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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to______________
Commission File Number: 1-7775
FLUOR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-0740960
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
3353 Michelson Drive, Irvine, CA 92698
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(Address of principal executive offices)
(949) 975-2000
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(Registrant's telephone number, including area code)
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 ( )
As of May 31, 1999 there were 75,809,059 shares of common stock outstanding.
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FLUOR CORPORATION
FORM 10-Q
APRIL 30, 1999
TABLE OF CONTENTS PAGE
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PART I: FINANCIAL INFORMATION
Condensed Consolidated Statement of Operations for the Three Months
Ended April 30, 1999 and 1998.............................................. 2
Condensed Consolidated Statement of Operations for the Six Months
Ended April 30, 1999 and 1998.............................................. 3
Condensed Consolidated Balance Sheet at April 30, 1999 and October 31,
1998....................................................................... 4
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
April 30, 1999 and 1998.................................................... 6
Notes to Condensed Consolidated Financial Statements....................... 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 10
Changes in Backlog......................................................... 23
PART II: OTHER INFORMATION ....................................................... 24
SIGNATURES......................................................................... 26
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PART I: FINANCIAL INFORMATION
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended April 30, 1999 and 1998
UNAUDITED
In thousands, except per share amounts 1999 1998
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REVENUES $ 3,091,307 $ 3,282,079
COSTS AND EXPENSES
Cost of revenues 3,001,212 3,184,891
Special provision 136,500 --
Corporate administrative and general expense 10,222 10,115
Interest expense 13,008 9,327
Interest income (5,112) (5,904)
-------------------------------
Total Costs and Expenses 3,155,830 3,198,429
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(LOSS) EARNINGS BEFORE INCOME TAXES (64,523) 83,650
INCOME TAX EXPENSE 8,372 29,361
-------------------------------
NET (LOSS) EARNINGS $ (72,895) $ 54,289
===============================
(LOSS) EARNINGS PER SHARE
BASIC $ (.97) $ .67
===============================
DILUTED $ (.97) $ .67
===============================
DIVIDENDS PER COMMON SHARE $ .20 $ .20
===============================
SHARES USED TO CALCULATE
BASIC (LOSS) EARNINGS PER SHARE 75,154 80,506
===============================
DILUTED (LOSS) EARNINGS PER SHARE 75,154 80,865
===============================
See Accompanying Notes.
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FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended April 30, 1999 and 1998
UNAUDITED
In thousands, except per share amounts 1999 1998
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REVENUES $ 6,475,372 $ 6,681,098
COSTS AND EXPENSES
Cost of revenues 6,292,416 6,494,170
Special provision 136,500 --
Corporate administrative and general expense 19,780 10,563
Interest expense 26,012 18,749
Interest income (9,712) (10,492)
-------------------------------
Total Costs and Expenses 6,464,996 6,512,990
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EARNINGS BEFORE INCOME TAXES 10,376 168,108
INCOME TAX EXPENSE 32,190 59,006
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NET (LOSS) EARNINGS $ (21,814) $ 109,102
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(LOSS) EARNINGS PER SHARE
BASIC $ (.29) $ 1.33
===============================
DILUTED $ (.29) $ 1.33
===============================
DIVIDENDS PER COMMON SHARE $ .40 $ .40
===============================
SHARES USED TO CALCULATE
BASIC (LOSS) EARNINGS PER SHARE 75,136 81,541
===============================
DILUTED (LOSS) EARNINGS PER SHARE 75,136 81,751
===============================
See Accompanying Notes.
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FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
April 30, 1999 and October 31, 1998
UNAUDITED
April 30, October 31,
$ in thousands 1999 1998*
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ASSETS
Current assets
Cash and cash equivalents $ 207,871 $ 340,544
Accounts and notes receivable 945,363 959,416
Contract work in progress 625,557 596,983
Deferred taxes 99,941 81,155
Inventory and other current assets 342,454 262,753
Net assets held for sale -- 36,300
----------------------------
Total current assets 2,221,186 2,277,151
----------------------------
Property, plant and equipment (net of accumulated
depreciation, depletion and amortization of $1,207,501
and $1,132,923, respectively) 2,179,076 2,147,308
Investments and goodwill, net 256,590 276,653
Other 356,928 318,096
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$5,013,780 $5,019,208
============================
(continued on next page)
* Amounts at October 31, 1998 have been derived from audited financial
statements.
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FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
April 30, 1999 and October 31, 1998
UNAUDITED
April 30, October 31,
$ in thousands 1999 1998*
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts and notes payable $ 893,296 $ 972,096
Commercial paper and loan notes 374,048 428,458
Advance billings on contracts 588,938 546,816
Accrued salaries, wages and benefit plans 324,083 324,412
Other accrued liabilities 312,773 223,596
Current portion of long-term debt 3 176
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Total current liabilities 2,493,141 2,495,554
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Long term debt due after one year 300,002 300,428
Deferred taxes 128,754 105,515
Other noncurrent liabilities 611,178 592,102
Commitments and contingencies
Shareholders' equity
Capital stock
Preferred - authorized 20,000,000
shares without par value; none issued
Common - authorized 150,000,000
shares of $.625 par value; issued and outstanding -
75,797,347 shares and 75,572,537
shares, respectively 47,373 47,233
Additional capital 208,023 199,077
Retained earnings 1,279,711 1,331,843
Unamortized executive stock plan expense (26,187) (22,633)
Accumulated other comprehensive income:
Cumulative translation adjustment (28,215) (29,911)
-------------------------------
Total shareholders' equity 1,480,705 1,525,609
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$ 5,013,780 $ 5,019,208
===============================
See Accompanying Notes.
* Amounts at October 31, 1998 have been derived from audited financial
statements.
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FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended April 30, 1999 and 1998
UNAUDITED
$ in thousands 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $ (21,814) $ 109,102
Adjustments to reconcile net (loss) earnings to cash
provided by operating activities:
Depreciation, depletion and amortization 153,629 139,179
Deferred taxes 5,216 (19,044)
Special provision, net of cash paid 130,424 --
Change in operating assets and liabilities,
excluding effects of business acquisitions/dispositions (188,557) 199,330
Other, net (21,342) (31,158)
---------------------------
Cash provided by operating activities 57,556 397,409
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (250,728) (241,025)
Proceeds from sale of subsidiary 36,300 --
Proceeds from sale of property, plant and equipment 77,634 53,884
Proceeds from sales/maturities of marketable securities -- 10,089
Investments, net (6,863) (3,779)
Other, net (4,205) (8,890)
---------------------------
Cash utilized by investing activities (147,862) (189,721)
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CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (54,410) 67,030
Proceeds from issuance of notes payable to affiliate 41,972 --
Cash dividends paid (30,318) (32,884)
Stock options exercised 1,852 8,744
Purchases of common stock -- (227,941)
Other, net (1,463) (2,470)
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Cash utilized by financing activities (42,367) (187,521)
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(Decrease) increase in cash and cash equivalents (132,673) 20,167
Cash and cash equivalents at beginning of period 340,544 299,324
===========================
Cash and cash equivalents at end of period $ 207,871 $ 319,491
===========================
See Accompanying Notes.
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FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(1) The condensed consolidated financial statements do not include footnotes
and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read
in conjunction with the Company's October 31, 1998 annual report on Form
10-K. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of
operations for the three and six months ended April 30, 1999 are not
necessarily indicative of results that can be expected for the full
year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
recurring accruals) which, in the opinion of the Company, are necessary
to present fairly its consolidated financial position at April 30, 1999
and its consolidated results of operations and cash flows for the three
and six months ended April 30, 1999 and 1998. In addition, results for
the Engineering and Construction segment include a previously announced
one-time, special provision of $136.5 million. See Note 6 below and
Management's Discussion and Analysis of Financial Condition and Results
of Operations for further information on this item.
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
(2) Inventories comprise the following:
April 30, October 31,
$ in thousands 1999 1998
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Equipment for sale/rental $ 123,816 $ 94,179
Coal 70,543 52,628
Supplies and other 53,842 51,838
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$ 248,201 $ 198,645
=================================
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FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
UNAUDITED
(3) Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of this Statement has no impact on the Company's net (loss)
earnings or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The components of comprehensive (loss) income, net of related tax, are
as follows:
Three months ended Six months ended
April 30, April 30,
---------------------- ---------------------
($ in thousands) 1999 1998 1999 1998
---------------------- ---------------------
Net (loss) earnings $(72,895) $54,289 $(21,814) $109,102
Foreign currency translation
adjustment 1,470 288 1,696 (7,419)
---------------------- ---------------------
Comprehensive (loss) income $(71,425) $54,577 $(20,118) $101,683
====================== =====================
(4) Cash paid for interest was $15.4 million and $19.4 million for the six
month periods ended April 30, 1999 and 1998, respectively. Income tax
payments, net of receipts, were $42.9 million and $33.5 million during
the six month periods ended April 30, 1999 and 1998, respectively.
(5) During the fourth quarter of 1998, the Company entered into a forward
purchase contract for 1,850,000 shares of its common stock at a price
of $49 per share. The contract matures in October 1999 and gives the
Company the ultimate choice of settlement option, either physical
settlement or net share settlement. This contract effectively
incorporates and extends a number of prior contracts originally entered
into during the third quarter of 1998 as part of the Company's then
ongoing share repurchase program. As of April 30, 1999, the contract
settlement cost per share exceeded the current market price per share
by $16.70. In May 1999, the contract was amended and the maturity date
extended until October 2000.
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FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
UNAUDITED
Although the ultimate choice of settlement option resides with the
Company, if the price of the Company's common stock falls to certain
levels, as defined in the contract, the holder of the contract has the
right to require the Company to settle the contract.
(6) On March 9, 1999, the Company announced a new strategic direction,
including a reorganization of the operating units and administrative
functions of its Engineering and Construction segment. A one-time,
special provision of $136.5 million ($119.8 million after-tax) was
recorded in the Company's second quarter for the implementation of the
reorganization. The provision is primarily for personnel, facilities
and asset impairment costs. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for a more detailed
discussion.
Expanded disclosure will be provided in future periods to report the
progress of the reorganization. As of April 30, 1999, $6.1 million of
cash costs were incurred for employee severance. In addition, $12.6
million of intangible assets (goodwill) and investments were charged
against the provision as impaired assets.
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FLUOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL 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 October 31, 1998 annual
report on Form 10-K. For purposes of reviewing this document "operating profit"
is calculated as revenues less cost of revenues excluding: corporate
administrative and general expense; interest expense; interest income; domestic
and foreign income taxes; gain or loss on discontinued operations; the
cumulative effect of a change in accounting principles; and certain other
miscellaneous non-operating income and expense items which are immaterial.
FORWARD-LOOKING INFORMATION
Statements regarding the Company's expectations for future performance or
results, including estimated and projected operating profits and earnings,
expectations regarding office closures and projected reductions in employment
levels and overhead expenses, expectations regarding its resolution of any "Year
2000" issues, expectations regarding continued weakness in new contract awards
and expectations regarding the issuance of long-term debt are forward-looking.
Forward looking statements reflect current analysis of existing information.
Caution must be exercised in relying on forward-looking statements. Due to known
and unknown risks, actual results may differ materially from expected or
projected results. Factors potentially contributing to such differences include,
among others:
o Cost overruns on contracts and other contract performance risk
o The uncertain timing of awards and revenues under contracts
o Conditions affecting the domestic and international coal market,
including competition in the global market for steel and weather
conditions
o Global economic and political conditions
o Unforeseen impediments to the Company's access to capital markets
o Year 2000 readiness
o Unforeseen impediments to the realization of the Company's strategic
initiatives
There is also a risk that future results may be impacted by currently unforeseen
impediments to the realization of revenues or other payments that have been
recognized through accruals prior to actual receipt. Failure to realize such
accrued amounts may result in a charge against future earnings.
Additional information concerning these and other factors can be found in press
releases as well as the Company's public periodic filings with the Securities
and Exchange Commission, including the discussion under the heading "Item 1.
Business - Other Matters - Fluor Business Risks" in the Company's Form 10-K
filed January 22, 1999. These filings are available publicly and upon request
from Fluor's Investor Relations Department: (949) 975-3909. The Company
disclaims any intent or obligation to update its forward-looking statements.
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RESULTS OF OPERATIONS
Revenues for the three and six month periods ended April 30, 1999 decreased by 6
percent and 3 percent, respectively, compared with the same periods of 1998. Net
losses for the three and six month periods ended April 30, 1999 were $72.9
million and $21.8 million, respectively, compared with net earnings of $54.3
million and $109.1 million, respectively, for the same periods of 1998. Results
for 1999 include a previously announced one-time, special provision of $136.5
million ($119.8 million after-tax) for personnel, facilities and asset
impairment costs required to implement the Company's new strategic direction and
reorganization of its Engineering and Construction segment. Also contributing to
the lower results was a decrease in operating profit from the Company's Coal
segment as well as higher interest and corporate administrative and general
expenses.
ENGINEERING AND CONSTRUCTION
The Engineering and Construction segment revenues and operating (loss) profit
for the three and six month periods ended April 30, 1999 and 1998 are as
follows:
Three months ended Six months ended
April 30, April 30,
-------------------------- ---------------------------
($ in thousands) 1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues $2,837,953 $3,014,378 $5,947,387 $6,120,853
Operating (loss) profit $(76,905) $57,867 $(19,832) $111,254
Revenues for the Engineering and Construction segment were slightly lower for
the three and six month periods ended April 30, 1999 compared with the same
periods in 1998, primarily due to a reduction in work performed in the core
engineering, procurement and construction business. This reduction is consistent
with the global slow down in the development of mining and petrochemical plants
and facilities, which has been adversely impacted by low petroleum and
commodity prices. Excluding the impact of the $136.5 million special provision,
the segment generated operating profits of $59.6 million and $116.7 million for
the three and six month periods ended April 30, 1999, respectively, both
represent increases over the same periods in 1998. Operating margins improved
slightly during 1999 as compared with 1998, primarily due to the Company's
continuing emphasis on improving margins through selectivity in new projects.
In addition to the $136.5 million special provision, results for the Engineering
and Construction segment included a provision totaling $64 million for process
design problems which have arisen on its Murrin Murrin nickel cobalt project in
Western Australia. The Company anticipates recovering a portion of this amount
and, accordingly, has recorded $44 million in potential insurance recoveries.
The result is a negative $20 million impact on the quarter from this project.
Partially offsetting this was recognition of $10 million of earnings from a
project in Indonesia. Realization of these earnings had been in question
primarily due to the previously reported uncertainty of collection of certain
progress billings. The collection of these billings combined with resolution of
other normal project completion contingencies during the current quarter,
resulted in recognition of project earnings in accordance with contract
accounting principles.
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As a result of the strategic reorganization, the Engineering and Construction
segment has been separated into two strategic business enterprises: Fluor Daniel
and Fluor Global Services. Fluor Daniel, which will concentrate on the Company's
engineering, procurement and construction business, reported operating profit
for the quarter of $39 million, including the significant project items
discussed in the preceding paragraph. Fluor Global Services, which includes
American Equipment Company, TRS Staffing Solutions, Government Services,
Telecommunications, and a new company, Operations, Maintenance and Consulting
Services, posted operating profit of $21 million for the quarter. The above
results exclude the impact of the $136.5 million special provision.
New awards for the three and six months ended April 30, 1999 were $1.6 billion
and $3.3 billion, respectively, compared with $2.8 billion and $5.4 billion for
the same periods of 1998. Approximately 45 percent and 52 percent, respectively,
of the new awards for the three and six months ended April 30, 1999 were for
projects located outside of the United States. There were no individual project
awards in excess of $225 million in the second quarter of 1999. The decrease in
1999 new awards as compared with 1998 reflects a continued trend by clients to
defer capital spending on new projects in certain markets as well as greater
project selectivity by the Company. Furthermore, despite some improvement in
both oil prices and the economic stability of Asia and Latin America, the
ongoing overall weak global economic conditions and volatility in capital
markets may result in new awards continuing to decline for the remainder of 1999
and into 2000 compared with 1998.
The following table sets forth backlog for each of the Company's Engineering and
Construction business groups:
April 30, October 31, April 30,
$ in millions 1999 1998 1998
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Process $ 4,141 $ 5,345 $ 6,129
Industrial 3,755 4,761 5,280
Power/Government 1,166 1,272 1,371
Diversified Services 1,161 1,267 1,134
----------------------------------------
Total backlog $ 10,223 $ 12,645 $ 13,914
========================================
U.S. $ 4,795 $ 5,911 $ 5,926
Outside U.S. 5,428 6,734 7,988
----------------------------------------
Total backlog $ 10,223 $ 12,645 $ 13,914
========================================
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The overall decrease in backlog is consistent with the slowing trends in new
awards. Approximately 53 percent of the Company's backlog as of April 30, 1999
is for projects located outside the United States. Due to the nature of the
projects the Company pursues and those included in backlog, the Company has not
experienced any significant disruption in ongoing project execution related to
turmoil in the global financial markets. Although backlog reflects business
which is considered 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.
REORGANIZATION COSTS
During the second quarter of 1999, the Company adopted a plan to reorganize its
operations to respond to deteriorating business conditions in its Engineering
and Construction segment. The anticipated benefits to be derived from the
reorganization will be a $160 million annual reduction in overhead expense.
The Company recorded a one-time, special provision of $136.5 million ($119.8
million after-tax) to recognize the costs associated with the reorganization.
Approximately 5,000 jobs are expected to be eliminated by these actions within
the next year. Some affected employees are entitled to receive severance
benefits under established severance policies or by governmental regulations.
Additionally, outplacement services may be provided on a limited basis to some
affected employees. The provision also reflects amounts for asset impairment,
primarily for property, plant and equipment; intangible assets (goodwill); and
certain investments, totaling $48.8 million. The asset impairments were recorded
primarily because of the Company's decision to exit certain non-strategic
geographic locations and businesses. The carrying values of impaired assets were
adjusted to their current market values based on estimated sale proceeds, using
either discounted cash flows or contractual amounts. Lease termination costs of
$14.5 are also included in the reorganization charge. The Company anticipates
closing 15 non-strategic offices worldwide as well as consolidating and
downsizing other office locations. The closure or rationalization of these
facilities is expected to be substantially completed by the end of fiscal year
2000.
The following table summarizes the Company's reorganization plan:
Lease
($ in millions) Personnel Asset Termination
Costs Impairments Costs Other Total
--------------------------------------------------------------
Special provision $72.2 $48.8 $14.5 $1.0 $136.5
Cash expenditures (6.1) -- -- -- (6.1)
Asset write-offs -- (12.6) -- -- (12.6)
--------------------------------------------------------------
Balance at April 30, 1999 $66.1 $36.2 $14.5 $1.0 $117.8
==============================================================
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COAL
Coal segment revenues and operating profit for the three and six month periods
ended April 30, 1999 and 1998 are as follows:
Three months ended Six months ended
April 30, April 30,
------------------------ ------------------------
($ in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
Revenues $253,354 $267,701 $527,985 $560,245
Operating profit $31,741 $40,298 $70,448 $76,989
Revenues decreased 5 percent and 6 percent, respectively, for the three and six
month periods ended April 30, 1999 compared with the same periods in 1998. The
decrease was primarily due to lower sales volume of metallurgical coal,
partially offset by an increase in lower margin steam coal sales. Prices for
both metallurgical and steam coal were also slightly lower during the periods as
compared with 1998. The metallurgical coal market continues to be adversely
affected by steel imports from outside the United States. These imports have
reduced demand for steel produced in the U.S. and thereby reduced U.S. demand
for metallurgical coal, which is used in steel production. Additionally, the
market for steam coal, which is used to fire electric generating plants, is
softening as a result of mild weather conditions and the low price of oil, which
offers a lower cost alternative to steam coal. These market conditions have
placed pressure on both the sales volume and pricing outlook for 1999. Gross
profit increased slightly during the three and six months ended April 30, 1999
as compared with 1998, primarily due to the decrease in production costs for
both metallurgical and steam coal. The improvement in gross profit during both
periods was more than offset by higher fixed costs, primarily depreciation,
depletion and amortization.
OTHER
Interest expense for the three and six months ended April 30, 1999 increased
compared with the same periods of 1998 due primarily to an increase in
commercial paper and loan notes used to fund the Company's share repurchase
program, which was completed in October 1998.
Corporate administrative and general expense during the three months ended April
30, 1999 was relatively flat compared with the same period in 1998. Corporate
administrative and general expense for the six month period ended April 30, 1999
was higher than the comparable period in 1998 due primarily to a credit in 1998
of approximately $10 million related to a long-term incentive compensation plan.
The Company accrues for certain long-term incentive awards whose ultimate cost
is dependent on attainment of various performance targets set by the
Organization and Compensation Committee (the "Committee") of the Board of
Directors. Under the long-term incentive compensation plan referred to above,
the performance target expired, without amendment or extension by the Committee,
on December 31, 1997.
The effective tax rate for the three and six month periods ended April 30, 1999
is significantly higher than the amounts reported for the same periods in 1998.
This is primarily because certain
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non-U.S. items included in the special provision did not receive full tax
benefit. If the special provision were excluded for tax rate determination
purposes, there would be no significant difference between the effective tax
rate and the statutory rate for the three and six month periods ended April 30,
1999.
FINANCIAL POSITION AND LIQUIDITY
At April 30, 1999, the Company had cash and cash equivalents of $207.9 million
and a total debt to total capital ratio of 32.6 percent. At April 30, 1998, the
Company had cash and cash equivalents of $319.5 million and a total debt to
total capital ratio of 22.0 percent.
Cash flow generated from operating activities was $57.6 million during the six
month period ended April 30, 1999, compared with $397.4 million during the same
period in 1998. The decrease in cash generated from operating activities is
primarily due to a decrease in cash flow from engineering and construction
activities which is affected from period to period by the mix, stage of
completion and commercial terms of engineering, procurement and construction
projects. In addition, operating cash flow was adversely impacted by an increase
in inventories, both for equipment for sale/rental and coal. The increase in
inventories is a result of slowing markets. Cash flow in 1998 was positively
impacted by the receipt of a $30 million tax refund in the first quarter.
Financing activities during the six months ended April 30, 1999 included capital
expenditures of $250.7 million, including $144.0 million for the Coal segment.
Capital expenditures, net of proceeds from the sale of property, plant and
equipment, were lower in 1999 than the comparable period in 1998, entirely in
the Engineering and Construction segment. The Company also completed the sale of
its ownership interest in Fluor Daniel GTI, Inc. during the first six months of
1999 and received proceeds totaling $36.3 million.
Investing activities during the six months ended April 30, 1999 included a
reduction in commercial paper and loan notes of $54.4 million partially offset
by the issuance of $42.0 million in notes payable to an affiliate. Dividends
during the first six months of 1999 were $30.3 million ($.40 per share) as
compared with $32.9 million ($.40 per share) in 1998. The decrease in the
dividends paid is due to a lower number of shares outstanding as a result of the
Company's 1997/1998 share repurchase program. Under this program, during the six
months ended April 30, 1998 the Company repurchased 4,995,400 shares of its
common stock for a total of $227.9 million.
The Company has on hand and access to sufficient sources of funds to meet its
anticipated operating needs, including cash required to implement the Company's
reorganization plan. Significant short- and long-term lines of credit are
maintained with banks which, along with cash on hand, provide adequate operating
liquidity. Liquidity is also provided by the Company's commercial paper and loan
note program. During January 1999, the Company filed a shelf registration
statement with the Securities and Exchange Commission for the sale of up to $500
million in debt securities.
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FINANCIAL INSTRUMENTS
During the fourth quarter of 1998, the Company entered into a forward purchase
contract for 1,850,000 shares of its common stock at a price of $49 per share.
The contract matures in October 1999 and gives the Company the ultimate choice
of settlement option, either physical settlement or net share settlement. This
contract effectively incorporates and extends a number of prior contracts
originally entered into during the third quarter of 1998 as part of the
Company's then ongoing share repurchase program. As of April 30, 1999, the
contract settlement cost per share exceeded the current market price per share
by $16.70. In May 1999, the contract was amended and the maturity date extended
until October 2000.
Although the ultimate choice of settlement option resides with the Company, if
the price of the Company's common stock falls to certain levels, as defined in
the contract, the holder of the contract has the right to require the Company to
settle the contract.
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 April 30, 1999 and October 31, 1998, the Company had
forward foreign exchange contracts of less than one year duration, to exchange
principally Australian Dollars, Korean Won, Dutch Guilders and German Marks for
U.S. dollars. In addition, the Company has a forward currency contract to
exchange U.S. dollars for British pounds sterling to hedge annual lease
commitments which expire in 1999. The total gross notional amount of these
contracts at April 30, 1999 and October 31, 1998 was $46 million and $106
million, respectively. Forward contracts to purchase foreign currency
represented $44 million and $102 million and forward contracts to sell foreign
currency represented $2 million and $4 million, at April 30, 1999 and October
31, 1998, respectively.
THE YEAR 2000 ISSUE - READINESS DISCLOSURE - UPDATE
The Year 2000 issue is the result of computer systems and other equipment with
processors that use only two digits to identify a year rather than four. If not
corrected, many computer applications and date sensitive equipment could fail or
create erroneous results before, during and after the Year 2000. The Company
utilizes information technology ("IT") systems such as computer networking
systems and non-IT devices which may contain embedded circuits such as building
security equipment. The Year 2000 issue could affect the systems, transaction
processing, computer applications and devices used by the Company to operate and
monitor all major aspects of its business, including financial systems,
marketing services, proprietary engineering and procurement systems, technical
reference databases and facilities operating systems. Both IT systems and non-IT
devices are subject to potential failure due to the Year 2000 issue.
The Company has developed and implemented a plan to achieve Year 2000 readiness
(the "Y2K Program"). The Company has implemented its Y2K Program through teams
located at the Company's operating units throughout the world. Senior corporate
staff oversee and coordinate such implementation efforts. Progress reports on
the Y2K Program are presented regularly to the Company's senior management and
periodically to the Audit Committee of the Company's Board
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of Directors. The Audit Committee reviews the Company's Year 2000 processes and
procedures to assess the appropriateness of its risk analysis process and
results.
The Company has divided systems potentially affected by the Year 2000 issue into
the following broad categories:
o Business Systems, including general ledger, accounting, human resources
and other ancillary business systems software that runs on mainframe
computers and various servers and is used throughout the Company's
facilities;
o Hardware, Network and Operating Systems, including mainframe computers
running Business Systems and other applications software, servers for
local area networks and wide area networks, hubs, routers, switches, and
various operating systems located on servers and personal computers;
o Engineering Systems, including engineering applications running
primarily on personal computers and local area networks;
o Major Site Specific Systems, including software and hardware which is
not shared throughout the Company's facilities but is used at the
Department of Energy's Hanford and Fernald Project Sites and at specific
coal facilities and processing plants of the Company;
o Other Site Specific Systems, including hardware and software used by the
Company at other project sites;
o Customer Systems, including equipment and software provided by the
Company to its customers; and
o Other Non-Mission Critical Systems, including, for the most part,
applications software for specific disciplines or projects.
In each category (excluding Other Non-Mission Critical Systems), the Company has
identified and assigned priority to certain mission critical systems. The
Company defines mission critical systems as those that might have a significant
adverse effect in one or more of the following areas: safety, environmental,
legal or financial exposure and Company credibility and image.
In relation to existing systems, the Company's Y2K Program has been implemented
in the following three phases: (1) identification and assessment of Year 2000
problems requiring systems modifications or replacements; (2) the remediation or
replacement and testing of systems having Year 2000 problems; and (3)
development of contingency and business continuity plans to mitigate the effect
of any system or equipment failure. The timeframe for each phase of the Y2K
Program, without respect to distinctions between mission critical systems and
non-mission critical systems, are represented in the following table:
Phases of the Project START DATE END DATE
Identification and assessment of IT and non-
IT systems Early 1996 December 31, 1998
Remediation or replacement and testing Late 1996 October 31, 1999
Contingency planning Late 1998 Ongoing into 2000
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With respect to systems that are being acquired by the Company for its own
account or the account of customers, the Company uses standard compliance
processes to certify Year 2000 compliance. The Company maintains relationships
with thousands of suppliers, some of whom supply software, hardware and systems
that must be assessed for Year 2000 compliance. The Company has identified
approximately 2,000 critical suppliers. The Company requires that all suppliers
certify and, where appropriate, guarantee that the systems and equipment they
provide to the Company for its own account and the account of its customers are
Year 2000 compliant. In addition to requiring such certifications, the Company
has also established a procedure for reviewing Year 2000 compliance by critical
suppliers. Actions include the review of remediation and testing of specific
equipment, review of suppliers' corporate Year 2000 progress and confirmation of
electronic exchange formats. Where appropriate, the Company may follow up its
review of supplier information with on-site visits. Where a supplier does not,
or cannot, satisfy the Company's Year 2000 requirements, the Company seeks
alternate suppliers, subject to customer requirements and contract
specifications. Given the number of suppliers utilized by the Company,
compliance assessment is ongoing. Although initial reviews indicate that Year
2000 compliance by the Company's suppliers should not have a material adverse
affect on the Company's operations, there can be no assurance that suppliers
will resolve all Year 2000 issues in their systems and equipment in a timely
manner.
Generally, the Company has substantially completed phase 1 (identification and
assessment) and phase 2 (remediation or replacement and testing) with respect to
most of its Business Systems. The upgrading or remediation of the balance of the
Business Systems are scheduled to be complete by the end of October 1999.
At this time, the Company believes its mainframe system is Year 2000 ready. The
Company is using an automated tool to test servers and approximately 17,000
personal computers with standard connections to servers. Approximately
77 percent of those computers have been tested, and approximately 85 percent of
the personal computers tested (or approximately 65 percent of the total) have
been found to be Year 2000 compliant. Approximately 15 percent of the computers
tested require upgrading and are being upgraded. Remaining hardware, including
personal computers that are not connected to servers, is predominately located
at project sites or smaller offices. Such hardware is not likely to be mission
critical and is being assessed through manual procedures. The Company is
migrating its personal computers to new operating systems (Windows 95 and
Windows NT), and migration is expected to address Year 2000 problems in various
operating systems that are being replaced. All equipment upgrades and
remediation are expected to be complete by August 1999.
With respect to Engineering Systems, the Company plans to retire approximately
29 percent of its engineering applications software to streamline its
operations, reduce support costs and avoid costs of Year 2000 remediation. The
cost of such software, to the extent originally capitalized, has been fully
amortized and the Company does not expect any significant write off as the
result of such retirement. The remediation of remaining applications software is
largely being addressed via upgrades. At this time, approximately 66 percent of
the engineering applications software that will remain in use has been upgraded.
With respect to the Engineering Systems, remediation and
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testing are proceeding in accordance with the schedule and are generally
expected to be complete by the end of June 1999.
The assessment of mission critical Major Site Specific Systems is substantially
complete. Remediation or replacement and testing of all the systems and
equipment the Company has identified at the Department of Energy's projects has
been completed. The assessment of site specific control systems used at the
Company's coal plants is substantially complete. Approximately 63% of those
systems are Year 2000 ready. Remediation of the remaining systems is expected to
be complete by October 1999.
Other Site Specific Systems have been assessed. The Company has identified
approximately 330 applications in this category. Approximately 115 will be
retired. Approximately 138 of those systems are Year 2000 ready. The balance are
scheduled to be remediated by the end of June 1999.
With respect to Customer Systems and current customer projects generally, the
Company is making evaluations to determine whether or not any action is required
to ensure Year 2000 readiness. At any time, the Company may have approximately
2,000 ongoing customer projects. The Company is reviewing those projects where
it has ongoing warranty or performance obligations for Year 2000 issues. It has
targeted approximately 1,000 projects for additional Year 2000 assessment, of
which approximately 94 percent have been reviewed. At those projects where Year
2000 issues may exist, the Company is evaluating what further action is
required, including remediation and contingency planning. In many cases, the
Company does not provide its own warranties but has passed through to its
customers the warranties provided by its suppliers. Accordingly, the Company is
contacting suppliers of the systems affected by Year 2000 issues and monitoring
their remediation efforts. The Company relies directly and indirectly on
external systems utilized by its suppliers and on equipment and materials
provided by those suppliers and used for the Company's business. As discussed
above, the Company has implemented a procedure for reviewing Year 2000
compliance by its suppliers.
With respect to systems and equipment previously provided to clients, the
Company does not control the upgrades, additions and/or changes made by its
clients, or by others for its clients, to those systems and equipment.
Accordingly, the Company does not provide any assurances, nor current
information about Year 2000 capabilities, nor potential Year 2000 problems, with
respect to past projects. Each project is performed under an agreement with the
Company's client. Those agreements specifically outline the extent of the
Company's obligations and warranties and the limitations that may apply.
Other Non-Mission Critical Systems are comprised, for the most part, of
approximately 600 specific applications software programs. Such software is not
critical to the Company's operations and is being reviewed and remediated in
accordance with the schedule.
The Company has investments in various joint ventures and is monitoring the Year
2000 efforts of such joint ventures. Based on available information, the Company
believes, that with a few exceptions, business systems used in such joint
ventures are Year 2000 ready.
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The Company uses both internal and external resources in its Y2K Program. The
Company estimates that, from 1996 to date, it has spent approximately $16.3
million on the Year 2000 issue. It anticipates spending an additional $14.0
million in the next year and running into the first quarter of 2000. This
estimate of additional spending was derived utilizing numerous assumptions,
including the assumption that the Company has already identified its most
significant Year 2000 issues and that plans of its third party suppliers will be
fulfilled in a timely manner without cost to the Company. The Company estimates
that 32 percent of the total costs incurred in the Y2K Program have been and
will be incurred to remediate systems (including software upgrades); the
remaining 68 percent will be incurred to replace problem systems and equipment.
In addition to the direct costs of the Y2K Program, the Company has accelerated
its program of replacing out-of-date personal computers and operating systems,
regardless of whether or not such computers and systems are Year 2000 compliant.
The Company estimates it has spent $11.8 million to date and will spend an
additional $13.1 million in connection with such replacement program. This
replacement program will continue into October 1999. The Y2K Program has been
funded under the Company's general IT and operating budgets. In 1999, Y2K
Program costs are estimated to be 12 percent of the IT budget. The Year 2000
expenditures have been and will continue to be expensed and deducted from income
when incurred, except for costs incurred to acquire new software developed or
obtained to replace old software which may be capitalized and amortized under
generally accepted accounting principles. No significant internal systems
projects are being deferred due to the Y2K Program efforts. The above amounts
are the Company's best estimate given other systems initiatives that were
ongoing irrespective of the Y2K Program (such as the migration to Windows NT and
related hardware upgrades). However, there can be no guarantee that these
assumptions are accurate, and actual results could differ materially from those
anticipated.
The Company is developing contingency plans to address the Year 2000 issues that
may pose a significant risk to its ongoing operations and existing projects.
Such plans will include the implementation of alternate procedures to compensate
for any system and equipment malfunctions or deficiencies with the Company's
internal systems and equipment, with systems and equipment utilized at the
Company's project sites and with systems and equipment provided to clients.
During the remediation phase of the internal business systems, the Company has
been and will be evaluating potential failures and attempt to develop responses
in a timely manner. However, there can be no assurance that any contingency
plans implemented by the Company would be adequate to meet the Company's needs
without materially impacting its operations, that any such plan would be
successful or that the Company's results of operations would not be materially
and adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
Further contingency plans are being developed to address issues related to third
parties that are not considered to be making sufficient progress in becoming
Year 2000 ready in a timely manner. Due to the large number of variables
involved with estimating resultant lost revenues should there be a third party
failure, the Company cannot provide an estimate of damage if any of the
scenarios were to occur.
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The Company's Y2K Program is subject to a variety of risks and uncertainties
some of which are beyond the Company's control. Those risks and uncertainties
include, but are not limited to, the availability of qualified computer
personnel, the Year 2000 readiness of third parties and the Year 2000 compliance
of systems and equipment provided by suppliers.
The Company believes that its most reasonably likely worst case Year 2000
scenarios would relate to problems with the systems of third parties, rather
than with the Company's internal systems. In this regard, the Company believes
that risks are greatest in the area of utilities. Each of the Company's
locations relies on local private and governmental suppliers for electricity,
water, sewer, telecommunication and other basic utility services. If the supply
of such necessary utilities were to fail at any location, the Company's
operations at that location, whether consisting of engineering, design or
construction activities, maintenance services or coal mining and processing,
would essentially be shut down or disrupted until such utilities were restored.
Depending on the location, the Company could suffer delays in performing
contracts and in otherwise fulfilling its commitments. Such delays could
materially adversely impact the Company's receipt of payments due from customers
upon its tender of contract deliverables or upon achievement of contract
milestones. At facilities located in developing countries, the risk of sustained
infrastructure failures is accentuated by the lack of transparency in government
and private enterprises and general constraints on infrastructure spending. The
Company is working to assess its exposure to utility providers and other
infrastructure risks. The Company believes that the geographical dispersion of
the Company's facilities mitigates the risk that infrastructure failures in any
locale will result in the simultaneous closure of, or sustained suspension of
operations at, multiple Company facilities. Consequently, to the extent
practical, the Company expects to mitigate any interruption in its business
operations in one locale by shifting the performance of the constrained activity
to a functioning office or facility. There may be instances, however, where the
activity cannot be performed elsewhere or on a timely basis given the disruption
caused by the Year 2000 problems in any locale. In such instances, the Company
will assess the relevant provisions of its contracts and, where it deems
appropriate, work with its customers to resolve performance and schedule delays
and any resulting financial consequences on a mutually satisfactory basis to the
extent possible under then prevailing circumstances.
No assurance can be given that the Company will achieve Year 2000 readiness.
Further, there is the possibility that significant litigation may occur due to
business and equipment failures caused by the Year 2000 issue. It is uncertain
whether, or to what extent, the Company may be affected by such litigation. The
failure of the Company, its clients (including governmental agencies), suppliers
of computer systems and equipment, joint venture partners and other third
parties upon whom the Company relies, to achieve Year 2000 readiness could
materially and adversely affect the Company's results from operations.
EURO CONVERSION - UPDATE
Given the nature and size of the Company's European operations, the Company does
not perceive the conversion to the Euro as a significant risk area. The
Company's businesses operate under long-term contracts, typically denominated in
U.S. Dollars, as compared with more traditional retail or manufacturing
environments. If required, the Company is currently able to bid, price and
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negotiate contracts using the Euro. The Company's treasury function is also
capable of operating with the Euro. Specifically, the Company is able to:
establish bank accounts; obtain financing; obtain bank guarantees or letters of
credit; trade foreign currency; and hedge transactions. The Company's ongoing
Euro conversion effort will be primarily concentrated in the systems area.
Conversion to the Euro impacts the Company's subsidiaries in The Netherlands,
Germany, Belgium, and Spain. All subsidiaries use a standard accounting system
and all reside in the same database. The Company's conversion plan is to
maintain the legacy database for historical reference and to create a new
database with the Euro as the base currency. The new database will permit
transactions to take place in both legacy currencies and the Euro as well as
perform prescribed rounding calculations. The new Euro-based database is
anticipated to be available by June 1999, with testing complete by the end of
July 1999. Full conversion is anticipated to be completed by the start of fiscal
year 2000, with the exception of the Spain office which is anticipated to be
completed by the start of fiscal year 2001.
The Company has not incurred and it does not expect to incur any significant
costs from the continued conversion to the Euro, including any currency risk,
which could significantly affect the Company's business, financial condition and
results of operations.
The Company has not experienced any significant operational disruptions to date
and does not currently expect the continued conversion to the Euro to cause any
significant operational disruptions, including the impact of systems operated
by others.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 will
be adopted by the Company in 1999. As discussed elsewhere in this Form 10-Q, the
Company is undertaking a complete reorganization of its current operating units
and administrative functions. Although management has not completed its review
of SFAS No. 131 in light of the new organizational structure, management
anticipates that under the new standard the number of its identifiable segments
will increase over that currently being reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording
derivatives in interim and annual financial statements. On May 19, 1999, the
Financial Accounting Standards Board voted to defer the implementation date of
this statement, thereby making it effective for the Company's fiscal year 2001.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant impact
on the results of operations or the financial position of the Company.
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FLUOR CORPORATION
CHANGES IN BACKLOG
Three and Six Months Ended April 30, 1999 and 1998
UNAUDITED
For the Three Months Ended April 30, 1999 1998
- ----------------------------------------------------------------------------------------------
Backlog - beginning of period $ 11,064.5 $ 14,018.1
New awards 1,621.1 2,776.6
Adjustments and cancellations, net 138.7 (73.3)
Work Performed (2,601.8) (2,807.4)
--------------------------
Backlog - end of period $ 10,222.5 $ 13,914.0
==========================
For the Six Months Ended April 30, 1999 1998
- ----------------------------------------------------------------------------------------------
Backlog - beginning of period $ 12,645.3 $ 14,370.0
New awards 3,322.0 5,378.7
Adjustments and cancellations, net (252.8) (70.8)
Work Performed (5,492.0) (5,763.9)
--------------------------
Backlog - end of period $ 10,222.5 $ 13,914.0
==========================
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PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Date of Meeting. The annual meeting of stockholders of Fluor
Corporation was held on March 9, 1999 at The Hyatt Regency
Hotel, Irvine, California.
(b) Election of Directors - Voting Results
Directors elected -
Don L. Blankenship
64,447,796 FOR
1,245,870 VOTED TO WITHHOLD AUTHORITY
Peter J. Fluor
64,507,431 FOR
1,186,235 VOTED TO WITHHOLD AUTHORITY
Bobby R. Inman
64,401,930 FOR
1,291,736 VOTED TO WITHHOLD AUTHORITY
James O. Rollans
64,440,910 FOR
1,252,756 VOTED TO WITHHOLD AUTHORITY
Other directors continuing in office -
Carroll A. Campbell, Jr.
Philip J. Carroll, Jr.
David P. Gardner
Thomas L. Gossage
Vilma S. Martinez
Dean R. O'Hare
Robin W. Renwick
Martha R. Seger
James C. Stein
(c) Matters Voted Upon. Ratification of the appointment of Ernst &
Young LLP as independent auditors for 1999:
65,124,670 FOR
288,700 AGAINST
280,296 ABSTAIN
-0- BROKER NON-VOTE
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Approval of Fluor Corporation 1999 Executive Performance
Incentive Plan:
59,700,705 FOR
5,311,184 AGAINST
681,777 ABSTAIN
-0- BROKER NON-VOTE
(d) Terms of settlement between registrant and any other
participant. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Fluor Corporation 1999 Executive Performance
Incentive Plan.
27.1 Financial Data Schedule as of and for the six
months ended April 30, 1999.
(b) Reports on Form 8-K.
None.
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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.
FLUOR CORPORATION
------------------
(Registrant)
Date: June 14, 1999 /s/ J. O. Rollans
------------- ----------------------------------------
J. O. Rollans, Senior Vice President
and Chief Financial Officer
/s/V. L. Prechtl
----------------------------------------
V. L. Prechtl, Vice President and
Controller
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Fluor Corporation 1999 Executive Performance Incentive Plan.
27.1 Financial Data Schedule as of and for the six months ended April
30, 1999.