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FLR > SEC Filings for FLR > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for FLUOR CORP


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

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

          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;

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;

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 September 30, 2012 increased 18 percent to $7.1 billion, from $6.0 billion for the three months ended September 30, 2011. Consolidated revenue for the nine months ended September 30, 2012 increased 20 percent to $20.6 billion, from $17.1 billion for the corresponding period in 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 growth in the Oil & Gas segment.

Net earnings attributable to Fluor Corporation were $145 million, or $0.86 per diluted share, and $461 million, or $2.72 per diluted share, for the three and nine months ended September 30, 2012, compared to net earnings attributable to Fluor Corporation of $135 million, or $0.78 per diluted share, and $441 million, or $2.51 per diluted share, for the corresponding periods of 2011. In the 2012 periods, there was improved performance in the Industrial & Infrastructure, Oil & Gas and Global Services segments, offset somewhat by lower earnings in the Power and Government segments.

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 competitive environment 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 mining and metals business line of the Industrial & Infrastructure segment has grown rapidly over the last four years, but is now showing signs of slowing down. During the third quarter of 2012, the segment experienced lower new award volume for mining projects, cancellations of two mining projects totaling $2.0 billion, and the deferral of major capital investment decisions by some mining customers due to project cost escalation, softening commodity demand and project-specific circumstances. The timing of when capital investment by these mining customers could resume is uncertain. However, it is possible that the weakened mining market conditions could be prolonged.

The effective tax rate, based on the company's operating results for the three and nine months ended September 30, 2012, was 34.8 percent and 31.7 percent, respectively, compared to 30.0 percent and 31.7 percent for the corresponding periods of 2011. The effective tax rate for the three months ended September 30, 2012 was unfavorably impacted by the payment of additional foreign taxes from the settlement of an audit and a reassessment of certain tax exposures. The same period in 2011 was favorably impacted by a worthless stock deduction. The effective tax rate was similar for the nine months ended September 30, 2012 compared to the corresponding period of 2011. The effective tax rate for the nine months ended September 30, 2012 was favorably impacted by the recognition of a deferred tax benefit of $16 million primarily attributable to foreign taxes previously


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paid on certain unremitted foreign earnings in South Africa; the same period in 2011 was favorably impacted by the worthless stock deduction mentioned above.

Consolidated new awards were $6.3 billion and $22.0 billion for the three and nine months ended September 30, 2012 compared to new awards of $6.7 billion and $22.6 billion for the three and nine months ended September 30, 2011. The Government, Oil & Gas and Industrial & Infrastructure segments were the major contributors to the new award activity in the current year periods. Approximately 73 percent of consolidated new awards for the nine months ended September 30, 2012 were for projects located outside of the United States compared to 87 percent for the first nine months of 2011.

Consolidated backlog as of September 30, 2012 decreased two percent to $40.8 billion from $41.8 billion as of September 30, 2011. As of September 30, 2012, approximately 75 percent of consolidated backlog related to projects located outside the United States compared to 80 percent as of September 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       Nine Months Ended
                     September 30,            September 30,
(in millions)       2012        2011        2012        2011

Revenue          $  2,551.6   $ 2,217.9   $ 6,887.4   $ 5,852.1
Segment profit         87.2        73.7       244.7       204.2

Revenue for the three and nine months ended September 30, 2012 increased 15 percent and 18 percent, respectively, compared to the corresponding periods in 2011. Segment profit for the three and nine months ended September 30, 2012 increased 18 percent and 20 percent, respectively, compared to the three and nine months ended September 30, 2011. The increases in revenue and segment profit were the result of higher project execution activities for several projects in the segment, including a coal bed methane gas project in Australia, a grassroots petrochemical complex in the Middle East and a major mine replacement project in Canada. Segment profit margin for the three and nine months ended September 30, 2012 was 3.4 percent and 3.6 percent, respectively, compared to 3.3 percent and 3.5 percent, respectively, for the same periods in the prior year.

New awards for the three months ended September 30, 2012 were $2.0 billion, compared to $1.6 billion for the corresponding period of 2011. Current quarter awards included a petrochemical facility project in the United States. Backlog as of September 30, 2012 increased 31 percent to $19.1 billion compared to $14.6 billion as of September 30, 2011, primarily driven by 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 $1.6 billion at September 30, 2012 from $1.2 billion as of December 31, 2011 due to an increase in working capital related to the growth in project execution activities.

Industrial & Infrastructure



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



                   Three Months Ended       Nine Months Ended
                     September 30,            September 30,
(in millions)       2012        2011        2012        2011

Revenue          $  3,201.6   $ 2,404.0   $ 9,352.2   $ 6,992.8
Segment profit        132.3        67.5       356.2       268.5

Revenue for the three and nine months ended September 30, 2012 increased 33 percent and 34 percent, respectively, compared to the corresponding periods of 2011, due to substantial growth in the mining and metals business line. Segment profit also increased significantly for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 primarily as the result of increased project contributions associated with the revenue increase for the current year, as well as the impact of charges taken in the prior year periods for the Greater Gabbard Offshore Wind Farm ("Greater


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Gabbard") Project, a $1.8 billion lump-sum project to provide engineering, procurement and construction services for the client's offshore wind farm project in the United Kingdom. Segment profit for the three and nine months ended September 30, 2011 was negatively affected by $38 million and $52 million, respectively, for these project charges, due to additional costs associated with project execution activities.

Segment profit margin for the three and nine months ended September 30, 2012 was 4.1 percent and 3.8 percent, respectively, compared to 2.8 percent and 3.8 percent, respectively, for the same periods in the prior year. Both of the 2011 comparison periods were negatively impacted by the Greater Gabbard Project charges, noted above. Additionally, in both of the current year periods, the segment had a higher mix of construction revenue than in the 2011 periods. Construction activities typically generate lower margins than engineering services due to the higher content of customer-furnished materials.

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 September 30, 2012, the company had recorded $278 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. As of September 30, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company is seeking 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 on the company's claims have been completed, and the parties are awaiting the decision of the arbitrators. The client has filed a counterclaim against the company seeking to recover costs associated with alleged defects. The counterclaim is currently scheduled for hearing in 2013. To the extent the company is not successful in recovering its damages or the client's counterclaim is successful, there could be a substantial charge to earnings.

New awards for the three months ended September 30, 2012 were $1.7 billion compared to $2.8 billion for the 2011 comparison period. New awards for the current quarter were spread across all business lines and included a managed toll lane project in Virginia and a blood fractionation project in Georgia. New awards for the 2011 quarter included the infrastructure and processing facilities for a major copper project in Peru. Backlog declined to $16.2 billion as of September 30, 2012 compared to $22.3 billion as of September 30, 2011 as a result of lower new award volume in the mining and metals business line, cancellations of two mining projects totaling $2.0 billion, and the deferral of major capital investment decisions by some mining customers due to project cost escalation, softening commodity demand and project-specific circumstances. The timing of when capital investment by these mining customers could resume is uncertain. However, it is possible that the weakened mining market conditions could be prolonged.

Total assets in the segment increased to $1.1 billion as of September 30, 2012 from $944 million as of December 31, 2011 due to an increase in working capital to support the 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       Nine Months Ended
                     September 30,            September 30,
(in millions)       2012         2011       2012        2011

Revenue          $    790.1    $  882.4   $ 2,511.5   $ 2,548.9
Segment profit         22.9        43.0        98.1       108.8

Revenue for the three months ended September 30, 2012 decreased 10 percent compared to the same period in the prior year, principally due to a reduction in the volume of work on the Logistics Civil Augmentation Program ("LOGCAP IV") for the United States Army in Afghanistan. In addition, a decline in revenue for the close-out of the American Recovery and Reinvestment Act funded work at the Savannah River Site Management and Operating Project (the "Savannah River Project") in South Carolina was offset by growth in 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. Revenue for the nine months ended September 30, 2012 declined slightly compared to the prior year period.


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Segment profit for the three months ended September 30, 2012 decreased 47 percent compared to the corresponding 2011 period, due to lower award fee on LOGCAP IV. Segment profit for the nine months ended September 30, 2012 declined 10 percent compared to the first nine months of the prior year as the result of charges totaling $13 million related to an adverse judgment in the first quarter of 2012 associated with the company's claim on an embassy project, which is discussed further in Note 13 to the Condensed Consolidated Financial Statements.

Segment profit margin for the three and nine months ended September 30, 2012 was 2.9 percent and 3.9 percent, respectively, compared to 4.9 percent and 4.3 percent for the three and nine months ended September 30, 2011. The lower segment profit margins in the 2012 periods were primarily due to the factors discussed above that impacted revenue and segment profit.

New awards for the three months ended September 30, 2012 were $2.0 billion compared to $1.7 billion for the corresponding 2011 period. This increase was primarily due to higher funding for LOGCAP IV task orders. New awards in both periods included the annual funding of the Department of Energy contracts for the Savannah River Project and the Portsmouth Project. Backlog as of September 30, 2012 was $1.6 billion compared to $1.8 billion as of September 30, 2011.

Total assets in the Government segment were $814 million as of September 30, 2012 and $800 million as of December 31, 2011.

Global Services



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



                   Three Months Ended       Nine Months Ended
                     September 30,            September 30,
(in millions)       2012         2011       2012        2011

Revenue          $    422.9    $  389.9   $ 1,252.8   $ 1,174.5
Segment profit         41.9        39.1       133.8       111.4

Revenue increased eight percent for the three months ended September 30, 2012 compared to the same period in 2011, primarily due to an increase in the operations and maintenance business line's international project execution activities. Revenue increased seven percent for the nine months ended September 30, 2012 compared to the corresponding period in the prior year, principally due to the equipment business line's increased volume of activity in Peru, Mexico and Canada. The temporary staffing and operations and maintenance business lines also contributed to the year-to-date revenue increase.

Segment profit for the three and nine months ended September 30, 2012 increased seven percent and 20 percent, respectively, compared to the same periods in 2011, primarily due to contributions from the operations and maintenance and temporary staffing business lines. The operations and maintenance business line experienced higher contributions from various domestic and international projects. The temporary staffing business line contributed to the increase in segment profit due to improvement from North American and European operations. Segment profit margin was 9.9 percent in the current quarter compared to 10.0 percent for the same quarter in 2011. Segment profit margin for the nine months ended September 30, 2012 was 10.7 percent compared to 9.5 percent for the same period in 2011 due to improvement in margins from the operations and maintenance business line.

New awards for the three months ended September 30, 2012 were $165 million compared to $302 million for the corresponding period in 2011. Backlog as of September 30, 2012 was $1.8 billion compared to $2.0 billion as of September 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 $940 million as of September 30, 2012 and $937 million as of December 31, 2011.


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Power



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



                          Three Months Ended       Nine Months Ended
                            September 30,            September 30,
(in millions)              2012         2011        2012        2011

Revenue                 $    169.9    $  143.4   $    550.5    $ 561.0
Segment profit (loss)         (6.0 )      12.6        (14.5 )     71.8

Revenue for the three months ended September 30, 2012 was 18 percent higher compared to the three months ended September 30, 2011. The revenue increase was primarily attributable to projects awarded in the latter part of 2011, including a new gas-fired power plant project in Texas and a new solar power project in Arizona. The prior year quarter included project execution activities for several projects which have since been completed, including gas-fired power plants in Texas, Virginia and Georgia. Revenue for the nine months ended September 30, 2012 was comparable to revenue for the first nine months of the prior year.

Segment profit and segment profit margin for the three months ended September 30, 2012 declined significantly compared to the three months ended September 30, 2011, primarily due to expenses associated with the company's continued investment in NuScale, a small modular nuclear reactor technology company, in which the company acquired a majority interest in late 2011. In addition, the prior year period benefitted from contributions of projects that have since been completed, including the gas-fired power plants in Texas and Virginia. Segment profit and segment profit margin for the nine months ended September 30, 2012 declined significantly compared to the comparable period of 2011, primarily due to reduced contributions from several completed projects, including the gas-fired power plants in Texas and Virginia, and expenses associated with NuScale. The NuScale expenses for the three and nine months ended September 30, 2012 were $15.7 million and $40.6 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. Market segments that are best suited to yield new near-term opportunities include gas-fired combined cycle generation, renewable energy, regional transmission feasibility additions and air emissions compliance projects for existing coal-fired power plants. New awards for the three months . . .

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