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 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
As of October 31, 2004, there were 83,797,157 shares of common stock outstanding.
September 30, 2004
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UNAUDITED
See Accompanying Notes
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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, 2003 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-Company Risk Factors” in the company’s Form 10-K filed March 15, 2004. These filings are available publicly on the SEC’s website at http://www.sec.gov, on Fluor’s website at http://investor.fluor.com 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 OPERATIONS
Net earnings in the three and nine months ended September 30, 2004 were $47.3 million or $0.57 per diluted share and $138.8 million or $1.68 per diluted share, respectively. These results compare with net earnings of $44.1 million or $0.55 per diluted share and $106.0 million or $1.32 per diluted share for the same periods of 2003. Results for the nine months ended September 30, 2003 include a loss of $11.6 million or $0.15 per diluted share from discontinued operations relating to the disposal of an equipment dealership. In addition, results for the nine months ended September 30, 2003 include a net charge of $10.4 million or $0.13 per diluted share for the cumulative effect of a change in accounting principle relating to the consolidation of variable interest entities.
As discussed in Note 8 to the condensed consolidated financial statements, during the third quarter of 2004, the Emerging Issues Task Force reached a consensus on the treatment of contingently convertible debt in diluted earnings per share computations. The provisions of this pronouncement are to be applied in the fourth quarter of 2004, with restatements of all prior periods during which the debt was outstanding. If the consensus had been applied during the current period, diluted earnings per share for the third quarter and nine months ended September 30, 2004 would have been reduced to $0.54 per diluted share and $1.62 per diluted share, respectively. Previously reported amounts for 2003 would not have changed, since the debt was issued in 2004.
Revenues from continuing operations for the three and nine months ended September 30, 2004 were $2.4 billion and $6.6 billion, respectively, compared with $2.1 billion and $6.4 billion for the 2003 comparison periods. Earnings from continuing operations for the three and nine months ended September 30, 2004 include a $5.5 million pre-tax gain from the final settlement of a residual interest in an asset sold by the company in 1985, combined with several other accrual and foreign currency adjustments totaling $4.0 million that resulted in a decline in general and administrative expense. Also included in earnings from continuing operations for the first nine months of 2004 is a pre-tax gain amounting to $7.4 million from the sale of three real estate assets. The nine months ended September 30, 2003 include a pre-tax provision of $7.4 million for impairment of an equity investment earned in exchange for consulting services provided on a magnesium project in Australia.
The company has continued to experience a trend away from power projects as demand for new power plant construction remains at a low level resulting in lower revenues and earnings from this market in the nine months ended September 30, 2004. Revenues and earnings from continuing operations were also negatively impacted by the lower level of new project awards in the economically sensitive mining, chemicals and manufacturing markets experienced in 2003. In addition, the company’s 2003 decision to suspend performance on a mining project and withdraw from certain commercial projects had a negative impact on third quarter 2003 backlog and the volume of work performed in the first nine months of 2004. A partial offset to these impacts is the positive trend for new awards in the Government segment resulting in a significant increase in work performed in Iraq on projects for the U.S. Government in 2004. Additionally, operating results of the Oil & Gas segment for the three months ended September 30, 2004 were favorably impacted by increased work performed associated with the transition to field activities on two major international projects. The company also benefited from increased revenues beginning in the first quarter of 2004 from business acquisitions completed in 2003 and early 2004.
Consolidated new awards for the three and nine months ended September 30, 2004 were $3.2 billion and $9.7 billion, up 18 percent and 27 percent, respectively, compared with the same periods in 2003. New awards in the 2004 periods include a broad diversity of projects in the Oil & Gas, Industrial & Infrastructure and Government segments reflecting the continuing improvement in the global economic environment. Consolidated backlog at September 30, 2004 increased 33 percent to $13.7 billion from $10.3 billion at September 30, 2003. Approximately 63 percent of consolidated new awards for the nine months ended September 30, 2004 were for projects located outside of the United States. As of September 30, 2004, approximately 60 percent of consolidated backlog relates 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.
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OIL & GAS
Revenues and operating profit for the Oil & Gas segment are summarized as follows:
As a result of a shift in the markets served by and the types of projects awarded to ICA Fluor Daniel (ICA Fluor), commencing in the third quarter of 2004, its operating results, new awards and backlog are included in the Oil & Gas segment. ICA Fluor was previously included in the Power segment.
Revenues were 74 percent higher in the third quarter of 2004 compared with the same period in 2003 and were 17 percent higher for the nine months ended September 30 2004 compared with the same period in 2003. The increases reflect work performed on projects that have shifted from preliminary studies and engineering work to the execution stage of procurement and construction during the quarter. Revenue for the first six months of 2004 included a higher level of front-end engineering services which do not generate significant revenue but do result in higher operating margins. Operating profit margin in the three and nine months ended September 30, 2004 was comparable with the same periods in 2003.
A major project that has reached mechanical completion in the Oil & Gas segment is the Hamaca Crude Upgrader Project (“Hamaca”) located in Jose, Venezuela. Hamaca is a $1.1 billion lump sum project (including $92 million of approved change orders) of Grupo Alvica (“GA”), a joint venture including Fluor Daniel (80 percent) and Inelectra 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., ChevronTexaco and ConocoPhillips.
The GA joint venture is pursuing the following three cost and schedule relief issues:
The site soil conditions issue was the subject of arbitration hearings in November 2002. There are no monetary cross-claims by PA in the arbitration. The amount of the claim for site soil conditions of $159 million includes the direct costs as well as significant delay-related and indirect costs. In April 2004, the arbitration panel awarded GA $36 million for direct cost of the site soil conditions remediation work, virtually all of the amounts sought by GA for this issue. The client had previously conditionally accepted responsibility relating to the soil conditions matter and $28 million had been paid. The balance of the $36 million award amount was received in April 2004. The award confirmed GA’s methodology for computing the amount of all change orders arising under the contract. In addition, the award also granted GA approximately 14 weeks of schedule relief. The delay and indirect costs were the subject of hearings in June 2004 and a decision is expected shortly.
The hearings on the fundamental cost differences between the earlier 1998 labor agreement and the 2000 Acta Convenio were held in April 2003 and a decision on this issue is also expected shortly. The amount of the claim for Acta Convenio is $210 million and no payments have been made by the client relating to this matter.
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In accordance with the contract, the joint venture is entitled to cost and schedule relief for the impact of the national strike in Venezuela. A change order relating to the national strike in the approximate amount of $340 million was submitted by GA. This action was followed by the filing of an arbitration claim relating to this issue in January 2004. The arbitration panel ordered hearings on this issue in December 2004 and January 2005. Other force majeure incidents occurring prior to the national strike also were the subject of arbitration hearings in October 2003.
Incurred costs associated with delay and indirect costs related to the soil conditions, Acta Convenio, the 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, 2004, incurred costs amounting to $253.2 million have been deferred. Subcontractor close-outs will result in additional costs as contracts are settled. The company believes that schedule relief awarded in connection with the direct costs of the site soil conditions, along with other delay days requested on the other issues, will be sufficient to avoid the imposition of liquidated damages. If costs relating to Acta Convenio, soil conditions, the national strike or other claims are determined to be not recoverable or liquidated damages are assessed, the company could face materially reduced profits or losses on this project, along with lower levels of cash and additional borrowings.
New awards for the three months ended September 30, 2004 were $612 million compared with $398 million in the comparable period of 2003. New awards in the 2004 period included engineering, procurement and construction management for a clean fuels project in the United States and a number of smaller projects located in various foreign countries. Backlog at September 30, 2004 increased 43 percent to $4.8 billion compared with $3.3 billion at September 30, 2003.
INDUSTRIAL & INFRASTRUCTURE
Revenues and operating profit for the Industrial & Infrastructure segment are summarized as follows:
Revenues for the three and nine months ended September 30, 2004 decreased 16 percent and 23 percent, respectively, compared with the same periods in 2003 primarily due to slow start-up progress on recently awarded projects and the lower level of new awards in the latter half of 2003. In addition, as discussed above, certain projects that were removed from backlog in the third quarter of 2003 also had a negative impact on the volume of work performed in the nine months ended September 30, 2004. Operating profit margin in the three months ended September 30, 2004 was 3.0 percent compared with 2.8 percent in the comparable period of the prior year. The current quarter’s operating profit includes a $9.0 million negative impact from a provision recorded for an estimated project loss, partially offset by a $7.2 million positive impact from the favorable resolution of a project related dispute. In the second quarter of 2003, a provision amounting to $7.4 million was recognized for the impairment of an equity investment earned in connection with consulting work on a magnesium project in Australia.
New awards for the three months ended September 30, 2004 were $1.1 billion compared with $0.7 billion for the 2003 comparison period. New awards in the 2004 period include construction management for a pharmaceuticals plant in Puerto Rico, a full scope chemicals plant in the United Kingdom and added scope on a LCD glass manufacturing plant in Taiwan. For the nine months ended September 30, 2004 new awards amounted to $3.9 billion compared with $2.1 billion for the same period in 2003. Activity in new awards has strengthened substantially in 2004 reflecting improvement in economically sensitive markets such as mining, chemicals and manufacturing. Backlog increased to $5.2 billion at September 30, 2004 compared with $3.5 billion at September 30, 2003.
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GOVERNMENT
Revenues and operating profit for the Government segment are summarized as follows:
The increase in revenues in the three and nine months ended September 30, 2004 is primarily due to the substantial increase in work performed on projects in Iraq and revenue from entities acquired during 2003. Del-Jen was acquired late in the first quarter of 2003 and J.A. Jones International was acquired in the fourth quarter of 2003. In addition, Trend Western was acquired by Del-Jen in the first quarter of 2004. In total, these acquired businesses contributed $280 million of revenue in the nine months ended September 30, 2004 compared with $95 million from acquired businesses in the same period of 2003. Work performed in Iraq contributed approximately $145 million and $503 million in revenue in the three and nine months ended September 30, 2004, respectively. There was no work in Iraq in the comparable periods of 2003. Increased operating profit in the three and nine months ended September 30, 2004 compared with the same periods of 2003 is primarily due to earnings on the projects in Iraq and also includes contributions from business acquisitions in 2003 and 2004.
New awards of $1.2 billion in the three months ended September 30, 2004 were roughly equivalent to the amount reported in the same period a year ago. Both quarters included the impact of the annual renewal of two major DOE projects. New awards of $1.8 billion in the nine months ended September 30, 2004 exceeded the amount reported for the 2003 comparison period of $1.5 billion primarily as the result of new awards for work in Iraq, which are added to backlog as task orders are received.
Backlog at September 30, 2004 increased to $1.7 billion from $1.3 billion at the end of the third quarter last year.
GLOBAL SERVICES
Revenues and operating profit for the Global Services segment are summarized as follows:
Revenue and operating profit increased 19 percent and 35 percent, respectively, in the third quarter of 2004 compared with the same period in 2003. These increases are primarily due to higher levels of procurement and increased staffing services driven by overall growth in Fluor’s work performed. Operating profit for the earlier part of 2004 was negatively impacted by reduced construction-related site services activities for power and oil and gas projects which have been completed.
New awards and backlog for Global Services reflect 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
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for the three and nine months ended September 30, 2004 were $274 million and $920 million, respectively, compared with $267 million and $844 million, respectively, for the 2003 comparison periods.
Backlog for Global Services at September 30, 2004 was $1.9 billion compared with $1.6 billion at September 30, 2003.
POWER
Revenues and operating profit (loss) for the Power segment are summarized as follows:
As a result of a shift in the markets served by and the types of projects awarded to ICA Fluor, commencing in the third quarter of 2004, its operating results, new awards and backlog are included in the Oil & Gas segment.
Revenues for 2004 reflect the expected decline, compared with the year ago periods, associated with continued softness in power plant procurement and construction activity. Operating margin in 2003 reflects performance on projects that were either completed or nearing completion where profit recognition is strongest. Operating profit in the first half of 2004 benefited from settlements relating to projects completed in prior periods. Unexpected costs associated with the start-up and commissioning of a waste-coal power plant was the cause of the operating loss for the three months ended September 30, 2004.
New project awards in the third quarter and first nine months of 2004 were $9 million and $115 million, respectively, compared with $210 million and $316 million in the prior year comparison periods. Demand for new power generation has declined significantly as existing industry capacity is currently meeting demand. Backlog at September 30, 2004 was $78 million compared with $565 million at September 30, 2003.
In July 2003, the company jointly announced with Duke Energy Corporation the decision to dissolve the Duke/Fluor Daniel partnership (“D/FD”) as a result of the significant decline in the construction of new power plants. The dissolution is not expected to have a material impact on results of operations or financial position of the company. The dissolution is in progress and is expected to be completed in 2005 as remaining project activities are concluded.
OTHER
Corporate general and administrative expense for the three months ended September 30, 2004 was $23.7 million, reflecting a 29 percent decline compared with $33.5 million in the same period of 2003. This decline was the result of a $5.5 million pre-tax gain related to the final disposal of a residual interest in a property that was sold by the company in 1985, combined with several other accrual and foreign currency adjustments totaling $4.0 million. Additionally, $7.4 million of other pre-tax gains from real estate sales during the first six months of 2004 contributed to the $17.1 million decline in corporate general and administrative expense for the nine months ended September 30, 2004, compared with the corresponding period of 2003. Corporate general and administrative expense in 2004 has been negatively impacted as a result of higher audit fees and other costs of complying with the provisions of the Sarbanes-Oxley Act of 2002. However, these increased costs have been largely offset by the success of expense reduction programs.
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During the third quarter of 2004, net interest income was $1.1 million, consistent with the amount reported in the same period of 2003. For the nine months ended September 30, 2004 net interest income of $1.0 million compares with $2.1 million in the same period of 2003 reflecting the higher level of outstanding borrowings in the 2004 period compared with 2003.
The effective tax rate on the company’s continuing operations for the three and nine months ended September 30, 2004 was 35.2 percent and 34.1 percent, respectively, compared with 32.2 percent and 33.2 percent in the 2003 comparison periods. The effective tax rate for the remainder of the year is projected to be approximately 33 to 34 percent compared with 33 percent for the full year of 2003.
MATTERS IN DISPUTE RESOLUTION
As of September 30, 2004, several matters on certain completed and in progress projects are in the dispute resolution process. The following discussion provides a background and current status of these matters:
Murrin Murrin
On May 5, 2004, Fluor Australia and its client, Anaconda Nickel (“Anaconda’’) entered into a settlement agreement resolving all disputes related to the Murrin Murrin Nickel Cobalt project located in Western Australia. Fluor Australia paid the equivalent of approximately US$120 million to end all remaining claims under both the first and second phases of arbitration, including any appeals. The payment had no material effect on the company’s financial position or results of operations for the current year as the amount was funded by the company’s insurers.
In September 2002, the first phase of arbitration resulted in an award to Anaconda of A$147 million (subsequently amended to A$150 million [US$84.0 million]) and an award to Fluor Australia of A$107 million [US$59.9 million] for amounts owing from Anaconda under the contract. The company had previously recovered the first phase award plus substantially all defense costs incurred from available insurance.
Fluor Daniel International and Fluor Arabia Ltd. v. General Electric Company, et al
In October 1998, Fluor Daniel International 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 shortly.
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 enlarging the scope of the project.
The Project was severely delayed with completion of Phase II. DIG unilaterally took over completion and operation of Phase II and commissioned that portion of the plant. Shortly thereafter, DIG drew upon a $30 million letter of credit which Duke/Fluor Daniel (“D/FD”) expects to recover upon resolution of the dispute. D/FD retains lien rights (in fee) against the project. In October 2001, D/FD commenced an action in Michigan State Court to foreclose on the lien interest.
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In December 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 late 2005.
Hamaca Crude Upgrader
Discussion of the status of the Hamaca project is included above under Oil & Gas.
FINANCIAL POSITION AND LIQUIDITY
During the first nine months of 2004, cash was generated from operations, issuance of debt in excess of debt reduction and sales of excess real estate. In the first nine months of 2003, cash used by operating activities was the primary reason for a substantial reduction in cash balances. In the first nine months of both 2004 and 2003, niche acquisitions were made that will enhance existing operations in the Government and Global Services segments.
In the first nine months of 2004, cash provided by operating activities of $17.3 million was primarily attributable to earnings sources, substantially offset by an increase in operating assets and liabilities. The Oil & Gas segment has 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 that has reached mechanical completion. A significant portion of these amounts result from incurred costs relating to change orders that are in the dispute resolution process. At September 30, 2004, the company has deferred its share of these costs amounting to $253.2 million, of which $73.6 million was funded in the first nine months of 2004. In addition, a number of projects are in the early front-end engineering and design phase which resulted in greater working capital requirements. Also contributing to the increase in operating assets and liabilities was a net reduction of $27.8 million in advances from Duke/Fluor Daniel partnership (“D/FD”) as power projects were completed and advance payments previously received from clients for those projects was expended. Cash utilized for operating activities in the first nine months of 2003 included approximately $275 million to fund progress on the Hamaca project and to repay advances from D/FD. In July 2003, the company jointly announced with Duke Energy Corporation the decision to dissolve the D/FD partnership as a result of the significant decline in the construction of new power plants. The dissolution is not expected to have a material impact on cash flows in 2004. 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.
Cash flows from investing activities in the first nine months of 2004 included $59.7 million from the sale of three real estate assets and a residual property interest and $16.7 million from the disposal of other property, plant and equipment. Partially offsetting these transactions was $33.0 million used to acquire Trend Western, a provider of logistics and operations services to military bases in the United States and Guam. In the first nine months of 2003, $54.5 million was used for two niche acquisitions. Del-Jen, a provider of outsourcing services to the US Government, and Plant Performance Services, a provider of specialty operations and maintenance services, were purchased for $33.3 million and $21.2 million, respectively, in cash. The sale of the last remaining AMECO dealership operation in the second quarter of 2003 resulted in proceeds of $31.9 million. Capital expenditures for continuing operations, primarily for on-going renewal and replacement in the construction equipment operations, were $68.8 million in the first nine months of 2004 compared with $47.6 million in the same period of 2003.
Cash provided by financing activities in the first nine months of 2004 included the issuance of convertible senior notes resulting in net proceeds of $322.5 million. The company utilized a portion of these proceeds
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to repay $121.5 million in commercial paper and $100.0 million in outstanding debt on its Aliso Viejo, California facilities. In addition, the company retired $28.6 million in outstanding debt on its Calgary, Canada facilities during the third quarter of 2004. The convertible notes are due February 15, 2024 and bear interest at 1.5 percent per annum. Interest is payable semi-annually on February 15 and August 15 of each year. The company’s debt-to-capital ratio at September 30, 2004 is 22.1 percent compared with 19.7 percent at December 31, 2003. Also impacting cash flows in the first nine months of 2004 was cash received from the exercise of stock options. Cash utilized for the payment of dividends ($0.48 per share) in the nine months ended September 30, 2004 and 2003 was $40.0 million and $39.2 million, respectively.
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 if not replaced by advances on new projects, the company’s cash position would be reduced. Cash is also required and is being provided from other sources to fund subcontractor close-outs on the Hamaca project in Venezuela. This project has incurred 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. For the next 12 months, cash generated from operations supplemented by borrowings under credit facilities 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 $874 million in short-term committed and 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. In certain limited circumstances, the company also posts surety bonds to guarantee its performance on contracts.
In the first quarter of 2004, changes in the company’s contractual obligations included the issuance of $330 million of 1.5 percent convertible senior notes and repayment of $129 million of lease financing. As of September 30, 2004, no other material changes had occurred with regard to the company’s commercial commitments and contractual obligations as disclosed in the company’s December 31, 2003 annual report on Form 10-K.
In July 2004, the company entered into a new, five-year, $800 million Senior Credit Facility. The agreement replaced existing facilities totaling $700 million. Of the total capacity, $300 million is dedicated to commercial paper back-up lines. The balance is available for letters of credit and funded loans. The company may borrow up to $300 million under unsecured committed revolving short- and long-term lines of credit and up to $500 million in committed lines of credit to support letters of credit. Borrowings on committed lines bear interest at rates based on the London Interbank Offered Rate (“LIBOR”) plus an applicable borrowing margin, or the prime rate.
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 clients and other 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 client or other third party for work performed in the ordinary course of contract execution. As of September 30, 2004, no material changes to financial or performance assurances to clients have occurred since the filing of the company’s December 31, 2003 annual report on Form 10-K.
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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, 2004.
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, 2004, the company had forward foreign exchange contracts of less than 36 months duration to exchange principally; Euros, British pounds, Australian dollars and South African rand for U.S. dollars. The total gross notional amount of these contracts at September 30, 2004 was $58 million representing forward contracts to purchase foreign currency.
OTHER MATTERS
The company’s independent auditor, Ernst & Young LLP (“E&Y”), recently notified the SEC, the Public Company Accounting Oversight Board (the “PCAOB”) and the company’s Audit Committee that certain foreign affiliates of E&Y performed non-audit work in China, Taiwan and Brazil that has raised questions regarding E&Y’s independence with respect to its performance of audit services.
In connection with the preparation of local tax returns, prior to 2001 and continuing until March 2004, E&Y’s foreign affiliate in China made payments of taxes to local tax authorities with respect to individual employee and immaterial subsidiaries’ tax liabilities. As a result, E&Y’s foreign affiliates had temporary custody of insubstantial amounts of company tax related funds. This E&Y affiliate also made payments of a rental deposit to a Chinese landlord on behalf of the company which involved the handling of immaterial amounts of company funds in 2002. The fees paid by the company to E&Y’s foreign affiliate for these services were $11,293, $8,581, $6,656 and $1,383 during 2001, 2002, 2003 and 2004, respectively.
During 2001, E&Y’s foreign affiliate in Taiwan made payments of the taxes to local authorities in connection with providing tax return preparation services for an employee of the company. Those payments involved the handling of company funds. The fees paid by the company to E&Y Taiwan for these services amounted to $1,653 during 2001. Similar services have not been provided by E&Y’s affiliate in Taiwan since 2001.
Prior to 2001 and continuing through March 2004 as part of its annual tax filing and bookkeeping services, E&Y’s foreign affiliate in Brazil had power of attorney that allowed it to issue checks from a bank account of one of the company’s immaterial subsidiaries. Fees paid by the company to E&Y’s foreign affiliate for its tax filing and bookkeeping services (including the prohibited check writing services and fees for the preparation of the power of attorney) were $15,000 in each of 2001, 2002 and 2003 and $5,400 in 2004. The amounts paid from or held in the checking account were inconsequential to the company.
The company’s Audit Committee and E&Y have discussed E&Y’s independence with respect to its audit of the consolidated financial statements of the company in light of the foregoing. E&Y has informed the Audit Committee that it does not believe that the provision of the services described above has impaired E&Y’s independence with respect to the company as the services are administrative in nature, immaterial in amount, and have been discontinued. The Audit Committee is continuing to monitor developments at the SEC and PCAOB and will continue to evaluate and review processes relevant to the maintenance of E&Y’s independence.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities(in thousands, except per share data)
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Item 6. Exhibits
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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
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