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FLR > SEC Filings for FLR > Form 10-Q on 2-May-2013All Recent SEC Filings

Show all filings for FLUOR CORP

Form 10-Q for FLUOR CORP


2-May-2013

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, 2012 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;

A failure to obtain favorable results in existing or future litigation or dispute resolution proceedings;

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;

          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;

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

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

          Liabilities arising from faulty engineering services;

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

          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 including climate change regulations;

          Possible limitations of bonding or letter of credit capacity;

          The company's ability to secure appropriate insurance;


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The risks associated with acquisitions, dispositions or other investments;

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.

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 20, 2013. 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

Effective January 1, 2013, the company implemented certain organizational changes that impacted the composition of its reportable segments. The company's operations and maintenance activities, previously included in the Global Services segment, have been integrated into the Industrial & Infrastructure segment. Additionally, the Global Services segment now includes activities associated with the company's efforts to grow its fabrication and construction capabilities and the operations of a new procurement entity, Acqyre, which was formed to provide strategic sourcing solutions to third parties. Operating information by segment for 2012 has been recast to reflect these organizational changes.

Consolidated revenue for the three months ended March 31, 2013 increased 14 percent to $7.2 billion from $6.3 billion for the three months ended March 31, 2012, principally due to substantial growth in the Oil & Gas and Power segments, as well as revenue growth in the mining and metals business line of the Industrial & Infrastructure segment.

Net earnings attributable to Fluor Corporation were $166 million or $1.02 per diluted share for the three months ended March 31, 2013, compared to net earnings attributable to Fluor Corporation of $155 million or $0.91 per diluted share for the corresponding period of 2012. This increase in net earnings was primarily due to improved performance in the Oil & Gas and Industrial & Infrastructure segments, offset somewhat by a higher effective tax rate discussed below.

A highly competitive business environment has continued to put pressure on margins. In some instances, margins have been 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).

In addition to the margin pressures noted above, certain market trends have emerged. First, the Oil & Gas segment has continued to show signs of strengthening, particularly for the upstream and petrochemicals markets. Second, the mining and metals business line of the Industrial & Infrastructure segment has recently slowed down as major capital investment decisions by some mining customers have been deferred, after four years of rapid growth. Third, the full impact of the federal government's budget sequestration is not known at this time, but future funding for certain work, such as the company's Department of Energy projects, could be affected.


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The effective tax rate, based on the company's operating results for the three months ended March 31, 2013 and 2012, was 30.4 percent and 26.4 percent, respectively. The effective tax rate was higher for the three month period ending March 31, 2013 as the prior year quarter included 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 $6.5 billion for the three months ended March 31, 2013 compared to new awards of $8.4 billion for the three months ended March 31, 2012. The Oil & Gas segment and the infrastructure business line in the Industrial & Infrastructure segment were the major contributors to the new award activity in the first quarter of 2013. Approximately 35 percent of consolidated new awards for the three months ended March 31, 2013 were for projects located outside of the United States.

Consolidated backlog as of March 31, 2013 was $37.5 billion compared to $42.5 billion as of March 31, 2012. The decline in backlog was due to reduced mining new award volume since the first quarter of last year and the cancellation of two mining projects during the third quarter of 2012, totaling $2.0 billion. As of March 31, 2013, approximately 68 percent of consolidated backlog related to projects outside of the United States. 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
                       March 31,
(in millions)       2013        2012

Revenue          $  2,769.3   $ 2,040.8
Segment profit        104.5        73.4

Revenue for the three months ended March 31, 2013 increased 36 percent compared to the three months ended March 31, 2012 as a result of increased project execution activities for several projects in the segment, including a coal bed methane gas project in Australia, a grass roots oil sands bitumen processing facility in Canada that was awarded in 2012 and a petrochemicals project in the Middle East. Certain projects progressing toward completion partially offset this increase in volume, including upstream services associated with another Canadian oil sands facility.

Segment profit for first three months of 2013 increased 42 percent compared to the corresponding period in 2012 primarily as the result of the project activity noted above that drove the broad-based net increase in revenue. Segment profit margin of 3.8 percent for the three months ended March 31, 2013 increased from 3.6 percent segment profit margin for the three months ended March 31, 2012, primarily due to improvement in the segment's operating leverage with the increase in business volume.

New awards for the three months ended March 31, 2013 were $3.1 billion, compared to $3.9 billion for the first quarter of 2012. Significant current quarter awards included a petrochemical facility in the United States and a petrochemical project in China. Backlog as of March 31, 2013 increased 11 percent to $18.6 billion, compared to $16.8 billion as of March 31, 2012. Although market conditions remain competitive, the increase in backlog reflects increasing worldwide demand for new capacity in oil and gas production and petrochemicals.

Total assets in the segment were $1.8 billion as of March 31, 2013 compared to $1.7 billion as of December 31, 2012.

Industrial & Infrastructure

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

                   Three Months Ended
                       March 31,
(in millions)       2013        2012

Revenue          $  3,132.2   $ 3,041.7
Segment profit        126.9       113.5


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Revenue for the three months ended March 31, 2013 increased three percent compared to the first quarter of 2012 due to growth in the mining and metals business line, which outpaced a smaller revenue decline for the other business lines. Segment profit for the first three months of 2013 increased 12 percent compared to the same period in 2012, primarily due to the infrastructure business line and specifically the successful completion of a toll road project in Texas and the achievement of certain milestones for a domestic bridge project. The segment also experienced modest increases in profitability from the operations and maintenance and mining and metals business lines for the 2013 period. Segment profit margin increased to 4.1 percent for the three months ended March 31, 2013 compared to 3.7 percent for the three months ended March 31, 2012, principally driven by the above-referenced higher performance in the infrastructure business line.

The company is involved in a dispute in connection with the substantially completed Greater 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. The remaining open issues related to the dispute involve a counterclaim that the client has filed against the company seeking to recover approximately $100 million for past and future costs associated with, among other things, monitoring certain monopiles and transition pieces for alleged defects. The hearing on the client's counterclaim commenced on April 15, 2013. While the ultimate outcome of the hearing is uncertain, the company believes that the monopiles and transition pieces meet applicable performance requirements and therefore does not believe that a loss associated with the counterclaim is probable. As a result, the company has not recorded a charge under ASC 450. To the extent the client's counterclaim is successful, there could be a substantial charge to earnings. See Note 13 to the Condensed Consolidated Financial Statements for further discussion of the legal proceedings related to the Greater Gabbard Project.

New awards in the Industrial & Infrastructure segment for the three months ended March 31, 2013 were $2.2 billion compared to $4.0 billion for the first quarter of 2012. New awards for the current quarter were primarily driven by the infrastructure business line and included the Tappan Zee Bridge project in New York and a road project in Texas. The new awards in the first quarter of 2012 were mostly in the mining and metals business line, which has since experienced 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. Backlog decreased 31 percent to $16.0 billion as of March 31, 2013 compared to $23.3 billion as of March 31, 2012. The decline in backlog was due to reduced mining new award volume since the first quarter of last year and the cancellation of two mining projects during the third quarter of 2012, totaling $2.0 billion.

Total assets in the Industrial & Infrastructure segment were $901 million as of March 31, 2013 compared to $752 million as of December 31, 2012. This increase resulted primarily from the consolidation of a variable interest entity in the mining and metals business line.

Government

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

                   Three Months Ended
                       March 31,
(in millions)       2013         2012

Revenue          $    751.2    $  850.1
Segment profit         41.3        35.3

Revenue for the three months ended March 31, 2013 decreased 12 percent compared to the same period in the prior year. Approximately half of the decrease was due to a reduction in project execution activities for the Logistics Civil Augmentation Program ("LOGCAP IV") for the United States Army in Afghanistan. The majority of the rest of the revenue decline was due to reduced project execution activities at the Savannah River Site Management and Operating Project (the "Savannah River Project") in South Carolina, including the winding down of the American Recovery and Reinvestment Act ("ARRA") portion of the work at the site. The federal government's March 1, 2013 budget sequestration contributed to the revenue decrease for the non-ARRA work at the Savannah River Project.

Segment profit increased 17 percent for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to the positive impact on segment profit in the first quarter of 2013 as a result of negotiations related to the close out of prior year indirect rates and an agreement with the client at the end of 2012 to change the LOGCAP IV award fee to a fixed fee. Segment profit in the first quarter of 2012 was reduced for a charge of $13 million related to an adverse judgment associated with the company's claim on an embassy project (discussed further in


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Note 13 above), but this impact was largely offset by a favorable reforecast of
amounts to be billed for indirect overhead rates. Segment profit margin for the three months ended March 31, 2013 and 2012 was 5.5 percent and 4.2 percent, respectively. This improvement was due to the factors noted above impacting revenue and segment profit.

New awards were $756 million during the three months ended March 31, 2013 compared to $389 million for the same period in the prior year. This increase was primarily due to higher incremental funding for LOGCAP IV task orders. The full impact of the federal government's budget sequestration is not known at this time, but future funding for certain work, such as the company's Department of Energy projects, could be affected. Backlog as of March 31, 2013 increased 39 percent to $964 million compared to $695 million as of March 31, 2012, primarily due to higher funding for LOGCAP IV.

Total assets in the Government segment were $894 million as of March 31, 2013 compared to $827 million as of December 31, 2012.

Global Services

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

                   Three Months Ended
                       March 31,
(in millions)       2013         2012

Revenue          $    149.9    $  182.6
Segment profit         27.7        33.0

Revenue decreased 18 percent for the three months ended March 31, 2013 compared to the same period in 2012, primarily due to the equipment business line's reduced volume of activities in Peru, Mexico and the Middle East. This decrease was partially offset by a higher volume of work from the equipment business line in Africa and Chile. The revenue increase in Africa was driven primarily from the acquisition of an equipment company in the third quarter of 2012.

Segment profit decreased 16 percent for the first three months of 2013 compared to the first three months of 2012, principally as the result of reduced contributions from the equipment business line in the Middle East, United States and Mexico. This decrease in segment profit was partially offset by increased profitability in South America and Africa, as well as reduced segment overhead. Segment profit margin was 18.5 percent in the current quarter compared to 18.1 percent for the same quarter in 2012.

The equipment, temporary staffing, supply chain solutions and construction business lines do not report backlog or new awards.

Total assets in the Global Services segment were $776 million as of March 31, 2013 compared to $769 million as of December 31, 2012.

Power



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



                          Three Months Ended
                              March 31,
(in millions)              2013         2012

Revenue                 $    383.0    $  174.9
Segment profit (loss)         (6.8 )      (1.9 )

Revenue for the three months ended March 31, 2013 increased substantially compared to the three months ended March 31, 2012, primarily due to construction progress on several projects awarded in 2011 and 2012, including a new gas-fired power plant project in Texas and new solar power projects in Arizona and California.

Segment profit and segment profit margin for the first quarter of 2013 and 2012 were adversely impacted by 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. The NuScale expenses for the first quarter of 2013 and 2012 were $15 million and $10 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.


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The Power segment continues to be impacted by relatively weak demand for new power generation. Market segments that are best suited to yield 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 in the first quarter of 2013 were $448 million compared to $93 million in the first quarter of 2012. The current quarter awards include a renewal of a fossil power maintenance contract and an additional phase of work on the solar power project in California. Backlog increased to $1.9 billion as of March 31, 2013 from $1.8 billion as of March 31, 2012.

Total assets in the Power segment increased to $155 million at March 31, 2013 from $121 million as of December 31, 2012 due to an increase in working capital related to the growth in project execution activities.

Other

Corporate general and administrative expense for the three months ended March 31, 2013 was $32.6 million compared to $37.8 million for the first quarter of 2012. This decrease was primarily the result of lower compensation expense.

Net interest expense was $2.9 million during the three month period ended March 31, 2013 compared to net interest income of $2.7 million during the corresponding period of 2012. Interest income was higher in the first quarter of 2012, primarily due to larger cash balances in certain international locations that earn higher yields.

Income tax expense for the three months ended March 31, 2013 and 2012 is discussed above under "Results of Operations."

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 $4.3 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 $3.4 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 capital markets. As of March 31, 2013, 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, 2013 was 12.9 percent compared to 13.9 percent as of December 31, 2012.

Cash Flows

Cash and cash equivalents were $2.0 billion as of March 31, 2013 compared to $2.2 billion as of December 31, 2012. Cash and cash equivalents combined with current and noncurrent marketable securities were $2.5 billion as of March 31, 2013 compared to $2.6 billion as of December 31, 2012. 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, 2013 and December 31, 2012, non-U.S. cash and cash equivalents were $1.2 billion and $1.3 billion, respectively. Non-U.S. cash and cash equivalents exclude deposits of U.S. legal entities that are either swept into overnight, offshore accounts or invested in short-term, offshore time deposits, for which there is unrestricted access. The company did not consider any cash to be permanently reinvested overseas as of . . .

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