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FLR > SEC Filings for FLR > Form 10-Q on 3-May-2012All Recent SEC Filings

Show all filings for FLUOR CORP

Form 10-Q for FLUOR CORP


3-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes and the company's December 31, 2011 Annual Report on Form 10-K. For purposes of reviewing this document, "segment profit" is calculated as revenue less cost of revenue and earnings attributable to noncontrolling interests excluding: corporate general and administrative expense; interest expense; interest income; domestic and foreign income taxes; and other non-operating income and expense items.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made herein, including statements regarding the company's projected revenue and earnings levels, cash flow and liquidity, new awards and backlog levels and the implementation of strategic initiatives and organizational changes are forward-looking in nature. We wish to caution readers that forward-looking statements, including disclosures which use words such as the company "believes," "anticipates," "expects," "estimates" and similar statements are subject to various risks and uncertainties which could cause actual results of operations to differ materially from expectations. Factors potentially contributing to such differences include, among others:

Difficulties or delays incurred in the execution of contracts, or failure to accurately estimate the resources and time necessary for our contracts, resulting in cost overruns or liabilities, including those caused by the performance of our clients, subcontractors, suppliers and joint venture or teaming partners;

Intense competition in the global engineering, procurement and construction industry, which can place downward pressure on our contract prices and profit margins;

The company's failure to receive anticipated new contract awards and the related impact on revenue, earnings, staffing levels and cost;

Current economic conditions affecting our clients, partners, subcontractors and suppliers, which may result in decreased capital investment or expenditures, or a failure to make anticipated increased capital investment or expenditures, by the company's clients or other financial difficulties by our partners, subcontractors or suppliers;

          Client delays or defaults in making payments;

          The cyclical nature of many of the markets the company serves,
including our commodity-based business lines, and our vulnerability to
downturns;

          A failure to obtain favorable results in existing or future

litigation or dispute resolution proceedings;

Changes in global business, economic (including currency risk), political and social conditions;

Civil unrest, security issues, labor conditions and other unforeseeable events in the countries in which we do business, resulting in unanticipated losses;

Failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects;

Failure of our suppliers, subcontractors or joint venture partners to provide supplies or services at the agreed-upon levels or times;

Repercussions of events beyond our control, such as severe weather conditions, that may significantly affect operations, result in higher cost or subject the company to liability claims by our clients;

Client cancellations of, or scope adjustments to, existing contracts, including our government contracts that may be terminated at any time and the related impacts on staffing levels and cost;

Liabilities arising from faulty engineering services;

The potential impact of certain tax matters including, but not limited to, those from foreign operations and the ongoing audits by tax authorities;

The impact of anti-bribery and international trade laws and regulations;

The risks associated with acquisitions, dispositions or other investments;

Possible systems and information technology interruptions or the failure to adequately protect intellectual property rights;

The availability of credit and restrictions imposed by credit facilities, both for the company and our clients, suppliers, subcontractors or other partners;

          Failure to maintain safe work sites;

          The impact of past and future environmental, health and safety
regulations;

          Possible limitations of bonding or letter of credit capacity;

          The company's ability to secure appropriate insurance;

          Limitations on cash transfers from subsidiaries that may restrict the

company's ability to satisfy financial obligations or to pay interest or principal when due on outstanding debt; and

Restrictions on possible transactions imposed by our charter documents and Delaware law.


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Any forward-looking statements that we may make are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those anticipated by us. Any forward-looking statements are subject to the risks, uncertainties and other factors that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements.

Due to known and unknown risks, the company's actual results may differ materially from its expectations or projections. While most risks affect only future cost or revenue anticipated by the company, some risks may relate to accruals that have already been reflected in earnings. The company's failure to receive payments of accrued amounts or incurrence of liabilities in excess of amounts previously recognized could result in a charge against future earnings. As a result, the reader is cautioned to recognize and consider the inherently uncertain nature of forward-looking statements and not to place undue reliance on them.

Additional information concerning these and other factors can be found in the company's press releases and periodic filings with the Securities and Exchange Commission, including the discussion under the heading "Item 1A. - Risk Factors" in the company's Form 10-K filed February 22, 2012. These filings are available publicly on the SEC's website at http://www.sec.gov, on the company's website at http://investor.fluor.com or upon request from the company's Investor Relations Department at (469) 398-7220. The company cannot control such risk factors and other uncertainties, and in many cases, cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties should be considered when evaluating the company and deciding whether to invest in its securities. Except as otherwise required by law, the company undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS

Consolidated revenue for the three months ended March 31, 2012 increased 24 percent to $6.3 billion from $5.1 billion for the three months ended March 31, 2011, principally due to substantial growth in the mining and metals business line of the Industrial & Infrastructure segment, as well as revenue growth in the Oil & Gas, Government and Global Services segments.

Net earnings attributable to Fluor Corporation were $155 million or $0.91 per diluted share for the three months ended March 31, 2012, compared to net earnings attributable to Fluor Corporation of $140 million or $0.78 per diluted share for the corresponding period of 2011. This increase in net earnings was primarily due to improved performance on Industrial & Infrastructure projects in the mining and metals business line and higher earnings in the Global Services and Oil & Gas segments. The Power segment and the infrastructure business line of the Industrial & Infrastructure segment contributed lower earnings for the current quarter.

The uncertain economic conditions in Europe and other markets have resulted in a highly competitive business environment that has continued to put increased pressure on margins. This trend is expected to continue and, in certain cases, may result in more lump-sum project execution for the company. In some instances, margins are being negatively impacted by the change in the mix of work performed (e.g., a higher mix of construction-related work and a higher content of customer-furnished materials, which typically generate lower margins than engineering work or projects without customer-furnished materials).

The effective tax rate, based on the company's actual operating results for the three months ended March 31, 2012 and 2011, was 26.4 percent and 33.1 percent, respectively. The effective tax rate was lower for the three month period ending March 31, 2012 due to the recognition of a deferred tax benefit of $16 million primarily attributable to foreign taxes previously paid on certain unremitted foreign earnings in South Africa.

Consolidated new awards were $8.4 billion for the three months ended March 31, 2012 compared to new awards of $6.2 billion for the three months ended March 31, 2011. The Oil & Gas segment and the mining and metals business line in the Industrial & Infrastructure segment were the major contributors to the new award activity in the first quarter of 2012. Approximately 82 percent of consolidated new awards for the three months ended March 31, 2012 were for projects located outside of the United States.

Consolidated backlog as of March 31, 2012 was $42.5 billion compared to $37.2 billion as of March 31, 2011. The increase in backlog was due to the strength of the new award activity noted above in the Oil & Gas and Industrial & Infrastructure segments. As of March 31, 2012, approximately 79 percent of consolidated backlog related to international projects. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost, and deferrals, as appropriate.


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Oil & Gas

Revenue and segment profit for the Oil & Gas segment are summarized as follows:

                   Three Months Ended
                       March 31,
(in millions)       2012        2011

Revenue          $  2,040.8   $ 1,656.1
Segment profit         73.4        61.8

Revenue and segment profit for the three months ended March 31, 2012 increased by 23 percent and 19 percent, respectively, compared to the corresponding period in 2011 as a result of higher project execution activities for various projects, including a liquefied natural gas project in Australia and a refinery expansion project in the United States. Segment profit margin of 3.6 percent for the three months ended March 31, 2012 was essentially level with the 3.7 percent segment profit margin for the three months ended March 31, 2011.

New awards for the three months ended March 31, 2012 were $3.9 billion, compared to $1.0 billion for the first quarter of 2011. Current quarter awards included major new projects in Kazakhstan and India and additional work releases for some ongoing projects in Canada. Backlog at March 31, 2012 increased 24 percent to $16.8 billion compared to $13.6 billion at March 31, 2011. Although market conditions remain very competitive, the increase in backlog reflects the improvement in the segment's markets, particularly the increasing worldwide demand for new capacity in oil and gas production, refining and petrochemicals.

Total assets in the segment were $1.3 billion as of March 31, 2012 compared to $1.2 billion as of December 31, 2011.

Industrial & Infrastructure

Revenue and segment profit for the Industrial & Infrastructure segment are summarized as follows:

                   Three Months Ended
                       March 31,
(in millions)       2012        2011

Revenue          $  2,797.9   $ 1,993.1
Segment profit        103.3        92.1

Revenue and segment profit for the three months ended March 31, 2012 increased 40 percent and 12 percent, respectively, compared to the first quarter of 2011 primarily due to substantial growth in the mining and metals business line. Segment profit margin of 3.7 percent for the three months ended March 31, 2012 decreased compared to 4.6 percent for the three months ended March 31, 2011, primarily due to higher performance for numerous projects in the infrastructure business line in 2011.

The company is involved in a dispute in connection with the Greater Gabbard Project. The dispute relates to the company's claim for additional compensation for schedule and cost impacts arising from delays in the fabrication of monopiles and transition pieces, along with certain disruption and productivity issues associated with construction activities and weather-related delays. The company believes the schedule and cost impacts are attributable to the client and other third parties. As of March 31, 2012, the company had recorded $289 million of claim revenue related to this issue for costs incurred to date. The company believes the ultimate recovery of incurred costs related to the claim is probable under ASC 605-35-25. The company will continue to periodically evaluate its position and the amount recognized in revenue with respect to this claim. The project is expected to be substantially complete by mid-2012. However, the resolution of the claim is expected to extend beyond the completion date of the project. As of March 31, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company will seek to recover in arbitration all damages resulting from the client's breaches of the contract for the project, including the claim amount and a significant portion of the liquidated damages. The client also recently filed a counterclaim against the company seeking to recover costs associated with alleged defects. To the extent the client's counterclaim is successful or the company is not successful in recovering its damages, there could be a substantial charge to earnings.

New awards in the Industrial & Infrastructure segment for the three months ended March 31, 2012 were $3.7 billion compared to $3.9 billion for the first quarter of 2011. Major new awards for the current year quarter included additional scope for an iron


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ore joint venture project in Western Australia and copper mining projects in Peru and the United States. Backlog increased eight percent to $21.4 billion as of March 31, 2012 compared to $19.8 billion as of March 31, 2011, primarily due to substantial new award activity in the mining and metals business line.

Total assets in the Industrial & Infrastructure segment were $1.1 billion as of March 31, 2012 compared to $944 million as of December 31, 2011. This increase was due to additional working capital to support project execution activities of the mining and metals business line and the Greater Gabbard Project.

Government

Revenue and segment profit for the Government segment are summarized as follows:

                   Three Months Ended
                        March 31
(in millions)       2012         2011

Revenue          $    850.1    $  818.5
Segment profit         35.3        34.1

Revenue for the three months ended March 31, 2012 increased a modest four percent compared to the same period in the prior year. Revenue increases attributable to project execution activities associated with the gaseous diffusion plant contract for the Department of Energy in Portsmouth, Ohio (the "Portsmouth Project") that was awarded in the first quarter of 2011 and an increase in the volume of work for the Logistics Civil Augmentation Program ("LOGCAP IV") for the United States Army in Afghanistan were partially offset by a reduction in revenue for certain other projects, including the close-out of the American Recovery and Reinvestment Act ("ARRA") funded work at the Savannah River Site Management and Operating Project (the "Savannah River Project") in South Carolina.

Segment profit increased three percent for the first three months of 2012 compared to the first three months of 2011, primarily due to a reforecast of amounts to be billed for indirect overhead rates and the higher project execution activities on the Portsmouth Project. The higher segment profit in the first quarter of 2012 was offset somewhat by charges totaling $13 million related to an adverse judgment associated with the company's claim on an embassy project, which is discussed further in Note 13 above, and reduced contributions from the ARRA funded work at the Savannah River Project. Segment profit margin for both the three months ended March 31, 2012 and the three months ended March 31, 2011 was 4.2 percent.

New awards were $389 million during the three months ended March 31, 2012 compared to $882 million for the same period in 2011. New awards in the first quarter of 2011 included the initial contract funding for the Portsmouth Project, which is renewed annually in the third quarter, and a higher level of advance funding for LOGCAP IV task orders. Backlog was $695 million as of March 31, 2012 compared to $811 million as of March 31, 2011. The reduction in backlog at the end of the first quarter of 2012 was primarily due to the reduced level of advance funding for LOGCAP IV task orders that impacted new awards.

Total assets in the Government segment increased to $908 million as of March 31, 2012 from $800 million as of December 31, 2011 due to an increase in working capital to support project execution activities, particularly for LOGCAP IV task orders.

Global Services

Revenue and segment profit for the Global Services segment are summarized as follows:

                   Three Months Ended
                       March 31,
(in millions)       2012         2011

Revenue          $    426.4    $  378.5
Segment profit         43.2        31.0

Revenue increased 13 percent for the three months ended March 31, 2012 compared to the same period in 2011 principally due to the equipment business line's higher volume of activity in Peru, Mexico, Africa and the Middle East.

Segment profit increased 39 percent for the first three months of 2012 compared to the first three months of 2011 primarily due to the equipment business line's growth in Afghanistan and project close-out activities in North America, as well as the


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operations and maintenance business line which experienced higher contributions from various domestic and international projects. Segment profit margin of 10.1 percent in the current quarter compared favorably to 8.2 percent for the same quarter in 2011 due to improvement in margins from the operations and maintenance business line.

New awards in the Global Services segment were $249 million for the three months ended March 31, 2012 compared to $422 million for the corresponding period in 2011. The operations and maintenance business line continues to experience lower volume related to renewals with existing clients, as well as delayed work releases. Backlog as of March 31, 2012 was $1.9 billion compared to $2.2 billion as of March 31, 2011. Operations and maintenance activities that have yet to be performed comprise Global Services backlog. Short-duration operations and maintenance activities may not contribute to ending backlog. In addition, the equipment, temporary staffing and supply chain solutions business lines do not report backlog or new awards.

Total assets in the Global Services segment were $936 million as of March 31, 2012 and $937 million as of December 31, 2011.

Power

Revenue and segment profit for the Power segment are summarized as follows:

                   Three Months Ended
                       March 31,
(in millions)       2012         2011

Revenue          $    174.9    $  211.6
Segment profit         (1.9 )      29.5

Revenue for the three months ended March 31, 2012 decreased 17 percent compared to the three months ended March 31, 2011 primarily due to the expected reduction in project execution activities on several projects which have reached or are near final completion including gas-fired power plants in Texas, Virginia and Georgia, as well as reduced volume on certain other projects progressing toward completion. Offsetting some of the overall revenue decrease was a revenue increase attributable to a number of projects awarded in 2011, including an air emissions control construction program for Luminant.

Segment profit and segment profit margin for the first quarter of 2012 declined significantly compared to the first quarter of 2011 primarily due to reduced contributions from projects nearing completion, including the gas-fired power plants in Texas and Virginia, and $10 million of expenses associated with NuScale, a small modular nuclear reactor technology company, in which the company acquired a majority interest during late 2011. The company continues to invest in NuScale operations, which are primarily research and development activities at this time. Although part of the Power segment, these activities could provide future benefits to both commercial and government clients.

The Power segment continues to be impacted by relatively weak demand for new power generation. Improving market opportunities include gas-fired baseload generation, renewable energy, regional transmission additions and air emissions compliance projects for existing coal-fired power plants. New awards in the first quarter of 2012 were $93 million compared to $57 million in the first quarter of 2011. Backlog increased to $1.8 billion as of March 31, 2012 from $812 million as of March 31, 2011, principally driven by new awards in the latter part of 2011, including an air emissions control construction program for Luminant, a new gas-fired power plant project in Texas and a new solar power project in Arizona.

Total assets in the Power segment were $170 million as of March 31, 2012 and $191 million as of December 31, 2011.

Other

Corporate general and administrative expense for the three months ended March 31, 2012 was $37.8 million compared to $33.8 million for the first quarter of 2011. This increase was the net result of several factors, none of which were individually significant.

Net interest income was $2.7 million during the three month period ended March 31, 2012 compared to net interest income of $4.7 million during the corresponding period of 2011.

Income tax expense for the three months ended March 31, 2012 and 2011 is discussed above under "Results of Operations."


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RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 of the Notes to Condensed Consolidated Financial Statements.

LITIGATION AND MATTERS IN DISPUTE RESOLUTION

See Note 13 of the Notes to Condensed Consolidated Financial Statements.

LIQUIDITY AND FINANCIAL CONDITION

Liquidity is provided by available cash and cash equivalents and marketable securities, cash generated from operations, credit facilities and access to financial markets. The company has committed and uncommitted lines of credit totaling $3.7 billion, which may be used for revolving loans, letters of credit and general purposes. The company believes that for at least the next 12 months, cash generated from operations, along with its unused credit capacity of $2.5 billion and substantial cash position, is sufficient to fund operating requirements. However, the company regularly reviews its sources and uses of liquidity and may pursue opportunities to increase its liquidity positions in favorable market conditions. The company's conservative financial strategy and consistent performance have earned it strong credit ratings, resulting in continued access to the financial markets. As of March 31, 2012, the company was in compliance with all its covenants related to its debt agreements. The company's total debt to total capitalization ("debt-to-capital") ratio as of March 31, 2012 was 13.1 percent compared to 13.6 percent as of December 31, 2011.

Cash Flows

Cash and cash equivalents were $1.9 billion as of March 31, 2012 compared to $2.2 billion as of December 31, 2011. Cash and cash equivalents combined with current and noncurrent marketable securities were $2.7 billion and $2.8 billion as of March 31, 2012 and December 31, 2011, respectively. Cash and cash equivalents are held in numerous accounts throughout the world to fund the company's global project execution activities. As of March 31, 2012 and December 31, 2011, cash and cash equivalents held outside the United States amounted to $1.4 billion and $1.5 billion, respectively. The company did not consider any cash to be permanently reinvested overseas as of March 31, 2012 and December 31, 2011 and, as a result, has accrued the U.S. deferred tax liability on foreign earnings, as appropriate.

Operating Activities

Cash utilized by operating activities was $47 million for the three months ended March 31, 2012 compared to cash provided by operating activities of $371 million for the three months ended 2011. Cash flows from operating activities result primarily from earnings sources and are impacted by changes in working capital. The year over year decrease in cash flows from operating activities is primarily attributable to fluctuations in working capital that result from normal project execution activities associated with numerous projects. Working capital balances increased during the first quarter of 2012 compared to a decline during the first quarter of 2011. The change in working capital during the first quarter of 2012 is attributable to increases in accounts receivable in the Industrial & Infrastructure and Government segments and increases in contract work in progress in the Oil & Gas, Industrial & Infrastructure and Government segments, partially offset by an increase in advance billings in the Oil & Gas and Industrial & Infrastructure segments. The higher accounts receivable balances are the result of normal billing and collection activities and not indicative of any significant collection or liquidity issue. The higher contract work in progress balances result from normal project execution activities and are expected to be billed and collected from clients. The decline in working capital in the first quarter of 2011 was attributable to an increase in advance billings for the Oil & Gas segment as well as a reduction of accounts receivable and contract work in progress in the Government segment.

During the three months ended March 2012 and 2011, the company had net cash . . .

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