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FLR > SEC Filings for FLR > Form 10-Q on 2-Aug-2012All Recent SEC Filings

Show all filings for FLUOR CORP

Form 10-Q for FLUOR CORP


2-Aug-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

Summary

Consolidated revenue for the three months ended June 30, 2012 increased 18 percent to $7.1 billion from $6.0 billion for the three months ended June 30, 2011. Consolidated revenue for the six months ended June 30, 2012 increased 21 percent to $13.4 billion from $11.1 billion for the first half of the prior year. The revenue increases in the current year periods were 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 segment.

Net earnings attributable to Fluor Corporation were $161 million, or $0.95 per diluted share, and $316 million, or $1.86 per diluted share, for the three and six months ended June 30, 2012, compared to net earnings attributable to Fluor Corporation of $165 million, or $0.94 per diluted share, and $305 million, or $1.72 per diluted share, for the corresponding periods of 2011. In the 2012 periods, there was improved performance in the Industrial & Infrastructure, Oil & Gas, Global Services and Government segments, offset by lower earnings in the Power segment.

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 and six months ended June 30, 2012 was 33.2 percent and 30.1 percent, respectively, compared to 31.9 percent and 32.5 percent for the corresponding periods of 2011. The higher effective tax rate for the three months ended June 30, 2012 compared to the same period in the prior year was primarily due to an increase in state tax expense. The lower effective tax rate for the six months ended June 30, 2012 compared to the first six months of 2011 was 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 $7.3 billion and $15.7 billion for the three and six months ended June 30, 2012 compared to new awards of $9.7 billion and $15.9 billion for the three and six months ended June 30, 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 current year periods. Approximately 87 percent of consolidated new awards for the six months ended June 30, 2012 were for projects located outside of the United States compared to 92 percent for the first six months of 2011.

Consolidated backlog as of June 30, 2012 increased seven percent to $43.0 billion from $40.3 billion as of June 30, 2011. As of June 30, 2012, approximately 82 percent of consolidated backlog related to projects located outside the United States compared


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to 81 percent as of June 30, 2011. 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.

Oil & Gas

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

                   Three Months Ended       Six Months Ended
                        June 30,                June 30,
(in millions)       2012        2011        2012        2011

Revenue          $  2,295.0   $ 1,978.1   $ 4,335.8   $ 3,634.2
Segment profit         84.1        68.7       157.5       130.5

Revenue for the three and six months ended June 30, 2012 increased 16 percent and 19 percent, respectively, compared to the corresponding periods in 2011. Segment profit for the three and six months ended June 30, 2012 increased 22 percent and 21 percent, respectively, compared to the corresponding periods in 2011. The increase in revenue and segment profit was a result of higher project execution activities for various projects, including a coal bed methane gas project in Australia and a refinery expansion project in the United States.

Segment profit margin for the three and six months ended June 30, 2012 was 3.7 percent and 3.6 percent, respectively, compared to 3.5 percent and 3.6 percent, respectively, for the three and six months ended June 30, 2011.

New awards for the three and six months ended June 30, 2012 were $5.0 billion and $9.0 billion, respectively, compared to $3.2 billion and $4.2 billion for the corresponding periods of 2011. Current quarter awards included new construction management scope and additional release of work associated with a grassroots oil sands bitumen processing facility in Canada. Backlog as of June 30, 2012 increased 30 percent to $19.5 billion compared to $14.9 billion as of June 30, 2011, primarily driven by the strong new award activity in the first half of this year. 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 increased to $1.4 billion at June 30, 2012 from $1.2 billion as of December 31, 2011 due to an increase in project working capital for project execution activities.

Industrial & Infrastructure



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



                   Three Months Ended       Six Months Ended
                        June 30,                June 30,
(in millions)       2012        2011        2012        2011

Revenue          $  3,352.7   $ 2,595.8   $ 6,150.6   $ 4,588.9
Segment profit        120.6       108.9       223.9       201.0

Revenue for the three and six months ended June 30, 2012 increased 29 percent and 34 percent, respectively, compared to the three and six months ended June 30, 2011 as a result of continued growth in the mining and metals business line.

Segment profit for the three and six months ended June 30, 2012 increased 11 percent compared to the corresponding periods in the prior year primarily due to growth in the mining and metals business line. The infrastructure business line also contributed to the increase in segment profit for both 2012 periods due to the achievement of milestones on a project in California. Segment profit margins of 3.6 percent for the three and six months ended June 30, 2012 decreased compared to segment profit margins of 4.2 percent and 4.4 percent for the three and six months ended June 30, 2011. This resulted from an increase in the proportion of mining and metals business line revenue, which generates lower margins than revenue from the other business lines due to a lower risk profile and a higher content of customer-furnished materials during construction.

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


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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 June 30, 2012, the company had recorded $283 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 substantially complete. However, the resolution of the claim is expected to extend beyond the completion date of the project. As of June 30, 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. Hearings in the arbitration have commenced. 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 for the three months ended June 30, 2012 were $1.1 billion compared to $5.1 billion for the second quarter of 2011. The prior year period included new awards for the continued expansion of a major iron ore project in Australia, as well as a large copper project in Chile. Segment backlog decreased to $19.5 billion as of June 30, 2012 compared to $21.4 billion as of June 30, 2011.

Total assets in the Industrial & Infrastructure segment were $1.1 billion as of June 30, 2012 compared to $944 million as of December 31, 2011. This increase was primarily due to an increase in working capital to support project execution activities in the mining and metals business line.

Government



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



                   Three Months Ended       Six Months Ended
                        June 30,                June 30,
(in millions)       2012         2011       2012        2011

Revenue          $    871.4    $  848.0   $ 1,721.5   $ 1,666.5
Segment profit         39.9        31.7        75.2        65.8

Revenue for both the three months and six months ended June 30, 2012 increased a modest three percent compared to the same periods in the prior year. Segment profit for the three and six months ended June 30, 2012 increased 26 percent and 14 percent, respectively, compared to the same periods in the prior year principally due to an increase in the volume of work and improved award fee performance on the Logistics Civil Augmentation Program ("LOGCAP IV") for the United States Army in Afghanistan. The stronger performance for the six months ended June 30, 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.

Segment profit margin for the three and six months ended June 30, 2012 was 4.6 percent and 4.4 percent, respectively, compared to 3.7 percent and 3.9 percent for the three and six months ended June 30, 2011. The improvement in segment profit margins for the 2012 periods was primarily due to the factors discussed above that impacted segment profit.

New awards for the three months ended June 30, 2012 were $769 million compared to $1.1 billion for the corresponding 2011 period. New awards for the prior year period included advanced funding for LOGCAP IV task orders. Segment backlog decreased to $505 million as of June 30, 2012 compared to $1.1 billion as of June 30, 2011, principally due to the work-off of the LOGCAP IV advanced funding.

Total assets in the Government segment were $850 million as of June 30, 2012 and $800 million as of December 31, 2011.


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Global Services



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



                   Three Months Ended       Six Months Ended
                        June 30,                June 30,
(in millions)       2012         2011        2012       2011

Revenue          $    403.5    $  406.1   $    829.9   $ 784.6
Segment profit         48.7        41.3         91.9      72.3

Revenue for the three months ended June 30, 2012 was comparable to the same period in 2011. Revenue increased six percent for the six months ended June 30, 2012 compared to the corresponding period in the prior year, principally due to the equipment business line's higher volume of activity in Mexico and Peru.

Segment profit for the three months ended June 30, 2012 increased 18 percent compared to the three months ended June 30, 2011, primarily due to higher contributions from the operations and maintenance and equipment business lines which experienced improved performance from various domestic and international projects. Segment profit for the six months ended June 30, 2012 increased 27 percent compared to the first six months of 2011 as the result of improved performance in the operations and maintenance, equipment and temporary staffing business lines. The segment profit improvement in the operations and maintenance business line was driven by projects in the United States. The improved performance in the equipment business line was principally due to operations in Afghanistan, Canada, the United States and Mexico, while the temporary staffing business line also experienced increased contributions both domestically and internationally during the first six months of 2012.

Segment profit margin for the three and six months ended June 30, 2012 was 12.1 percent and 11.1 percent, respectively, compared to 10.1 percent and 9.2 percent for the three and six months ended June 30, 2011 due to improvement in margins from the operations and maintenance business line.

New awards for the three months ended June 30, 2012 were $279 million compared to $164 million for the corresponding period in 2011. Backlog as of June 30, 2012 was $1.9 billion compared to $2.1 billion as of June 30, 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 $876 million as of June 30, 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       Six Months Ended
                               June 30,                June 30,
(in millions)              2012         2011        2012       2011

Revenue                 $    205.7    $  205.9   $    380.6   $ 417.5
Segment profit (loss)         (6.6 )      29.7         (8.5 )    59.2

Revenue for the three months ended June 30, 2012 was comparable to the three months ended June 30, 2011. Revenue for the six months ended June 30, 2012 declined nine percent compared to the six months ended June 30, 2011. This decline was 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. This overall revenue decrease was offset somewhat by an increase in revenue attributable to projects awarded in 2011, including an air emissions control construction program for Luminant and a new gas-fired power plant in Texas.

Segment profit and segment profit margin for the three and six months ended June 30, 2012 declined significantly compared to the three and six months ended June 30, 2011, primarily due to reduced contributions from projects completed or nearing completion, including the gas-fired power plants in Texas and Virginia, and expenses associated with NuScale, a small modular nuclear reactor technology company, in which the company acquired a majority interest in late 2011. The NuScale expenses for


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the three and six months ended June 30, 2012 were $15 million and $25 million, respectively. The operations of NuScale are primarily for research and development activities. 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 for the three months ended June 30, 2012 were $118 million compared to $107 million in the second quarter of 2011. Backlog increased to $1.7 billion as of June 30, 2012 from $744 million as of June 30, 2011, primarily the result of new award activity 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 $133 million as of June 30, 2012 and $191 million as of December 31, 2011.

Other

Corporate general and administrative expense for the three and six months ended June 30, 2012 was $31.2 million and $69.0 million compared to $31.1 million and $64.9 million for the three and six months ended June 30, 2011.

Net interest income was $0.9 million and $3.6 million during the three and six month periods ended June 30, 2012 compared to net interest income of $5.5 million and $10.2 million during the corresponding periods of 2011. The decrease in net interest income for the three and six months ended June 30, 2012 compared to the same periods in the prior year was primarily due to interest expense on the $500 million of 3.375% Senior Notes that were issued in September 2011.

Income tax expense for the three and six months ended June 30, 2012 and 2011 is discussed above under "Results of Operations - Summary."

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 $3.8 billion, which may be used for revolving loans, letters of credit and/or 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 support operating requirements. However, the company regularly reviews its sources and uses of liquidity and may pursue opportunities to increase its liquidity positions. 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 June 30, 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 June 30, 2012 was 13.0 percent compared to 13.6 percent as of December 31, 2011.

Cash Flows

Cash and cash equivalents were $1.8 billion as of June 30, 2012 compared to $2.2 billion as of December 31, 2011. Cash and cash equivalents combined with current and noncurrent marketable securities were $2.5 billion and $2.8 billion as of June 30, 2012 and December 31, 2011, respectively. Cash and cash equivalents are held in numerous accounts throughout the world to fund the company's global . . .

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