UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
Commission File Number: 1-16129
FLUOR CORPORATION
One Enterprise Drive, Aliso Viejo, CA 92656
(949) 349-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of October 31, 2003, there were 82,041,981 shares of common stock outstanding.
TABLE OF CONTENTS
September 30, 2003
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FLUOR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF EARNINGSThree Months Ended September 30, 2003 and 2002
UNAUDITED
See Accompanying Notes
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FLUOR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF EARNINGSNine Months Ended September 30, 2003 and 2002
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FLUOR CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSeptember 30, 2003 and December 31, 2002
* Amounts at December 31, 2002 have been derived from audited financial statements.
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FLUOR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSNine Months Ended September 30, 2003 and 2002
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FLUOR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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FLUOR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
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Item 2: Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the condensed consolidated financial statements and accompanying notes and the company’s December 31, 2002 annual report on Form 10-K. For purposes of reviewing this document, “operating profit” is calculated as revenues less cost of revenues.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made herein, including statements regarding the company’s projected earnings levels, new awards and backlog levels and the implementation of strategic initiatives and organizational changes are forward-looking in nature. These forward-looking statements reflect current analysis of existing information and are subject to various risks and uncertainties. As a result, caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, the company’s actual results may differ materially from its expectations or projections. Factors potentially contributing to such differences include, among others:
While most risks affect only future costs or revenues 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 if liabilities are incurred in excess of amounts previously recognized, a charge against future earnings could result.
Additional information concerning these and other factors can be found in our press releases as well as our periodic filings with the Securities and Exchange Commission, including the discussion under the heading “Item 1. Business-Other Matters-Company Business Risks” in the company’s Form 10-K filed March 31, 2003. These filings are available either publicly or upon request from Fluor’s Investor Relations Department: (949) 349-3909. The company disclaims any intent or obligation to update its forward-looking statements, whether as a result of new information, future events or otherwise.
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RESULTS OF CONTINUING OPERATIONS
Revenues from continuing operations for the three and nine months ended September 30, 2003 were $2,120.8 million and $6,441.2 million, respectively, compared with $2,451.2 million and $7,493.9 million for the 2002 comparison periods. Earnings from continuing operations for the three and nine months ended September 30, 2003 were $44.1 million and $128.0 million, respectively, compared with $46.1 million and $125.2 million for the three and nine months ended September 30, 2002. Earnings from continuing operations in the three and nine month periods of 2003 compared with 2002 include various items that impact the comparability of the results. The nine months ended September 30, 2003 includes a pre-tax provision of $7.4 million, which was recognized in the second quarter for the permanent impairment in the value of an equity investment in an Australian magnesium smelter. Included in the three and nine months ended September 30, 2002 was an impairment charge of $9.4 million related to an investment in The Beacon Group Energy Investment Fund, L.P. Earnings for the nine months ended September 30, 2002 were also impacted by pre-tax provisions totaling $26 million in the second quarter recognized primarily for the unfavorable outcome of arbitration relating to the Verde Gold project in Chile.
Consolidated new awards for the three and nine months ended September 30, 2003 increased 10 percent and 8 percent to $2.7 billion and $7.6 billion, respectively, compared with $2.5 billion and $7.1 billion in the 2002 comparison periods. Consolidated backlog at September 30, 2003 was $10.3 billion compared with $10.9 billion at September 30, 2002. Approximately 30 percent and 50 percent of consolidated new awards for the three and nine months ended September 30, 2003 were for projects located outside of the United States. As of September 30, 2003, approximately 40 percent of consolidated backlog related to international projects. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward.
OIL & GAS
Revenues and operating profit for the Oil & Gas segment are summarized as follows:
In the first quarter of 2003, the company made a change in this business segment. The newly named Oil & Gas segment, formerly Energy & Chemicals, will focus on oil and gas and larger petrochemical opportunities. Prospective downstream bulk and specialty chemicals projects will be executed by and reported in the Industrial & Infrastructure segment. All prior periods have been restated to reflect this change.
Revenues declined significantly in the three and nine months ended September 30, 2003 compared with the 2002 periods primarily due to a reduction in work performed consistent with the downward trend in new awards experienced in the latter half of 2002.
Expressed as percentages of revenue, operating profit margin for the three and nine months ended September 30, 2003 was 5.0 percent and 4.4 percent compared with 3.2 percent and 3.5 percent in the 2002 comparable periods. The margin improvement reflects the higher level of profits on a number of projects nearing completion.
Total assets at September 30, 2003 were $523.0 million compared with $338.7 million at December 31, 2002. The increase is primarily attributable to the deferral of costs related to Hamaca. Following is a discussion of the matter.
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The Hamaca Crude Upgrader Project located in Jose, Venezuela is a $1.1 billion lump sum project (including $88 million of approved change orders) of Grupo Alvica (“GA”), a joint venture including Fluor Daniel (80 percent) and Inelectra S.A.C.A. (20 percent), to design and build a petroleum upgrader for a consortium of owners called Petrolera Ameriven (“PA”) including Petroleos de Venezuela S.A. (“PDVSA”), ChevronTexaco and ConocoPhillips. The joint venture is continuing to actively pursue two issues that were referred to arbitration in December 2001: the first is responsibility for costs arising from the site labor agreement for 2000 called “Acta Convenio” and the second relates to modifications and extra work arising from differing site soil conditions. The hearings on the fundamental cost differences between the earlier 1998 labor agreement and the 2000 Acta Convenio were recently concluded. The site soil conditions issue was the subject of hearings in November 2002 on both schedule and cost issues. There are no monetary cross-claims by PA in the arbitration. Recent events in Venezuela are having a significant impact on the progress of the project. In accordance with the contract, the joint venture is entitled to cost and schedule relief for the impact of the recent national strike, and a change order in the approximate amount of $300 million has been submitted to PA. Force majeure incidents occurring prior to the national strike were the subject of arbitration hearings on October 5 through 10, 2003.
The arbitration panel, pursuant to agreement and by order, has extended the completion date of the project to January 9, 2004 pending completion of the site soils conditions issues. The first award is anticipated during the first quarter of 2004. In the event that the arbitration panel does not issue its award prior to January 2, 2004, a further interim order is anticipated to be issued by the panel which would extend the completion date. In addition, the client has conditionally accepted responsibility relating to the soil conditions and certain incurred costs have been paid. Substantial additional costs are expected to be incurred as the project progresses and resolution of outstanding issues concerning the total costs to be reimbursed under the soil conditions change order are yet to be determined. The amount of the claim for site soil conditions is $159 million, $28 million of which has been conditionally paid by the client. The company is accounting for the additional costs incurred for the soil conditions matter as additional revenue as payments are received. The amount of the claim for Acta Convenio is $210 million and no payments have been made by the client relating to this matter. Incurred costs associated with Acta Convenio and soil conditions, the recent national strike and other claims are probable of being recovered and thus are being deferred. These costs will be recognized in revenue when a change order is approved or payment is received. As of September 30, 2003, the company’s share of incurred costs amounting to $139.5 million has been deferred. If costs relating to Acta Convenio, soil conditions, the recent national strike or other claims are determined to be not fully recoverable, the company could face reduced profits or losses on this project, along with lower levels of cash and additional borrowings. The project remains subject to future disruptions that could result in additional costs and claims.
New awards for the three and nine months ended September 30, 2003 were $397.9 million and $2,934.1 million compared with $438.9 million and $1,594.4 million for the 2002 comparison periods. Included in new awards for the nine months ended September 30, 2003 is the Tengizchevroil (“TCO”) project, a major oil and gas development program in Kazakhstan, and a construction management project led by ExxonMobil. These project awards were previously announced in the first and second quarters, respectively. Backlog at September 30, 2003 was $3,349.2 million compared with $2,842.3 million at September 30, 2002.
INDUSTRIAL & INFRASTRUCTURE
Revenues and operating profit for the Industrial & Infrastructure segment are summarized as follows:
Beginning in the first quarter of 2003, the Industrial & Infrastructure segment includes downstream bulk and specialty chemicals projects formerly reported in Energy & Chemicals. All prior periods have been restated to reflect this change.
Revenues for the third quarter increased 11 percent compared with the 2002 period. Operating profit as a percentage of revenues declined in the third quarter of 2003 compared with the prior comparable quarter due to a greater proportion of construction management projects in the mix of work, which contributed lower operating margins due to the overall reduced risks in performing these services.
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Operating profit for the 2003 and 2002 periods also include provisions in the results. The nine months ended September 30, 2003 includes a pre-tax provision of $7.4 million, which was recognized in the second quarter for the permanent impairment in the value of an equity investment in an Australian magnesium smelter. Earnings for the nine months ended September 30, 2002 were impacted in the second quarter by $26 million in dispute resolution provisions. The major portion of this provision related to an unfavorable arbitration ruling on the Verde Gold project in Chile.
New awards for the three and nine months ended September 30, 2003 were $696.2 million and $2,075.3 million, respectively, compared with $1,088.7 million and $2,577.3 million for the 2002 comparison periods. Included in new awards for the third quarter of 2002 was the SH130 transportation project in Texas.
During the third quarter of 2003, the company removed three major projects from backlog, totaling approximately $750 million, which had been booked over the last two years. One is a mining project put on hold due to ongoing financing issues. The remaining two are in the commercial sector where rising insurance costs and mounting long-term liability issues led the company to withdraw from the projects. Backlog at September 30, 2003 was $3,451.0 million compared to $4,041.9 million a year ago.
POWER
Revenues and operating profit for the Power segment are summarized as follows:
Revenues declined in the third quarter compared with a year ago reflecting the continuing decrease in procurement and construction activity. Operating profit margins remain strong as projects are completed. As a percent of revenues, operating profit margin for the three months ended September 30, 2003 was 7.9 percent compared with 6.1 percent in the three months ended September 30, 2002.
On July 9, 2003, the company jointly announced with Duke Energy Corporation the decision to terminate the Duke/Fluor Daniel partnership (“D/FD”) as a result of the significant decline in the construction of new power plants. A joint plan among the partners is being developed to dissolve the business over the next two years. The dissolution is not expected to have a material impact on results of operations or financial position of the company. The company will continue to identify power generation opportunities and any prospective projects will be performed 100 percent by Fluor.
New awards for the third quarter of 2003 was $210 million and consists primarily of the recently announced 620-megawatt power generation facility for Brazos Electric Cooperative, Inc. in Jacksboro, Texas. This is the first major power project awarded to Fluor since the D/FD dissolution announcement.
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GLOBAL SERVICES
Revenues and operating profit for the Global Services segment are summarized as follows:
Revenues for the three and nine months ended September 30, 2003 increased 16 percent and 14 percent, respectively, compared with the prior year periods. The increase is due primarily to the addition of Plant Performance Services (“P2S”), which was acquired late in the first quarter. Revenues for P2S for the third quarter of 2003 were $36.9 million and revenues from the date of acquisition to September 30, 2003 were $106.9 million.
Operating profit for the third quarter of 2003 decreased as a result of competitive pressure on operating margin in the Operations & Maintenance business and a decline in construction-related support services in the oil & gas and power industries.
New awards and backlog for Global Services reflects Operations and Maintenance activities. The equipment, temporary staffing and global sourcing and procurement operations do not report backlog due to the short turnaround between the receipt of new awards and the recognition of revenue. New awards for the three and nine months ended September 30, 2003 were $266.3 million and $843.6 million, respectively, compared with $82.5 million and $918.2 million in the 2002 comparable periods. New awards for the third quarter of 2003 reflects Operations & Maintenance work, which includes several new site management and small capital projects. Backlog at September 30, 2003 was $1,619.2 million compared with $1,636.9 million at September 30, 2002.
GOVERNMENT
Revenues and operating profit for the Government segment are summarized as follows:
Revenues for the third quarter increased significantly from the third quarter a year ago. The increase is attributable to improved performance on two major projects and results from Del-Jen, which was acquired in the first quarter of 2003. Revenues for Del-Jen for the three months ended September 30, 2003 were $41.2 million and revenues from the date of acquisition to September 30, 2003 were $95.5 million. Operating profit for the third quarter of 2003 was also positively impacted by improved performance on two major projects and Del-Jen results. However, costs associated with considerable proposal activity offset this improvement and operating profit for the quarter remained level with the same period last year.
Total assets at September 30, 2003 were $248.2 million compared with $128.6 million at December 31, 2002. The increase is primarily attributable to the acquisition of Del-Jen with total assets of $54.4 million as of September 30, 2003. In addition, the company has unbilled fees totaling $32.9 million related to the Fernald project. The project has moved into the closeout stage and contract terms provide that a portion of the earned fees will not be billed until project completion in 2007. Deferred fees recognized in revenue
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in the three and nine months ended September 30, 2003 were $5.1 million and $15.5 million, respectively, compared with $5.8 million and $4.5 million in the 2002 comparison periods. Included in the nine months ended September 30, 2002 was an adjustment related to the re-baselining of the Fernald project.
New awards for the three and nine months ended September 30, 2003 were $1,165.9 million and $1,454.2 million, respectively, compared with $845.7 million and $1,024.7 million in the 2002 comparison periods. New awards for the third quarter of 2003 includes the annual renewal of two major DOE projects, a number of projects for Del-Jen and additional scope related to the Ford Island project for the U.S. Navy. Backlog at September 30, 2003 increased 36 percent to $1,319.8 million from $973.2 million in the third quarter of last year.
OTHER
Corporate general and administrative expense for the three and nine months ended September 30, 2003 was $33.5 million and $101.6 million, respectively, compared with $43.2 million and $108.3 million in the 2002 comparison periods. Included in the three and nine months ended September 30, 2002 was an impairment charge of $9.4 million related to an investment in The Beacon Group Energy Investment Fund, L.P. Net interest income for the three and nine months ended September 30, 2003 was $1.1 million and $2.1 million, respectively, compared with $2.0 million and $4.4 million for the three and nine months ended September 30, 2002. Interest expense in the three and nine months ended September 30, 2003 includes interest on debt recognized as a result of the consolidation of entities that own certain engineering office facilities (see discussion of the Cumulative Effect of Change in Accounting Principle below.)
The effective tax rate on the company’s continuing operations for the three months ended September 30, 2003 was 32.2 percent. The tax rate expected for the remainder of the year is projected to be approximately 32.5 percent.
MATTERS IN DISPUTE RESOLUTION
As of September 30, 2003, several matters on certain completed projects are in the dispute resolution process. The following discussion provides a background and current status of these matters:
Murrin Murrin
Disputes between Fluor Australia and its client, Anaconda Nickel (“Anaconda”), over the Murrin Murrin Nickel Cobalt project located in Western Australia were partially resolved through arbitration during the third quarter of 2002. The first phase of the arbitration hearing was completed in May 2002 and a decision was rendered in September 2002 resulting in an award to Anaconda of A$147 million (subsequently amended to A$150 million [US$84.0 million at the time of the award]) and an award to Fluor of A$107 million [US$59.9 million at the time of the award] for amounts owing from Anaconda under the contract. The company has recovered a portion of the first phase award plus substantially all defense costs incurred to date from available insurance. On July 28, 2003, the Supreme Court of Victoria, Australia granted Anaconda’s appeal of an issue that had been decided in favor of Fluor by the arbitration panel in the first phase. This decision sends the arbitration panel’s denial of Anaconda’s claim for the cost of a fifth autoclave train back to the panel for further reconsideration. Fluor intends to appeal the Supreme Court’s decision to the State of Victoria Court of Appeal.
The second phase of the arbitration was heard in September 2003. A decision is expected in the second quarter of 2004. The company anticipates that any liability arising from proceedings under either the first or the second phase of arbitration, regardless of the outcome of the appeal, will be covered by available insurance.
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Fluor Daniel Intercontinental and Fluor Arabia Ltd. v. General Electric Company, et al
In October 1998, Fluor Daniel Intercontinental and Fluor Arabia Ltd. filed a complaint in the United States District Court for the Southern District of New York against General Electric Company and certain operating subsidiaries as well as Saudi American General Electric, a Saudi Arabian corporation. The complaint seeks damages in connection with the procurement, engineering and construction of the Rabigh Combined Cycle Power Plant in Saudi Arabia. Subsequent to a motion to compel arbitration of the matter the company initiated arbitration proceedings in New York under the American Arbitration Association international rules. The evidentiary phase of the arbitration has been concluded and a decision is expected in the second quarter of 2004.
Dearborn Industrial Project
The Dearborn Industrial Project (the “Project”) started as a co-generation combined cycle power plant project in Dearborn, Michigan. The initial Turnkey Agreement, dated November 24, 1998, consisted of three phases. Commencing shortly after Notice to Proceed, the owner/operator, Dearborn Industrial Generation (“DIG”), issued substantial change orders to Duke/Fluor Daniel (“D/FD”) enlarging the scope of the project.
The Project has been severely delayed with completion of Phase II. DIG has unilaterally taken over completion and operation of Phase II and is commissioning that portion of the plant. Shortly thereafter, DIG drew upon a $30 million letter of credit, which D/FD expects to recover upon resolution of the dispute. D/FD retains lien rights (in fee) against the project. In October 2001, suit was commenced in Michigan State Court to foreclose on the lien interest.
On December 12, 2001, DIG filed a responsive pleading denying liability and simultaneously served a demand for arbitration to D/FD claiming, among other things, that D/FD is liable to DIG for alleged construction delays and defective engineering and construction work at the Dearborn plant. The court has ordered the matter to arbitration. The lien action remains stayed pending completion of the arbitration of D/FD’s claims against DIG and DIG’s claims against D/FD. An arbitration panel has been appointed and the arbitration will likely proceed in 2004.
Butinge Nafta Oil Terminal
On March 10, 2000, Butinge Nafta (“Nafta”) commenced arbitration proceedings against Fluor Daniel Intercontinental (“FDI”) concerning a bulk oil storage terminal (the “Facility”) located in Lithuania alleging, among other issues, that FDI represented costs in excess of actual estimates. FDI engineered, procured and managed the construction of the Facility on a lump sum basis. On June 21, 2000, Fluor filed a separate arbitration against Nafta to recover delay/disruption damages caused by Nafta, as well as compensation for out of scope services. The first hearing on the merits of the case was conducted in late May 2001 with an additional hearing in June 2002. Final legal submissions and arguments were completed in September 2002. In June 2003, FDI was issued a favorable award on its claims and Nafta’s major claims against FDI were dismissed with prejudice resulting in a net award to Fluor of $4.6 million. The resolution of this matter did not have a material effect on results of operations.
Hamaca Crude Upgrader
Discussion of the status of the Hamaca project is included above under Oil & Gas.
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DISCONTINUED OPERATIONS
The company completed the disposal of discontinued operations with the sale of the last equipment dealership operation during the second quarter of 2003. The company received cash proceeds of $31.9 million, which approximated the carrying value of the dealership. In the first quarter of 2003, the company recorded an after-tax impairment provision of $13.5 million, which included adjustments to deferred taxes, to recognize deterioration in the fair value of the operation due to severely depressed conditions in the equipment rental industry.
No operating results were reported for discontinued operations in the three months ended September 30, 2003 as discontinued operations activity was concluded in the second quarter.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” Pursuant to the requirements of this Interpretation, the company has consolidated two entities that own certain engineering office facilities, which are leased to the company. The company has no ownership interest in the companies that own the facilities but is deemed to be the primary beneficiary of the variable interests in these entities. The leases contain residual value guarantees, which totaled approximately $105 million at December 31, 2002. None of the terms of the leasing arrangements or the company’s obligations as a lessee will be impacted by this change in accounting. If the company defaults on the lease payments or were to fail to meet its obligation under the residual value guarantee, the lenders and owners of the entities could proceed with recourse actions against the company to enforce payment.
The company recognized an after-tax provision of $10.4 million for the cumulative effect of a change in accounting principle in the first quarter of 2003. The provision consists of the after-tax cumulative difference of rent expense previously recognized, compared with depreciation expense on the facilities and interest expense on the underlying financing, from inception of the leases through December 31, 2002. At September 30, 2003, Property, Plant and Equipment and long term debt included $107.8 million and $126.7 million, respectively, related to the consolidation of these entities. The long-term debt provides for interest only payments at interest rates based on a reference rate (LIBOR for the Aliso Viejo facility and Canadian banker’s acceptance for the Calgary facility) plus a margin. Maturity on the debt coincides with the term of the leases, which expire in 2004 for facilities in Aliso Viejo and 2006 for facilities in Calgary. Rent payments are equal to the debt service on the underlying financing.
FINANCIAL POSITION AND LIQUIDITY
During the first nine months of 2003, cash was reduced significantly primarily due to cash paid to fund work performed on contracts and in connection with two niche acquisitions. This reduction was partially offset by the receipt of cash proceeds from the sale of the last remaining equipment dealership operation and proceeds from insurance recoveries on the Murrin Murrin project in the nine months ended September 30, 2003.
In the nine months ended September 30, 2003, cash used by operating activities was $143.6 million as the significant increase in operating assets and liabilities more than offset cash provided from other earnings sources. The Oil & Gas segment experienced a significant increase in contract work in progress and reduction in client advances due in large part to costs incurred related to contract performance on the Hamaca project in Venezuela. A significant portion of these amounts result from incurred costs relating to change orders that are in the dispute resolution process. At September 30, 2003, the company has deferred its share of these costs amounting to $139.5 million. Also contributing to the use of cash was a reduction of $135.8 million in advances from Duke/Fluor Daniel as several power projects were completed and advance payments previously received from clients for those projects was expended. The work-off of power projects coupled with the significant reduction in new power industry awards is expected to continue in the near term future and could further reduce Duke/Fluor Daniel advances in the range of $50 million to
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$100 million by the end of 2003. Cash was also utilized to provide operating liquidity amounting to approximately $46 million for Plant Performance Services from the date of acquisition to September 30, 2003. Contributing to cash provided from operating activities was proceeds from insurance recoveries relating to the Murrin Murrin project totaling $67.4 million that were received during the second and third quarters of 2003. The levels of operating assets and liabilities vary from year to year and are affected by the mix, stage of completion and commercial terms of engineering and construction projects.
In the nine months ended September 30, 2002, cash provided by operating activities was $243.7 million. In addition to cash generated from earnings sources, cash was provided from changes in operating assets and liabilities through reduction of accounts receivable and work in progress, and increases in accounts payable, partially offset by a reduction in advance billings on contracts including $168.4 million in advances from Duke/Fluor Daniel.
Cash used in investing activities in the nine months ended September 30, 2003 included $54.5 million for two niche acquisitions. Del-Jen, a provider of outsourcing services to the US Government was purchased for $33.3 million in cash and Plant Performance Services, a provider of specialty operations and maintenance services was purchased for $21.2 million in cash during the first quarter of 2003. The sale in the second quarter of 2003 of the last remaining AMECO dealership operation resulted in proceeds of $31.9 million.
During the nine months ended September 30, 2002, $51.0 million in proceeds was generated from the sale of discontinued equipment operations. In addition, discontinued operations generated $47.6 million in the nine-month period from the liquidation sale of equipment at one dealership, AMECO operations in Argentina and Peru and other discontinued operations disposals.
Cash utilized by financing activities primarily relates to payment of dividends ($0.48 per share) in both the nine months ended September 30, 2003 and 2002. In 2002 cash of $25.1 million was utilized to pay off short-term debt.
Liquidity is provided by cash generated from operations, customer advances on contracts in progress and access to financial markets. As customer advances are reduced through use in project execution and not replaced by advances on new projects, the company’s cash position will be reduced. Cash is also required and is being provided to fund work performed on the Hamaca project in Venezuela. This project is incurring significant costs for work relating to change orders that are subject to arbitration proceedings. The requirements for operating liquidity could result in the need for short-term borrowings. The company has $290 million in unutilized commercial paper back-up lines of credit. In addition, the company has a shelf registration statement for the issuance of up to $300 million in debt. For the next 12 months, cash generated from operations supplemented by borrowings under credit facilities or the issuance of debt securities are expected to be sufficient to fund operations.
Off-Balance Sheet Arrangements
The company maintains a variety of commercial commitments that are generally made available to provide support for various commercial provisions in its engineering and construction contracts. The company has $441 million in short-term committed and $254 million in uncommitted credit lines to support letters of credit. Letters of credit are issued in the ordinary course of business to clients to support advance payments, in lieu of retention, as performance guarantees for projects and certain other corporate purposes. Primarily as a result of the company’s strong credit standing which provides the availability of letters of credit capacity, retainage on engineering and construction contracts is minimal. The company also posts surety bonds to guarantee its performance on contracts. On October 22, 2003, Fitch Ratings affirmed the company’s ‘A’ rating on its senior unsecured debt and senior unsecured bank facilities. In addition, Fitch Ratings affirmed the company’s ‘F1’ commercial paper rating.
As of September 30, 2003, no material changes have occurred with regard to the company’s commercial commitments and contractual obligations as disclosed in the company’s December 31, 2002 annual report on Form 10-K.
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The company has agreed to make available certain letter of credit capacity to ICA Fluor Daniel for their projects. Additional Fluor support may be required as a result of the financial condition of Fluor’s partner.
In the ordinary course of business, the company enters into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated subsidiaries, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The guarantees have various expiration dates ranging from mechanical completion of the facilities being constructed to a period extending beyond contract completion in certain circumstances. The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. In most cases any amounts expended on behalf of a partner or joint venture participant pursuant to performance guarantees would be recovered from the third party for work performed in the ordinary course of contract execution.
Financial guarantees, made in the ordinary course of business on behalf of clients and others in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate the company to make payment in the event of a default by the borrower. Most arrangements require the borrower to pledge collateral in the form of property, plant and equipment which is deemed adequate to recover amounts the company might be required to pay. The company was not obligated for any material financial guarantees of the debt of third parties as of September 30, 2003.
As of September 30, 2003, no material changes to financial or performance assurances to clients have occurred since the filing of the company’s December 31, 2002 annual report on Form 10-K.
Financial Instruments
The company utilizes forward exchange contracts to hedge foreign currency transactions entered into in the ordinary course of business and not to engage in currency speculation. At September 30, 2003, the company had forward foreign exchange contracts of less than 18 months duration to exchange principally; Euros, British pounds, Canadian dollars and South African rand for U.S. dollars. The total gross notional amount of these contracts at September 30, 2003 was $5.1 million representing forward contracts to purchase foreign currency.
In the nine months ended September 30, 2003, exchange rates for functional currencies for most of the company’s international operations strengthened against the U.S. dollar resulting in unrealized translation gains that are reflected in the cumulative translation component of other comprehensive income. Most of these unrealized gains relate to cash balances held in currencies other than the U.S. dollar.
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Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). To maintain a cost-effective controls structure, management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can only provide reasonable assurance that our management’s control objectives are met. In addition, the design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote.
Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to the company that is required to be included in our periodic SEC reports.
There were no significant changes to our internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the Evaluation Date. Since there were no significant deficiencies or material weaknesses identified in our internal controls, we did not take any corrective actions.
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FLUOR CORPORATIONCHANGES IN CONSOLIDATED BACKLOGThree and Nine Months Ended September 30, 2003 and 2002
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Fluor and its subsidiaries, incident to their normal business activities, are parties to a number of legal proceedings and other matters in various stages of development. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate are not expected to have a material effect upon the consolidated financial position, or the results of operations of the company, after giving effect to provisions already recorded. For additional information, refer to Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 11, included in this Quarterly Report on Form 10-Q which is hereby incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K.
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Current Report on Form 8-K dated July 29, 2003, furnishing a copy of Fluor Corporation’s press release announcing its financial results for the quarter ended June 30, 2003, under Items 7 and 9 (pursuant to Item 12).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
30
31