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FLR > SEC Filings for FLR > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for FLUOR CORP

Form 10-Q for FLUOR CORP


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

Client delays or defaults in making payments;

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;

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;

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 services that could result in significant professional or product liability, warranty or other claims;

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;


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          The company's ability to secure appropriate insurance;

          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 as part of the new industrial services business line, which also includes project execution activities that were previously reported in the manufacturing and life sciences business line. 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 June 30, 2013 increased modestly to $7.2 billion from $7.1 billion for the three months ended June 30, 2012. Consolidated revenue for the six months ended June 30, 2013 increased seven percent to $14.4 billion from $13.4 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 Oil & Gas and Power segments, partially offset by revenue declines in the other segments.

Net earnings attributable to Fluor Corporation were $161 million, or $0.98 per diluted share, and $328 million, or $2.00 per diluted share, for the three and six months ended June 30, 2013, compared to net earnings attributable to Fluor Corporation of $161 million, or $0.95 per diluted share, and $316 million, or $1.86 per diluted share, for the corresponding periods of 2012. In the 2013 periods, there was improved performance in the Oil & Gas and Power segments, offset by lower earnings in the Government and Global Services segments.

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).


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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 federal government has accelerated the closure of bases in the execution of the Logistics Civil Augmentation Program ("LOGCAP IV") in Afghanistan which has reduced the volume of work for the Government segment.

The effective tax rate, based on the company's actual operating results for the three and six months ended June 30, 2013, was 30.6 percent and 30.5 percent, respectively, compared to 33.2 percent and 30.1 percent for the corresponding periods of 2012. The lower effective tax rate for the three month period ending June 30, 2013 was primarily attributable to increased earnings related to noncontrolling interests for joint ventures and partnerships for which taxes are not typically paid by the company.

Consolidated new awards were $7.2 billion and $13.7 billion for the three and six months ended June 30, 2013 compared to new awards of $7.3 billion and $15.7 billion for the three and six months ended June 30, 2012. The Oil & Gas and Industrial & Infrastructure segments were the major contributors to the new award activity in the current year periods. Approximately 66 percent of consolidated new awards for the six months ended June 30, 2013 were for projects located outside of the United States compared to 87 percent for the first six months of 2012.

Consolidated backlog as of June 30, 2013 decreased 14 percent to $37.0 billion from $43.0 billion as of June 30, 2012. The decline in backlog was primarily due to lower new award volume in the mining and metals business line since the second quarter of last year and cancellations of two mining projects during the third quarter of 2012 totaling $2.0 billion. As of June 30, 2013, approximately 70 percent of consolidated backlog related to projects located outside the United States compared to 82 percent as of June 30, 2012. 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)       2013        2012        2013        2012

Revenue          $  2,856.5   $ 2,295.0   $ 5,625.8   $ 4,335.8
Segment profit        106.8        84.1       211.3       157.5

Revenue for the three and six months ended June 30, 2013 increased 24 percent and 30 percent respectively, compared to the corresponding periods in 2012. The increase in revenue for the comparison periods was the result of higher project execution activities for various projects in different regions. The revenue increase in the current quarter compared to the second quarter of 2012 was primarily attributable to oil sands facilities in Canada and a petrochemicals project in the Middle East. These same projects drove the revenue increase in the first six months of 2013 compared to the first six months of 2012, along with a substantial increase in project execution activities for a coal bed methane project in Australia. During the most recent quarter and the first six months of 2013, certain projects had revenue declines when compared to the prior year periods, including upstream services for another Canadian oil sands facility, which offset some of the revenue growth noted above.

Segment profit for the three and six months ended June 30, 2013 increased 27 percent and 34 percent respectively, compared to the corresponding periods in 2012. The same collection of geographically broad-based projects that drove the net revenue increases, discussed above, also contributed to the segment profit increases, along with petrochemicals complexes in the United States and the Middle East and a gas processing project in Kazakhstan. For the six month comparison period, the most significant contributor to the segment profit increase was the coal bed methane project in Australia.

Segment profit margin for the three and six months ended June 30, 2013 was 3.7 percent and 3.8 percent, respectively, compared to 3.7 percent and 3.6 percent, respectively, for the three and six months ended June 30, 2012.

New awards for the three months ended June 30, 2013 were $3.3 billion compared to $5.0 billion for the corresponding period of 2012. Current quarter new awards included new scope and additional releases associated with upstream and petrochemical projects in Russia and North America. The new awards for the second quarter of the prior year included new construction management scope and an additional release of work associated with a grassroots oil sands bitumen processing facility in Canada. Backlog as of June 30, 2013 was $18.7 billion compared to $19.5 billion as of June 30, 2012. Although market


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conditions remain competitive, there continues to be an increasing worldwide demand for new capacity in oil and gas production and petrochemicals. The segment is well positioned for new project activity in the gas monetization market on the Gulf Coast of the United States.

Total assets in the segment increased to $1.9 billion as of June 30, 2013 from $1.7 billion as of December 31, 2012 due to higher levels of working capital needed to support the segment's growth.

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)       2013        2012        2013        2012

Revenue          $  3,082.3   $ 3,595.2   $ 6,214.5   $ 6,636.9
Segment profit        129.4       131.1       256.3       244.6

Revenue for the three and six months ended June 30, 2013 decreased 14 percent and six percent, respectively, compared to the three and six months ended June 30, 2012, primarily as a result of decreased volume in the mining and metals business line.

Segment profit for the three months ended June 30, 2013 was relatively unchanged from the corresponding period in the prior year, as lower contributions associated with the decline in volume for the mining and metals business line was largely offset by improvement in the industrial services business line which experienced improved performance from various international projects. Segment profit for the six months ended June 30, 2013 increased five percent compared to the corresponding period in the prior year. The decline in segment profit for the mining and metals business line was more than offset by the above-referenced improved contributions from the industrial services business line, as well as increased contributions in the infrastructure business line due to the successful completion of a toll road project in Texas and the achievement of certain milestones for a domestic bridge project, both during the three months ended March 31, 2013.

Segment profit margins of 4.2 percent and 4.1 percent for the three and six months ended June 30, 2013 increased compared to segment profit margins of 3.6 percent and 3.7 percent for the three and six months ended June 30, 2012 due to the same factors noted above that impacted revenue and segment profit.

The company was involved in a dispute in connection with the 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. During the second quarter of 2013, the company reached a settlement on all outstanding claims related to the project with no material effect on earnings. The settlement resolved all disputes, and this concluded the company's involvement in the completion of the project.

New awards for the three months ended June 30, 2013 were $3.6 billion compared to $1.4 billion for the second quarter of 2012. The current year period included a new award for the continued expansion of a large copper project in Peru. Backlog decreased to $16.2 billion as of June 30, 2013 compared to $21.4 billion as of June 30, 2012. The decline in backlog was due to lower new award volume in the mining and metals business line since the second quarter of last year and cancellations of two mining projects during the third quarter of 2012 totaling $2.0 billion. The timing of when capital investment by these mining customers could resume is uncertain, and it is possible that the weakened mining market conditions could be prolonged.

Total assets in the Industrial & Infrastructure segment were $918 million as of June 30, 2013 compared to $752 million as of December 31, 2012. This increase was due to the consolidation of a variable interest entity in the mining and metals business line during the first quarter of 2013, offset somewhat by a reduction in project working capital associated with the decrease in volume in the mining and metals business line.


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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)       2013         2012       2013        2012

Revenue          $    674.5    $  871.4   $ 1,425.8   $ 1,721.5
Segment profit         13.6        39.9        54.9        75.2

Revenue for the three and six months ended June 30, 2013 decreased 23 percent and 17 percent, respectively, compared to the same periods in the prior year. Nearly two-thirds of the decrease for both periods 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 for both comparative periods 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 for the three and six months ended June 30, 2013 decreased 66 percent and 27 percent, respectively, compared to the three months and six months of the corresponding 2012 periods, primarily due to reduced contributions associated with the decline in project execution activities for LOGCAP IV task orders. Segment profit in the second quarter of 2013 was also negatively affected by a $17 million charge related to an adverse judgment associated with the company's final claim on an embassy project. The first six months of 2013 benefitted from the positive impact on segment profit from negotiations in the first quarter 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 half of 2012 was reduced for a $13 million charge related to an adverse judgment in the first quarter of last year associated with a claim on another embassy project. (Both of the embassy projects are discussed further in Note 13 above.)

Segment profit margin for the three and six months ended June 30, 2013 was 2.0 percent and 3.9 percent, respectively, compared to 4.6 percent and 4.4 percent for the three and six months ended June 30, 2012. Segment profit margins were comparatively lower in the 2013 periods, primarily as the result of the factors affecting revenue and segment profit noted above.

New awards for the three months ended June 30, 2013 were $256 million compared to $769 million for the same period in the prior year. This decrease was primarily due to lower incremental funding for LOGCAP IV task orders and reduced incremental initiatives for the Savannah River Project. Backlog was $531 million as of June 30, 2013 compared to $505 million as of June 30, 2012.

Total assets in the Government segment were $581 million as of June 30, 2013 compared to $827 million as of December 31, 2012. This decrease was primarily the result of reduced project working capital needs for LOGCAP IV.

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)       2013         2012        2013       2012

Revenue          $    154.4    $  161.0   $    304.3   $ 343.6
Segment profit         27.6        38.2         55.3      71.2

Revenue decreased slightly for the three months ended June 30, 2013 compared to the same period in 2012 due to reduced volume in the equipment business line in North America. Revenue decreased 11 percent for the six months ended June 30, 2013 compared to the corresponding period in the prior year, principally due to a one-time sale of equipment in Peru in the equipment business line during the first quarter of 2012. The equipment business line experienced improved volume in Africa and Chile during the first six months of 2013 which was more than offset by a decrease in volume due to project close-out activities in the United States and the Middle East, as well as softness in Mexico equipment rental activities for the same period.


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Segment profit for the three and six months ended June 30, 2013 decreased 28 percent and 22 percent respectively, compared to the same periods in 2012, principally as the result of reduced contributions from the equipment business line in the United States, Mexico and the Middle East.

Segment profit margin for the three and six months ended June 30, 2013 was 17.8 percent and 18.2 percent, respectively, compared to 23.7 percent and 20.7 percent for the three and six months ended June 30, 2012. The decrease in segment profit margins in the current year periods was due to favorable project resolutions and equipment sales in 2012 from the equipment business line.

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 $738 million as of June 30, 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       Six Months Ended
                        June 30,                June 30,
(in millions)       2013         2012        2013       2012

Revenue          $    422.6    $  205.7   $    805.6   $ 380.6
Segment profit         10.6        (6.6 )        3.8      (8.5 )

Revenue for the three and six months ended June 30, 2013 increased substantially compared to the three and six months ended June 30, 2012, primarily due to construction progress on a gas-fired power plant project in Texas and two solar power projects in Arizona and California.

Segment profit and segment profit margin for the three and six months ended June 30, 2013 increased significantly compared to the three and six months ended June 30, 2012, due to increased contributions from numerous projects, including the solar power projects noted above. Segment profit and segment profit margin for the three and six months ended June 30, 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 three months ended June 30, 2013 and 2012 were $13 million and $15 million, respectively. The NuScale expenses for the six months ended June 30, 2013 and 2012 were $28 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. Markets segments that are best suited to yield near term opportunities include gas-fired combined cycle generation, renewable energy, regional transmission feasibility studies and additions, and air emissions compliance projects for existing coal-fired power plants. New awards for the three months ended June 30, 2013 were $59 million compared to $118 million in the second quarter of 2012. Backlog decreased modestly to $1.6 billion as of June 30, 2013 from $1.7 billion as of June 30, 2012.

Total assets in the Power segment increased to $182 million as of June 30, 2013 from $121 million as of December 31, 2012, primarily due to an increase in working capital to support project execution activities.

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