standing in the industry. For example, in 1 980 the energy equipment group designed and constructed the first pri vate industry fluidized bed steam generator fired by coal in the Unit ed States. They also created a unique cyclone design for their circul ating fluidized bed boiler, a design that increased heat transfer, en abled a quicker start-up, reduced space requirements, and lowered mai ntenance costs.

Slowdown in the 1980s

In the late 1970s and early 1980s, Foster Wheeler benefited greatly f rom the boom in oil and utility power industries, achieving excellent profit margins in their contracts. The industry's heavy overbuilding , however, resulted in a substantial reversal in the 1980s. Foster Wh eeler's profits slumped, as indicated by a period of several years wh en dividends on common stock were held at 11 cents per share. The com pany's backlog, generally a reliable predictor of future revenues, li ngered at approximately $1 billion through the mid-1980s.

To lessen its reliance on the sagging oil and power utility industrie s, Foster Wheeler developed subsidiaries in new industries, including Foster Wheeler Power Systems, Inc., and Foster Wheeler Environmental Services, Inc. Foster Wheeler Power Systems built, owned, and operat ed waste-to-energy plants, recycling and composting plants, and cogen eration facilities. The company had some experience to draw on in thi s area, having built the first waterfall mass-burning refuse boiler i n the United States. Foster Wheeler Environmental Services handled ha zardous waste management and later became the holding company of the subsidiaries Foster Wheeler Enviresponse, Inc., which offered environ mentally related regulatory, technical, design, and remediation servi ces, and Barsotti's, Inc., which offered asbestos abatement services.

Foster Wheeler also reacted to the economic downturn of the early 198 0s by selling real estate properties and underperforming subsidiaries . In 1988 Conergics Corporation was sold to Phillips Industries, Inc. , for $43.2 million, and in 1989 TANCO Corporation bought Forney Engineering Company for an undisclosed sum. The proceeds were used to strengthen Foster Wheeler's ventures into waste-to-energy and hazard ous waste management.

In 1987 Foster Wheeler moved headquarters to Clinton, New Jersey, aft er nearly 25 years in Livingston, New Jersey; the same year, Foster W heeler became the object of another takeover attempt. Asher B. Edelma n seemed determined to have the company, stating that if the board of directors would not consider his offer, he would appeal directly to the stockholders. Although he garnered stock holdings of nearly 12 pe rcent, the company rejected his offer. Edelman backed down, reducing his holdings over several months until they reached 4.9 percent.

Steady Growth in the 1990s

The company's traditional businesses, particularly its engineering an d construction enterprises, were revitalized in the early 1990s. The company's backlog grew from the steady $1 billion mark of the 198 0s to $3.47 billion by 1992. Foster Wheeler received several inte rnational contracts for oil refinery construction or modernization, i ncluding an upgrading project at three Saudi Arabian oil refineries w ith an estimated final cost of $4 billion, refinery work in Franc e worth approximately $50 million, and an $80 million joint v enture in the Soviet Union for materials and engineering for a new re fining unit. In addition, the reconstruction in Kuwait after the Gulf War provided some refinery work for Foster Wheeler.

Although most of the company's new business had come from internation al contracts, particularly in Europe and Asia, Foster Wheeler anticip ated a surge of refinery work in the United States due to new federal clean-air legislation that required many refineries to upgrade their facilities by 1995. Other business areas also seemed to be improving in the early 1990s, as indicated by Foster Wheeler's first order for a large central station steam generator in several years. The genera l outlook for Foster Wheeler in the early 1990s seemed good. The comp any's book value per share had been rising steadily, from $12.79 in 1988 to $15.13 in 1991. Despite a recession, Foster Wheeler's revenues increased 20 percent in 1991, and the growing backlog of bus iness suggested a continued rise in revenues.

Along with increased oil refinery renovation, the company expected to see demand for utility construction to rise with the economic recove ry in the United States in the mid-1990s. Domestic business for Foste r Wheeler, however, grew more slowly than many analysts had predicted . With pressure from energy companies, legislators pushed back compli ance dates mandated by the Clean Air Act. Therefore, the massive impr ovements to oil refineries Foster Wheeler was anticipating were delay ed. Utility construction also did not materialize with the economic r ecovery. Apparently, supply had so outstripped demand in the United S tates in the late 1980s that even the warming economy did not require new plant construction.

Nevertheless, Foster Wheeler's international presence benefited the c ompany in the mid-1990s. With environmental concerns growing in Europ e, the demand for improvements to refineries and coal-burning plants increased, offering opportunities to Foster Wheeler's engineering and construction group. With offices in Singapore and Thailand, the comp any was well positioned to take advantage of the Asian economic boom. In 1993 the company signed new contracts with China to build two 600 -megawatt boilers, and in 1996 it signed a $200 million contract with the Philippines to build a polyethylene plant.

Foster Wheeler reorganized in 1993, incorporating its environmental g roup into its engineering and construction group. The following year the company acquired Enserch Environmental Corporation. By merging it with its Environmental Services Division to form Foster Wheeler Envi ronmental Corporation, Foster Wheeler created the largest full-servic e environmental services company in the world. The acquisition of Opt imized Process Designs in 1994 provided Foster Wheeler with the means to provide engineering and construction to the hydrocarbon processin g industry.

In 1995 the company expanded further both internationally and domesti cally. It acquired the power-generating company Pyropower from the A. Ahlstrom Corporation, bringing Foster Wheeler operations into Finlan d, Poland, and Japan. The $207.5 million deal also expanded Foste r Wheeler's operations in the former Soviet Union. The same year the company bought a Texas-based supplier of sulfur-recovery equipment, T PA, Inc.

The analysts' predictions of booming contracts for Foster Wheeler cam e to fruition in the mid-1990s. The company's backlog of unfilled ord ers rose from 2.5 billion in 1992 to $5.1 billion in 1994. By 199 6, that number stood at a record $7.1 billion. Much of the increa se came from Foster Wheeler's international business, which accounted for approximately 70 percent of new bookings in 1996. Revenues and n et earnings had grown commensurably throughout the mid-1990s. The com pany's revenues of $2.3 billion in 1994 had almost doubled to 6;4.0 billion in 1996, and net earnings had risen from $65 millio n in 1994 to $82 million in 1996. In 1997 Foster Wheeler reorgani zed its pharmaceutical and fine chemicals unit. As part of the engine ering and construction group, the unit accounted for 42 percent of th at group's operating revenue in 1996. Later in 1997, the company sold Glitsch International, Inc., a supplier of mass transfer systems and chemical separations equipment. The company received $250 millio n cash for Glitsch, which had revenues of $300 million in 1996. F oster Wheeler sold its Koch Engineering unit later that year.

The outlook for Foster Wheeler in the late 1990s seemed bright. Its s trong international presence stood to gain from the rising energy nee ds of developing nations in Latin America and Asia, particularly in C hina. The company also anticipated new projects for its energy equipm ent group from the increasingly privatized power-generating industry in Europe. During 1999 the company signed a contract to design Vietna m's first oil refinery.

Overcoming Problems in the Late 1990s and Beyond

Despite the appearance of a bright future for Foster Wheeler, the com pany began to experience problems at its Robbins Resource Recovery fa cility in Illinois during the late 1990s. The state government repeal ed Illinois' retail rate law, which had allowed Foster Wheeler to bui ld the Robbins facility and receive subsidies from the local governme nt. In essence, the law allowed Foster Wheeler (and other waste-to-en ergy plants) to charge utilities higher rates. The utilities, in turn , received tax breaks to make up for the higher charge. Foster Wheele r was then expected to eventually pay the state the difference betwee n the two rates, but with zero interest.

Foster Wheeler claimed it would have never built the plant without th e retail rate law in place and filed suit against the state in an att empt to reinstate the law. From 1997 through 1999, the company took & #36;235 million in charges related to costs at the Robbins facility. The company's stock price dropped significantly as a result, down fro m $45 in April 1997 to approximately $14 per share in August 1998. By 1999, the company opted to file Chapter 11 bankruptcy protec tion for the plant. It also launched a major companywide reorganizati on plan that called for the closure of several plants and 1,600 job c uts.

The restructuring continued into the early years of the new millenniu m. During 2000, it combined the operations of its Power Systems and E nergy Equipment divisions. In 2001, the company's legal headquarters were moved to Bermuda and Foster Wheeler officially adopted the Foste r Wheeler Ltd. corporate moniker. At this time, nearly 70 percent of its business stemmed from its international operations and the move t o Bermuda enabled the company to avoid paying taxes on income earned outside of the United States. Most of the company's main offices, how ever, remained in New Jersey.

The company posted a net loss of $309.1 million in 2001 and its f inancial position continued to weaken due to a slowdown in the energy sector. At the same time, company debt was growing at a rapid clip d ue to cost overruns on unprofitable projects. By 2001, debt had climb ed to $2.4 billion. With a negative cash flow since the late 1990 s, many analysts began to speculate that bankruptcy may be in Foster Wheeler's future.

Newly elected Chairman and CEO Raymond Milchovich immediately began t o trim costs in 2002 by jettisoning noncore businesses and consolidat ing operations. In 2004, the Securities and Exchange Commission appro ved an equity-for-debt exchange offer, a plan that allowed the compan y to sell outstanding debt in exchange for ownership in the company. Overall, the exchange offer cut the company's debt by $437 millio n. To avoid future cost overruns, Milchovich also created a Project R isk Management Group that was charged with the task of reviewing prop osals and new contracts to determine their financial benefits or weak nesses. In June 2005, the company's stock began trading on the NASDAQ .

By now, Foster Wheeler appeared to be on the road to recovery with tw o main business segments: Engineering & Construction and Global P ower Group. An expected upturn in building contracts in the oil, gas, and chemical industries bode well for the company. With its debt und er control and solid strategy in place, the company hoped to win lucr ative contracts that would lead to success and profitability in the y ears to come.

Principal Divisions: The Global Engineering & Construction (E&C) Group; The Global Power Group.

Principal Competitors: Bechtel Group Inc.; Fluor Corporation; Halliburton Company.

Chronology

• Key Dates:
• 1891: Wheeler Condenser and Engineering Company is created.
• 1900: Power Specialty Company is founded in New York City.
• 1927: The two companies merge to form Foster Wheeler Corporati on.
• 1949: Foster Wheeler France S.A. is established.
• 1967: Fritz W. Glitsch and Sons, Inc. is acquired.
• 1974: The company embarks on a significant reorganization plan ; Foster Wheeler Corporation becomes a holding company.
• 1987: Foster Wheeler moves headquarters to Clinton, New Jersey .
• 1994: Enserch Environmental Corporation is purchased.
• 1997: Glitsch International, Inc. is sold.
• 1999: Foster Wheeler files Chapter 11 bankruptcy at its Robbin s Resource Recovery facility in Illinois.
• 2001: Company headquarters are moved to Bermuda for tax purpos es.
• 2004: The Securities and Exchange Commission approves an equit y-for-debt exchange offer, allowing the company to sell outstanding d ebt in exchange for ownership in the company and thereby cutting its debt by $437 million.
• 2005: The company's stock begins trading on the NASDAQ.