1
EXHIBIT 13
Fluor Corporation 1999 Annual Report
OPERATING STATISTICS
Year ended October 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in millions)
FLUOR DANIEL
Revenues $ 8,403 $ 9,736 $10,180
Customer-furnished material included in revenues 3,786 3,916 4,948
Work performed $ 8,403 $ 9,736 $10,180
Gross margin percent 5.7% 4.8% 3.5%
Operating profit $ 160 $ 161 $ 70
New awards $ 4,757 $ 8,173 $10,366
New awards gross margin percent 7.2% 6.0% 5.0%
Backlog $ 6,770 $10,403 $12,269
Backlog gross margin percent 4.6% 4.0% 3.2%
Salaried employees 18,147 24,060 24,942
FLUOR GLOBAL SERVICES
Revenues $ 2,931 $ 2,642 $ 3,038
Work performed $ 2,055 $ 1,857 $ 2,615
Gross margin percent 9.4% 11.2% 8.7%
Operating profit $ 92 $ 81 $ 52
New awards $ 2,032 $ 1,819 $ 1,756
New awards gross margin percent 7.8% 7.6% 9.6%
Backlog $ 2,372 $ 2,242 $ 2,101
Backlog gross margin percent 6.1% 6.4% 5.7%
Salaried employees 6,011 5,554 5,359
BACKLOG BY STRATEGIC BUSINESS ENTERPRISE
Fluor Daniel
Chemicals & Life Sciences $ 1,964 $ 4,130 $ 4,414
29% 40% 36%
Oil, Gas & Power 2,583 2,134 3,298
38% 20% 27%
Mining 657 1,890 2,931
10% 18% 24%
Manufacturing 1,170 1,749 1,420
17% 17% 12%
Infrastructure 396 500 206
6% 5% 1%
- ---------------------------------------------------------------------------------------------------------------------
Total backlog $ 6,770 $10,403 $12,269
100% 100% 100%
=====================================================================================================================
Fluor Global Services
Fluor Federal Services $ 710 $ 781 $ 1,000
30% 35% 48%
Telecommunications 525 135 179
22% 6% 9%
Operations & Maintenance 1,127 1,217 827
48% 54% 39%
Consulting Services and Other 10 109 95
-% 5% 4%
- ---------------------------------------------------------------------------------------------------------------------
Total backlog $ 2,372 $ 2,242 $ 2,101
100% 100% 100%
=====================================================================================================================
TOTAL BACKLOG BY LOCATION
Year ended October 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(in millions)
United States $ 5,008 $ 5,911 $ 5,665 $ 7,326 $ 6,666
55% 47% 39% 46% 45%
Asia Pacific (includes Australia) 998 2,260 3,959 4,402 3,303
11% 18% 28% 28% 23%
EAME* 1,074 2,023 3,828 2,677 3,088
12% 16% 27% 17% 21%
Americas 2,062 2,451 918 1,352 1,668
22% 19% 6% 9% 11%
- -----------------------------------------------------------------------------------------------------------------------------
Total backlog $ 9,142 $12,645 $14,370 $15,757 $14,725
100% 100% 100% 100% 100%
================================================================================
- ------------
* EAME represents Europe, Africa and the Middle East.
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OPERATING STATISTICS
Year ended October 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(in thousands/in thousands of short tons)
COAL
Revenues $1,083,030 $1,127,297 $1,081,026 $ 960,827 $ 849,758
Operating profit $ 146,857 $ 172,762 $ 154,766 $ 134,526 $ 111,033
Produced coal sold
Steam coal 22,916 19,398 19,300 17,520 15,777
Metallurgical coal 14,948 18,210 16,343 13,571 11,633
- --------------------------------------------------------------------------------------------------------------------
Total produced coal sold 37,864 37,608 35,643 31,091 27,410
Total employees 3,190 3,094 2,968 2,809 2,479
- --------------------------------------------------------------------------------------------------------------------
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SELECTED FINANCIAL DATA
(in millions, except
per share amounts) 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Revenues $ 12,417.4 $ 13,504.8 $ 14,298.5 $ 11,015.2 $ 9,301.4 $ 8,485.3
Earnings from continuing
operations before taxes 185.7 362.6 255.3 413.2 362.2 303.3
Earnings from continuing
operations, net 104.2 235.3 146.2 268.1 231.8 192.4
Earnings (loss) from
discontinued operations, net -- -- -- -- -- --
Cumulative effect of change in
accounting principle, net -- -- -- -- -- --
Net earnings 104.2 235.3 146.2 268.1 231.8 192.4
Basic earnings per share
Continuing operations 1.38 2.99 1.76 3.24 2.82 2.35
Discontinued operations -- -- -- -- -- --
Cumulative effect of change
in accounting principle -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share 1.38 2.99 1.76 3.24 2.82 2.35
Diluted earnings per share
Continuing operations 1.37 2.97 1.75 3.21 2.81 2.34
Discontinued operations -- -- -- -- -- --
Cumulative effect of change
in accounting principle -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.37 $ 2.97 $ 1.75 $ 3.21 $ 2.81 $ 2.34
Return on average
shareholders' equity 6.8% 14.5% 8.7% 17.4% 17.6% 17.1%
Cash dividends per
common share $ .80 $ .80 $ .76 $ .68 $ .60 $ .52
CONSOLIDATED FINANCIAL POSITION
Current assets $ 1,910.2 $ 2,277.2 $ 2,213.4 $ 1,796.8 $ 1,411.6 $ 1,258.4
Current liabilities 2,204.3 2,495.6 1,978.2 1,645.5 1,238.6 1,021.3
- ----------------------------------------------------------------------------------------------------------------------------
Working capital (294.1) (218.4) 235.2 151.3 173.0 237.1
Property, plant and
equipment, net 2,223.0 2,147.3 1,938.8 1,677.7 1,435.8 1,274.4
Total assets 4,886.1 5,019.2 4,685.3 3,951.7 3,228.9 2,824.8
Capitalization
Short-term debt* 247.9 430.7 88.8 67.2 60.8 58.4
Long-term debt 317.5 300.4 300.5 3.0 2.9 24.4
Shareholders' equity 1,581.4 1,525.6 1,741.1 1,669.7 1,430.8 1,220.5
- ----------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 2,146.8 $ 2,256.7 $ 2,130.4 $ 1,739.9 $ 1,494.5 $ 1,303.3
Total debt as a percent of
total capitalization 26.3% 32.4% 18.3% 4.0% 4.3% 6.4%
Shareholders' equity per
common share $ 20.80 $ 20.19 $ 20.79 $ 19.93 $ 17.20 $ 14.79
Common shares outstanding
at October 31 76.0 75.6 83.7 83.8 83.2 82.5
OTHER DATA
New awards $ 6,789.4 $ 9,991.9 $ 12,122.1 $ 12,487.8 $ 10,257.1 $ 8,071.5
Backlog at year end 9,142.0 12,645.3 14,370.0 15,757.4 14,724.9 14,021.9
Capital expenditures and
acquisitions** 504.3 612.9 647.4 484.5 335.1 274.8
Cash provided by operating
activities $ 464.9 $ 702.5 $ 328.6 $ 406.9 $ 366.4 $ 458.6
(in millions, except
per share amounts) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Revenues $ 7,850.2 $ 6,600.7 $ 6,572.0 $ 7,248.9 $ 6,127.2
Earnings from continuing
operations before taxes 242.2 215.4 228.4 153.6 135.6
Earnings from continuing
operations, net 166.8 135.3 153.1 119.4 84.1
Earnings (loss) from
discontinued operations, net -- (96.6) 11.0 35.2 28.6
Cumulative effect of change in
accounting principle, net -- (32.9) -- -- --
Net earnings 166.8 5.8 164.1 154.6 112.7
Basic earnings per share
Continuing operations 2.05 1.67 1.91 1.50 1.07
Discontinued operations -- (1.19) .14 .44 .36
Cumulative effect of change
in accounting principle -- (.41) -- -- --
- --------------------------------------------------------------------------------------------------------------
Basic earnings per share 2.05 .07 2.05 1.94 1.43
Diluted earnings per share
Continuing operations 2.04 1.66 1.89 1.48 1.05
Discontinued operations -- (1.19) .14 .44 .36
Cumulative effect of change
in accounting principle -- (.40) -- -- --
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.04 $ .07 $ 2.03 $ 1.92 $ 1.41
Return on average
shareholders' equity 17.4% .6% 20.2% 23.3% 21.5%
Cash dividends per
common share $ .48 $ .40 $ .32 $ .24 $ .14
CONSOLIDATED FINANCIAL POSITION
Current assets $ 1,309.1 $ 1,138.6 $ 1,159.5 $ 1,222.8 $ 1,036.4
Current liabilities 930.9 845.4 848.2 984.0 797.7
- --------------------------------------------------------------------------------------------------------------
Working capital 378.2 293.2 311.3 238.8 238.7
Property, plant and
equipment, net 1,100.9 1,046.9 1,092.7 925.3 775.3
Total assets 2,588.9 2,365.5 2,421.4 2,475.8 2,154.3
Capitalization
Short-term debt* 61.8 75.6 52.3 2.1 36.8
Long-term debt 59.6 61.3 75.7 57.6 62.5
Shareholders' equity 1,044.1 880.8 900.6 741.3 589.9
- --------------------------------------------------------------------------------------------------------------
Total capitalization $ 1,165.5 $ 1,017.7 $ 1,028.6 $ 801.0 $ 689.2
Total debt as a percent of
total capitalization 10.4% 13.5% 12.4% 7.5% 14.4%
Shareholders' equity per
common share $ 12.72 $ 10.81 $ 11.10 $ 9.22 $ 7.39
Common shares outstanding
at October 31 82.1 81.5 81.1 80.4 79.8
OTHER DATA
New awards $ 8,000.9 $ 10,867.7 $ 8,531.6 $ 7,632.3 $ 7,135.3
Backlog at year end 14,753.5 14,706.0 11,181.3 9,557.8 8,360.9
Capital expenditures and
acquisitions** 171.5 272.7 106.5 126.4 130.4
Cash provided by operating
activities $ 188.7 $ 306.1 $ 219.0 $ 353.1 $ 265.1
* Includes commercial paper, loan notes, a note payable to affiliate,
miscellaneous trade notes payable and the current portion of long-term
debt.
** Excludes discontinued operations.
See Management's Discussion and Analysis on pages 28 to 37 and Notes to
Consolidated Financial Statements on pages 42 to 53 for information relating to
significant items affecting the results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the consolidated financial statements
and accompanying notes. 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.
RESULTS OF OPERATIONS
As a result of a strategic reorganization, during 1999 the company realigned its
operating units into four business segments (which the company refers to as
Strategic Business Enterprises): Fluor Daniel, Fluor Global Services, Coal and
Fluor Signature Services. The Fluor Daniel segment provides design, engineering,
procurement and construction services on a worldwide basis to an extensive range
of industrial, commercial, utility, natural resources and energy clients. The
Fluor Global Services segment, which includes American Equipment Company, TRS
Staffing Solutions, Fluor Federal Services, Telecommunications, Operations &
Maintenance and Consulting Services, provides outsourcing and asset management
solutions to its customers. The Coal segment produces, processes and sells
high-quality, low-sulfur steam coal for the utility industry as well as
industrial customers, and metallurgical coal for the steel industry. Fluor
Signature Services, which commenced operations on November 1, 1999, was created
to provide business administration and support services for the benefit of the
company and ultimately, to unaffiliated customers.
To implement the reorganization, the company recorded a special
provision of $117.2 million - see Strategic Reorganization Costs elsewhere in
Management's Discussion and Analysis. The provision was not allocated to the
business segments.
FLUOR DANIEL SEGMENT
Total 1999 new awards were $4.8 billion compared with $8.2 billion in 1998 and
$10.4 billion in 1997. The following table sets forth new awards for each of the
segment's business units:
Year ended October 31, 1999 1998 1997
- ------------------------------------------------------------
(in millions)
Chemicals & Life Sciences $ 1,211 $ 3,053 $ 4,166
25% 37% 40%
Oil, Gas & Power 2,599 2,302 2,814
55% 28% 27%
Mining 26 464 1,595
1% 6% 15%
Manufacturing 785 1,856 1,741
16% 23% 17%
Infrastructure 136 498 50
3% 6% 1%
- ------------------------------------------------------------
Total new awards $ 4,757 $ 8,173 $10,366
100% 100% 100%
================================
United States $ 2,267 $ 4,112 $ 3,885
47% 50% 37%
International 2,490 4,061 6,481
53% 50% 63%
- ------------------------------------------------------------
Total new awards $ 4,757 $ 8,173 $10,366
100% 100% 100%
================================
New awards in 1999 were lower compared with 1998, reflecting both the
lingering impact of deferred capital spending by clients, primarily in the
petrochemical and mining industries, and the company's continuing emphasis on
greater project selectivity. The large size and uncertain timing of complex,
international projects can create variability in the company's award pattern;
consequently, future award trends are difficult to predict with certainty.
However, given the improving global economic conditions, including significantly
higher oil prices and the recent stabilizing of commodity prices, the company is
optimistic about the level of new awards in 2000.
Since 1997 the trend in new awards activity within each business unit
reflects the impact of the economic conditions and operating strategies noted
above. There were no individual new awards in excess of $550 million in either
1999 or 1998. New awards for the Chemicals & Life Sciences business unit in 1997
included the $1.9 billion Yanpet project, a petrochemical complex in Saudi
Arabia. The Mining business unit's new awards are down significantly from 1997
primarily due to depressed commodity prices, thereby limiting new projects, as
well as this unit's focus on project selectivity. The decrease in new awards in
1999 compared with 1998 and 1997 for the Manufacturing business unit is
primarily the result of an increased focus on project selectivity.
Backlog at October 31, 1999, 1998 and 1997 was $6.8 billion, $10.4 billion
and $12.3 billion, respectively.
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(See page 18 in this annual report for information relating to backlog by
business unit.) The decrease in total backlog is consistent with the downward
trend in new awards. Work performed on existing projects has exceeded new awards
in both 1999 and 1998. The decrease in backlog from projects located outside the
United States at October 31, 1999, resulted from work performed on international
projects such as a copper and gold mine in Indonesia and the aforementioned
petrochemical project in Saudi Arabia, in addition to a 39 percent decrease in
international-related new awards. 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.
Fluor Daniel revenues decreased to $8.4 billion in 1999 compared with
$9.7 billion in 1998 and $10.2 billion in 1997, primarily due to a continuing
decline in the volume of work performed. The decline in revenues is consistent
with the downward trend in new awards, reflecting both deferred capital spending
by clients as well as the company's emphasis on project selectivity. Fluor
Daniel operating profit was $160 million in 1999, $161 million in 1998 and $70
million in 1997. Despite a 14 percent decline in revenues, operating margins for
the year ended October 31, 1999 improved over the same period in 1998, primarily
due to improved project execution. Operating results for the year ended October
31, 1997, reflect provisions totaling $118.2 million recorded for estimated
losses on certain contracts and adjustments to project-related investments and
accounts receivable. Results for 1997 also included charges totaling $25.4
million related to implementation of certain cost reduction initiatives.
Results for the year ended October 31, 1999 for Fluor Daniel include a
provision totaling $84 million for process design problems which arose on its
Murrin Murrin Nickel Cobalt project located in Western Australia. The company
anticipates recovering a portion of this amount and, accordingly, has recorded
$64 million in expected insurance recoveries. The result on operating profit was
a negative $20 million impact which reflects costs in excess of contract
maximums and which are not otherwise recoverable from any insurance coverage.
During the fourth quarter of 1999, Fluor Daniel completed a more definitive
estimate of costs required to address the design problems and potential
insurance recoveries. As a result of this effort, both the estimated cost and
expected insurance recovery amounts discussed above include an upward revision
of $20 million.
The majority of Fluor Daniel's engineering and construction contracts
provide for reimbursement of costs plus a fixed or percentage fee. In the highly
competitive markets served by this segment, there is an increasing trend for
cost-reimbursable contracts with incentive-fee arrangements and fixed or unit
price contracts. In certain instances, Fluor Daniel has provided guaranteed
completion dates and/or achievement of other performance criteria. Failure to
meet schedule or performance guarantees or increases in contract costs can
result in non-recoverable costs, which could exceed revenues realized from the
project. Fluor Daniel continues to focus on improving operating margins by
enhancing selectivity in the projects it pursues, lowering overhead costs and
improving project execution.
The Fluor Daniel segment made no significant business acquisitions
during 1999, 1998 or 1997.
FLUOR GLOBAL SERVICES SEGMENT
Total 1999 new awards were $2.0 billion compared with $1.8 billion in both 1998
and 1997. The following table sets forth new awards for each of the segment's
business units:
Year ended October 31, 1999 1998 1997
- -------------------------------------------------------------
(in millions)
Fluor Federal Services $ 582 $ 451 $ 497
29% 25% 28%
Telecommunications 646 30 277
32% 2% 16%
Operations & Maintenance 772 1,106 713
38% 61% 41%
Consulting Services and Other 32 232 269
1% 12% 15%
- -------------------------------------------------------------
Total new awards $2,032 $1,819 $1,756
100% 100% 100%
============================
United States $1,928 $1,524 $1,558
95% 84% 89%
International 104 295 198
5% 16% 11%
- -------------------------------------------------------------
Total new awards $2,032 $1,819 $1,756
100% 100% 100%
============================
New awards in 1999 were higher compared with 1998, as a result of an
increase in telecommunications projects. New awards in 1998 were slightly higher
than 1997 primarily due to the renewal of facility management service contracts
for IBM at various facilities located throughout
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the United States. Because of the nature of the services performed by Fluor
Global Services, primarily related to American Equipment Company (AMECO) and TRS
Staffing Solutions, a significant portion of this segment's activities are not
includable in backlog.
Backlog at October 31, 1999, 1998 and 1997 was $2.4 billion, $2.2
billion and $2.1 billion, respectively. (See page 18 in this annual report for
information relating to backlog by business unit.) The increase in total backlog
is consistent with the increasing trend in new awards. The backlog of Fluor
Global Services is concentrated in the United States, representing approximately
90 percent, 88 percent and 92 percent of the total backlog at the end of 1999,
1998 and 1997, respectively. Although backlog reflects business that 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.
Fluor Global Services revenues increased to $2.9 billion in 1999
compared with $2.6 billion in 1998, as the result of higher revenues in its
AMECO, Fluor Federal Services and Telecommunications business units. The decline
in Fluor Global Services revenues from $3.0 billion in 1997 to $2.6 billion in
1998 was primarily due to a reduction in revenues related to its environmental
strategies business which was phased out during 1998. Operating profit for the
segment was $92 million in 1999, $81 million in 1998 and $52 million in 1997.
Gross margin in 1999 declined to 9.4 percent from 11.2 percent in 1998 primarily
due to the AMECO business unit, which is being adversely impacted by the
increasingly competitive equipment sale and rental industry. Despite the lower
gross margin, operating profit increased in 1999 compared with 1998 primarily
due to the elimination of certain unprofitable operations which negatively
impacted 1998. The improvement in operating results in 1998 as compared with
1997 is due primarily to losses incurred during 1997 by various unprofitable
business units that were eliminated in 1998.
The majority of Fluor Global Services' contracts provide for
reimbursement of costs plus a fixed or percentage fee. Due to intense
competitive market conditions, there is an increasing trend for contracts with
incentive-fee arrangements or fixed or unit price contracts. In certain
instances, contracts provide guaranteed completion dates and/or achievement of
other performance criteria. Failure to meet schedule or performance guarantees
or increases in contract costs can result in non-recoverable costs, which could
exceed revenues realized from the project.
In December 1996, TRS Staffing Solutions, the segment's temporary
personnel services business unit, acquired the ConSol Group; in May 1997, AMECO
acquired the SMA Companies; and, in June 1997, AMECO acquired J.W. Burress, Inc.
These businesses, in addition to other smaller acquisitions, were purchased for
a total of $142 million.
All acquisitions have been accounted for under the purchase method of
accounting and their results of operations have been included in the company's
consolidated financial statements from the respective acquisition dates. If
these acquisitions had been made at the beginning of 1997, pro forma
consolidated results of operations would not have differed materially from
actual results.
In October 1998, the company entered into an agreement to sell its
ownership interest in Fluor Daniel GTI, Inc. ("FD/GTI"), an environmental
services company. Under terms of the agreement, the company sold its 4,400,000
shares in FD/GTI for $8.25 per share, or $36.3 million in cash, on December 3,
1998. This transaction did not have a material impact on the company's results
of operations or financial position. In August 1997, the company completed the
sale of ACQUION, a global provider of supply chain management services, for $12
million in cash, resulting in a pre-tax gain of $7 million.
COAL SEGMENT
Revenues and operating profit from Coal operations in 1999 were $1.08 billion
and $147 million, respectively, compared with $1.13 billion and $173 million in
1998. Revenues and operating profit in 1997 were $1.08 billion and $155 million,
respectively.
Revenues decreased $44 million in 1999 compared with 1998 primarily due
to the combination of a reduction in volume of the higher priced metallurgical
coal and a decline in prices. Metallurgical coal volume decreased nearly 18
percent during 1999 compared with 1998. This decrease was more than offset by an
increase in lower priced steam coal volume. Also contributing to the decline in
coal revenues were lower realized prices for both steam and metallurgical coal.
Steam coal prices declined 4 percent while metallurgical coal prices declined 2
percent. The metallurgical coal market continues to be adversely affected by
steel imports from outside the United States and a weak U.S. coal export market.
The imports have reduced demand for steel produced in the U.S. and thereby
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reduced U.S. demand for metallurgical coal, which is used in steel production.
Demand is weak for U.S. coal exported to foreign markets as the U.S. Dollar
remains strong and the Asian economies slowly recover from their financial
crises. Additionally, the market for steam coal, which is used to fire
electric-generating plants, continues to be impacted by high customer inventory
levels resulting from last year's mild winter and competition from western
coals, which continue to penetrate the traditional eastern coal market areas.
Gross profit for the year ended October 31, 1999 is down slightly from the same
period in 1998 as a result of lower metallurgical coal sales volume and lower
prices for both metallurgical and steam coal. Operating profit for 1999 is lower
than 1998 due to higher fixed costs, primarily depreciation, depletion and
amortization, as volume levels have remained relatively flat.
The market conditions described above have placed pressure on both the
sales volume and pricing outlook for 2000. The company continues to focus on
reducing mining production costs through expansion of its surface mining
capabilities and utilization of longwall mining.
Revenues increased $46 million in 1998 compared with 1997 primarily due
to increased sales volume of metallurgical coal, partially offset by lower steam
coal prices. Metallurgical coal revenues increased 11 percent primarily due to
higher demand by steel producers. Steam coal revenues were flat on steady volume
in 1998 as compared with 1997, while steam coal prices declined approximately 3
percent as overall demand was down due to both a mild winter and summer in 1998.
Gross profit increased by 15 percent and operating profit increased by 12
percent in 1998 compared with 1997, primarily due to reduced production costs
and an increased proportion of higher margin metallurgical coal sales, partially
offset by lower steam coal prices.
Coal segment acquisitions during the three years ended October 31, 1999
were primarily focused on the purchase of additional low-sulfur coal reserves in
areas adjacent to existing mine and mill operations. All acquisitions have been
accounted for under the purchase method of accounting and their results of
operations have been included in the company's consolidated financial statements
from the respective acquisition dates. If these acquisitions had been made at
the beginning of the respective year acquired, pro forma consolidated results of
operations would not have differed materially from actual results.
STRATEGIC REORGANIZATION COSTS
As noted above, during 1999 the company reorganized its engineering and
construction operations. The company recorded a special provision of $117.2
million ($100.5 million after-tax) to cover direct and other reorganization
related costs, primarily for personnel, facilities and asset impairment
adjustments. The provision was initially recorded during the second quarter at
the then estimated amount of $136.5 million ($119.8 million after-tax). Total
estimated personnel costs associated with the reorganization were reduced during
the fourth quarter as both the actual number of employee terminations as well as
the cost per employee termination were lower than originally estimated.
Under the reorganization plan, approximately 5,000 jobs are expected to
be eliminated. The provision includes amounts for personnel costs for certain
affected employees that are entitled to receive severance benefits under
established severance policies or by government 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. 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 were also included in
the special provision. 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
complete by the end of fiscal year 2000.
As of October 31, 1999, the company has reduced headcount by
approximately 5,000 employees and has closed 13 offices. The company anticipates
closing two additional offices within the next six months. The special provision
liability as of October 31, 1999 totaled $58.5 million. The remaining liability
for personnel costs ($25.2 million) and asset impairments ($23.3 million) will
be substantially utilized by April 30, 2000. The remaining liability associated
with abandoned lease space ($9.7 million) will be amortized as an offset to
lease expense over the remaining life of the respective leases starting on the
date of abandonment.
Overhead beginning in 2000 is expected to be reduced by approximately
$100 to $120 million annually as a result of the personnel reductions and office
closures.
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OTHER
Net interest expense for 1999 increased by $8.4 million compared with 1998
primarily due to an increase in interest expense resulting from higher average
outstanding short-term borrowings used to fund the company's share repurchase
program, which was completed in 1998. In addition, interest income declined as a
result of lower average cash balances outstanding during the year. Net interest
expense for 1998 increased compared with 1997 primarily due to an increase in
short-term borrowings required to fund the company's share repurchase program
and a full year of interest related to the $300 million in long-term debt issued
in March 1997.
Corporate administrative and general expense for the year ended October
31, 1999 was $55.4 million compared with $22.6 million for the same period in
1998. The increase is due to higher stock-based compensation plan expense and an
increase in consulting costs related to the development and implementation of
the company's new strategic direction. Also included in corporate administrative
and general expense for 1999 is approximately $8 million for the development of
the company's Enterprise Resource Management system, Knowledge@Work. In
addition, the year ended October 31, 1998 included a credit 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.
Corporate administrative and general expense for the year ended October 31,
1998, increased as compared with 1997 due to costs associated with the company's
strategic business planning effort, executive severance and recruiting costs.
Also included was the $10 million credit noted above.
The effective tax rate for year ended October 31, 1999 is significantly
higher than the amount reported for the same period in 1998 primarily due to
certain non-U.S. items included in the special provision which did not receive
full tax benefit. The effective tax rate for the year ended October 31, 1998 was
essentially the same as the U.S. federal statutory rate. In 1997, the effective
tax rate was materially higher than the U.S. federal statutory tax rate
primarily due to foreign-based project losses, other project-related investment
losses and certain implementation costs for cost reduction initiatives incurred
during the year which did not receive full tax benefit.
DISCONTINUED OPERATIONS
In October 1997, the company received $60 million representing a negotiated
prepayment of the remaining amounts outstanding stemming from the 1994 sale of
its Lead business. The amount received slightly exceeded the recorded discounted
value of the receivable.
FINANCIAL POSITION AND LIQUIDITY
The decrease in cash provided by operating activities in 1999, compared with
1998, is primarily due to lower net earnings (adjusted for the non-cash and
unexpended amounts of the special provision in 1999) and an increase in
project-related operating assets and liabilities. Also contributing to the
decline was an increase in inventories, for both equipment for sale/rental and
coal. The increase in inventories is the result of slowing markets. The receipt
of a $30 million tax refund also positively impacted operating cash flow in
1998. The increase in cash provided by operating activities in 1998, compared
with 1997, is primarily due to a net decrease in operating assets and
liabilities (excluding the effects of business acquisitions and dispositions),
primarily related to a decrease in the volume of work performed on engineering
and construction contracts, and the aforementioned tax refund. Changes in
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 utilized by investing activities totaled $375.2 million in 1999
compared with $563.3 million in 1998. The decrease resulted primarily from lower
capital expenditures and acquisitions, net of proceeds from the sale of
property, plant and equipment. Capital expenditures in 1999 were primarily for
the Fluor Global Services segment, specifically for AMECO and directed toward
acquiring machinery and equipment for its rental business, and for the Coal
segment, which were directed toward developing existing reserves. In addition,
capital expenditures in 1999 include approximately $26 million of costs
associated with Knowledge@Work. The company also completed the sale of its
ownership interest in FD/GTI during 1999 and received proceeds totaling $36.3
million. The increase in
PAGE 32
9
cash utilized by investing activities in 1998 compared with 1997, is primarily
attributable to monies received in 1997 from notes receivable related to the
ongoing collection of deferred amounts associated with the company's 1994 sale
of its Lead business. Capital expenditures, net of proceeds from the sale of
property, plant and equipment, increased in 1998 compared with 1997, primarily
in the Fluor Global Services and Coal segments. Offsetting this increase was a
significant decline in acquisitions, again primarily in the Fluor Global
Services and Coal segments.
Cash utilized by financing activities totaled $220.6 million in 1999
compared with $98.0 million in 1998. During 1999 the company reduced commercial
paper and loan notes by $299.2 million partially offset by the issuance of a
$113.4 million note payable to an affiliate. In addition, the company became
obligated with respect to $17.6 million in long-term municipal bonds. Cash
utilized by financing activities totaled $98.0 million in 1998 compared with
1997 during which time the company provided cash from financing activities of
$235.7 million. In 1998, the company had short-term borrowings of $341.8 million
to fund its 1997/1998 share repurchase program. Under this program, the company
repurchased 8.3 million shares of its common stock for a total of $379.0
million. In 1997, the company issued $300 million of 6.95 percent senior notes
due March 1, 2007. Proceeds were used to fund operating working capital, capital
expenditures and the company's share repurchase program. During 1997, the
company purchased .6 million shares of its common stock for a total of $34
million.
Cash dividends decreased in 1999 to $60.7 million ($.80 per share) from
$63.5 million ($.80 per share) in 1998 and $63.8 million ($.76 per share) in
1997 as a consequence of the reduced number of shares outstanding that resulted
from the company's share repurchase program. In December 1999, the company
announced an increase in its quarterly cash dividend from $.20 per share to $.25
per share in 2000.
The total debt to capitalization ratio at October 31, 1999, was 26.3
percent compared with 32.4 percent at October 31, 1998.
The company has on hand and access to sufficient sources of funds to
meet its anticipated operating needs. 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 program under which there was $113.7 million outstanding at
October 31, 1999, compared with $245.5 million at October 31, 1998. In December
1998, the company expanded both its revolving credit facility and its commercial
paper program from $400 million to $600 million. 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.
Although the company is affected by inflation and the cyclical nature of
the industry, its engineering and construction operations are generally
protected by the ability to fix costs at the time of bidding or to recover cost
increases in most contracts. Coal operations produce a commodity that is
internationally traded at prices established by market factors outside the
control of the company. However, commodity prices generally tend over the long
term to correlate with inflationary trends, and the company's substantial coal
reserves provide a hedge against the long-term effects of inflation. Although
the company has taken actions to reduce its dependence on external economic
conditions, management is unable to predict with certainty the amount and mix of
future business.
FINANCIAL INSTRUMENTS
In connection with its 1997/1998 share repurchase program, 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 2000 and gives the
company the ultimate choice of settlement option, either physical settlement or
net share settlement. As of October 31, 1999, the contract settlement cost per
share exceeded the current market price per share by $11.44.
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's investment securities and substantially all of its debt
instruments carry fixed rates of interest over their respective maturity terms.
The company does not currently use derivatives, such as swaps, to alter the
interest characteristics of its investment securities or its debt instruments.
The company's exposure to interest rate risk
PAGE 33
10
on its $300 million senior notes, due in 2007, is not material given the
company's strong balance sheet and creditworthiness which provides the ability
to refinance.
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 October 31, 1999 and 1998, the company had
forward foreign exchange contracts of less than eighteen months duration, to
exchange principally Australian Dollars, Canadian Dollars, Korean Won, Dutch
Guilders and German Marks for U.S. Dollars. In addition, the company has a
forward foreign currency contract to exchange U.S. Dollars for British Pounds
Sterling to hedge annual lease commitments which expired December 1999. The
total gross notional amount of these contracts at October 31, 1999 and 1998 was
$124 million and $106 million, respectively. Forward contracts to purchase
foreign currency represented $122 million and $102 million, and forward
contracts to sell foreign currency represented $2 million and $4 million, at
October 31, 1999 and 1998, respectively.
THE YEAR 2000 ISSUE -- READINESS DISCLOSURE
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 those
which may be found in building security equipment. 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"). 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 of Directors.
The company 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.
The company's Y2K Program has been implemented in the following three
phases: (1) Identification Phase - includes the identification and assessment of
Year 2000 problems requiring systems modifications or replacements; (2)
Remediation Phase - includes the remediation and testing of systems having Year
2000 problems and the identification of compliant systems' installation
scheduled during 1999; and (3) Contingency Planning Phase - includes the
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 are represented in the following table:
Start Date End Date
- --------------------------------------------------------------
Identification Phase Early 1996 December 31, 1998
Remediation Phase Late 1996 October 31, 1999
Contingency Planning Phase Late 1998 Ongoing into 2000
As of October 31, 1999, the company's software applications are Year
2000 compliant, although a small number of systems have a November installation
date to accommodate user system schedules. As of October 31, 1999, the
company's hardware is Year 2000 compliant with the exception of the phone system
at one business unit where a compliant system is scheduled for installation in
early December. Transitioning into Year 2000, the company did not experience any
material issues and all of its computer systems are operating normally. The
company will continue to monitor its systems on an ongoing basis for the
immediate future. As of January 13, 2000, the company has not been made aware of
any Year 2000 disruptions for which it is responsible at any of its various
project sites throughout the world.
With respect to systems 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 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 also has
completed a process of reviewing the Year 2000 compliance of critical suppliers.
Actions included 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 has followed up its review of
supplier information with telephone interviews
PAGE 34
11
and on-site visits. Where a supplier has not, or cannot, satisfy the company's
Year 2000 requirements, the company has sought alternate suppliers, subject to
customer requirements and contract specifications. Although initial reviews and
the results following the company's transition into Year 2000 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 all Year 2000
issues have been resolved in a timely manner.
With respect to Engineering Systems, the company has retired
approximately 38 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 implementation of compliant versions of all
remaining Engineering Systems is complete, with the remediation of those
remaining applications largely being addressed via upgrades.
All Project Site Specific Systems are Year 2000 ready, including the
Department of Energy's projects and the control systems in use at the company's
coal plants.
With respect to Customer Systems and current customer projects
generally, the company has evaluated those systems and projects to determine
whether or not any action is required to ensure Year 2000 readiness. The company
has reviewed projects where it has ongoing warranty or performance obligations
for Year 2000 issues. It targeted approximately 1,600 projects for additional
Year 2000 assessment, all of which have been reviewed. At those projects where
Year 2000 issues may exist, the company has evaluated what further action is
required and any required remediation and contingency planning is complete. 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, which will be
ongoing into year 2000.
With respect to systems and equipment 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.
The company has investments in various joint ventures and has monitored
the Year 2000 efforts of such joint ventures. Based on available information,
the company believes business systems used in such joint ventures are Year 2000
ready.
The company uses both internal and external resources in its Y2K
Program. The company estimates that, from 1996 to date, it has spent
approximately $25 million on the Year 2000 issue. It anticipates spending an
additional $.6 million during the first quarter of fiscal year 2000. The
estimate of additional spending was derived utilizing numerous assumptions,
including the assumption that the company has already identified and completed
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 44 percent of the total costs incurred for
the Y2K Program have been incurred to remediate systems (including software
upgrades); the remaining 56 percent of the total costs incurred have been
incurred to replace systems and equipment. The company estimates its direct
costs for the Y2K Program (costs necessary to assess and remediate existing
systems) are approximately $14 million. 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 were Year 2000 compliant. All replacement equipment and
systems are Y2K compliant. The costs associated with those replacements are
estimated at $11 million. The company estimates it has spent $14 million to date
and will spend an additional $.3 million in connection with replacing equipment
and systems.
The Y2K Program has been funded under the company's general IT and operating
budgets. In 1999, Y2K Program costs were 11 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 were deferred due to the Y2K Program efforts. The
above amounts are the company's best estimate given other
PAGE 35
12
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 has developed contingency plans to address the Year 2000
issues that may pose a significant risk to its ongoing operations and existing
projects, including an early warning system developed for the millennium
transition. Such plans 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, with systems and equipment provided to clients and
with systems and equipment supplied by third parties. 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. 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.
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 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. At this time, the company
believes that risks are greatest in the area of third party system and equipment
suppliers. Each of the company's locations relies on suppliers for basic utility
service as well as the timely provision of project services and equipment. If
the supply of such necessary services and equipment 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
services and equipment deliveries 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. The company believes that the
geographical dispersion of the company's facilities mitigates the risk that such
failures in any locale or at any project site will result in the simultaneous
closure of, or sustained suspension of operations at, multiple company
facilities or at project sites. Consequently, to the extent practical, the
company expects to mitigate any interruption in its business operations in one
location 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 location. 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 all aspects of
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
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. The company's
businesses operate under long-term contracts, typically denominated in U.S.
Dollars, compared with more traditional retail or manufacturing environments. If
required, the company is currently able to bid, price and 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
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13
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
available and testing is in progress. Full conversion is anticipated to be
complete 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 1998, the Financial Accounting Standards Board issued Statement of
Financial 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. This
statement, as amended, is effective for the company's fiscal year 2001.
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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14
CONSOLIDATED BALANCE SHEET
At October 31, 1999 1998
- ----------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 209,614 $ 340,544
Accounts and notes receivable 850,557 959,416
Contract work in progress 416,285 596,983
Inventories 248,118 198,645
Deferred taxes 105,502 81,155
Other current assets 80,095 64,108
Net assets held for sale -- 36,300
- ----------------------------------------------------------------------------------------------------
Total current assets 1,910,171 2,277,151
- ----------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 71,664 69,779
Buildings and improvements 352,883 352,653
Machinery and equipment 2,103,663 2,012,539
Mining properties and mineral rights 858,965 788,978
Construction in progress 81,422 56,282
- ----------------------------------------------------------------------------------------------------
3,468,597 3,280,231
Less accumulated depreciation, depletion and amortization 1,245,644 1,132,923
- ----------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,222,953 2,147,308
- ----------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization of
$32,458 and $33,766, respectively 116,045 139,091
Investments 167,891 137,562
Other 469,057 318,096
- ----------------------------------------------------------------------------------------------------
Total other assets 752,993 594,749
- ----------------------------------------------------------------------------------------------------
$ 4,886,117 $ 5,019,208
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts and notes payable $ 798,751 $ 972,096
Commercial paper, loan notes and a note
payable to affiliate of $113,379 in 1999 242,625 428,458
Advance billings on contracts 565,373 546,816
Accrued salaries, wages and benefit plan liabilities 321,148 324,412
Other accrued liabilities 276,413 223,596
Current portion of long-term debt -- 176
- ----------------------------------------------------------------------------------------------------
Total current liabilities 2,204,310 2,495,554
- ----------------------------------------------------------------------------------------------------
Long-Term Debt Due After One Year 317,555 300,428
Noncurrent Liabilities
Deferred taxes 162,210 105,515
Other 620,670 592,102
- ----------------------------------------------------------------------------------------------------
Total noncurrent liabilities 782,880 697,617
- ----------------------------------------------------------------------------------------------------
Contingencies and Commitments
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 in
1999-- 76,034,296 shares and in
1998-- 75,572,537 shares 47,521 47,233
Additional capital 217,844 199,077
Retained earnings 1,375,338 1,331,843
Unamortized executive stock plan expense (21,579) (22,633)
Accumulated other comprehensive income (37,752) (29,911)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 1,581,372 1,525,609
- ----------------------------------------------------------------------------------------------------
$ 4,886,117 $ 5,019,208
=================================
See Notes to Consolidated Financial Statements.
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15
CONSOLIDATED STATEMENT OF EARNINGS
Year ended October 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
REVENUES
Engineering and construction services $ 11,334,355 $ 12,377,476 $ 13,217,515
Coal 1,083,030 1,127,297 1,081,026
- -------------------------------------------------------------------------------------------------------
Total revenues 12,417,385 13,504,773 14,298,541
- -------------------------------------------------------------------------------------------------------
COST OF REVENUES
Engineering and construction services 11,090,520 12,140,901 13,096,310
Coal 936,173 954,535 926,260
- -------------------------------------------------------------------------------------------------------
Total cost of revenues 12,026,693 13,095,436 14,022,570
OTHER (INCOME) AND EXPENSES
Special provision 117,200 -- --
Corporate administrative and general expense 55,350 22,598 13,230
Interest expense 50,918 45,277 30,758
Interest income (18,429) (21,164) (23,286)
- -------------------------------------------------------------------------------------------------------
Total cost and expenses 12,231,732 13,142,147 14,043,272
- -------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES 185,653 362,626 255,269
INCOME TAX EXPENSE 81,466 127,282 109,082
- -------------------------------------------------------------------------------------------------------
NET EARNINGS $ 104,187 $ 235,344 $ 146,187
====================================================
EARNINGS PER SHARE
Basic $ 1.38 $ 2.99 $ 1.76
Diluted $ 1.37 $ 2.97 $ 1.75
====================================================
SHARES USED TO CALCULATE EARNINGS PER SHARE
Basic 75,228 78,801 83,091
Diluted 75,929 79,135 83,478
====================================================
See Notes to Consolidated Financial Statements.
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16
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended October 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 104,187 $ 235,344 $ 146,187
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation, depletion and amortization 318,204 288,870 248,353
Deferred taxes 29,268 28,780 25,428
Special provision, net of cash payments 85,410 -- --
Provisions for impairment/abandonment of joint ventures
and investments -- -- 22,962
Gain on sale of business -- -- (7,222)
Changes in operating assets and liabilities, excluding effects
of business acquisitions/dispositions (22,551) 168,576 (67,224)
Other, net (49,642) (19,051) (39,860)
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 464,876 702,519 328,624
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (504,334) (600,933) (466,202)
E&C businesses acquired -- -- (141,718)
Coal businesses and reserves acquired -- (12,004) (39,482)
Proceeds from sales and maturities of marketable securities -- 10,089 59,289
Investments, net (4,688) (20,745) (9,275)
Proceeds from sale of property, plant and equipment 105,154 125,493 50,996
Collection of notes receivable -- -- 77,496
Contributions to deferred compensation trusts (8,160) (21,365) (43,026)
Net assets held for sale, including cash 36,300 (26,375) --
Proceeds from sale of business -- -- 11,992
Other, net 549 (17,477) (12,041)
- ---------------------------------------------------------------------------------------------------------------------
Cash utilized by investing activities (375,179) (563,317) (511,971)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (60,692) (63,497) (63,750)
(Decrease) increase in short-term borrowings, net (299,212) 341,809 21,692
Proceeds from issuance of note payable to affiliate 113,379 -- --
Proceeds from (payments on) long-term debt, net 16,951 (285) 295,719
Stock options exercised 10,760 9,935 16,007
Purchases of common stock -- (378,979) (33,924)
Other, net (1,813) (6,965) (37)
- ---------------------------------------------------------------------------------------------------------------------
Cash (utilized) provided by financing activities (220,627) (97,982) 235,707
- ---------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (130,930) 41,220 52,360
Cash and cash equivalents at beginning of year 340,544 299,324 246,964
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 209,614 $ 340,544 $ 299,324
===========================================
See Notes to Consolidated Financial Statements.
PAGE 40
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unamortized Accumulated
Executive Other
(in thousands, except Common Stock Additional Stock Plan Comprehensive Retained
per share amounts) Shares Amount Capital Expense Income Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 83,791 $52,369 $573,037 $(32,538) $ (701) $1,077,559 $1,669,726
=============================================================================================
Comprehensive income
Net earnings -- -- -- -- -- 146,187 146,187
Foreign currency translation
adjustment (net of
deferred taxes of $3,867) -- -- -- -- (6,503) -- (6,503)
------
Comprehensive income -- -- -- -- -- -- 139,684
Cash dividends ($.76 per share) -- -- -- -- -- (63,750) (63,750)
Exercise of stock options, net 415 260 15,747 -- -- -- 16,007
Stock option tax benefit -- -- 3,528 -- -- -- 3,528
Amortization of executive
stock plan expense -- -- -- 8,183 -- -- 8,183
Issuance of restricted stock, net 161 101 9,006 (9,086) -- -- 21
Purchases of common stock (619) (387) (33,537) -- -- -- (33,924)
Tax benefit from reduction of
valuation allowance for
deferred tax assets -- -- 1,575 -- -- -- 1,575
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 83,748 52,343 569,356 (33,441) (7,204) 1,159,996 1,741,050
=============================================================================================
Comprehensive income
Net earnings -- -- -- -- -- 235,344 235,344
Foreign currency translation
adjustment (net of
deferred taxes of $14,439) -- -- -- -- (22,707) -- (22,707)
-------
Comprehensive income -- -- -- -- -- -- 212,637
Cash dividends ($.80 per share) -- -- -- -- -- (63,497) (63,497)
Exercise of stock options, net 268 167 9,768 -- -- -- 9,935
Stock option tax benefit -- -- 2,425 -- -- -- 2,425
Amortization of executive
stock plan expense -- -- -- 7,343 -- -- 7,343
Issuance of restricted stock, net (144) (90) (8,680) 3,465 -- -- (5,305)
Purchases of common stock (8,299) (5,187) (373,792) -- -- -- (378,979)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 75,573 47,233 199,077 (22,633) (29,911) 1,331,843 1,525,609
=============================================================================================
Comprehensive income
Net earnings -- -- -- -- -- 104,187 104,187
Foreign currency translation
adjustment (net of
deferred taxes of $4,910) -- -- -- -- (7,841) -- (7,841)
------
Comprehensive income -- -- -- -- -- -- 96,346
Cash dividends ($.80 per share) -- -- -- -- -- (60,692) (60,692)
Exercise of stock options, net 304 190 10,570 -- -- -- 10,760
Stock option tax benefit -- -- 1,989 -- -- -- 1,989
Amortization of executive
stock plan expense -- -- -- 7,517 -- -- 7,517
Issuance of restricted stock, net 157 98 6,208 (6,463) -- -- (157)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 76,034 $47,521 $ 217,844 $(21,579) $(37,752) $1,375,338 $1,581,372
=============================================================================================
See Notes to Consolidated Financial Statements.
PAGE 41
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAJOR ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the company and its
subsidiaries. The equity method of accounting is used for investment ownership
ranging from 20 percent to 50 percent. Investment ownership of less than 20
percent is accounted for on the cost method. All significant intercompany
transactions of consolidated subsidiaries are eliminated. Certain 1998 and 1997
amounts have been reclassified to conform with the 1999 presentation.
Use of Estimates
The preparation of the financial statements of the company requires management
to make estimates and assumptions that affect reported amounts. These estimates
are based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
Engineering and Construction Contracts
The company recognizes engineering and construction contract revenues using the
percentage-of-completion method, based primarily on contract costs incurred to
date compared with total estimated contract costs. Customer-furnished materials,
labor and equipment, and in certain cases subcontractor materials, labor and
equipment, are included in revenues and cost of revenues when management
believes that the company is responsible for the ultimate acceptability of the
project. Contracts are segmented between types of services, such as engineering
and construction, and accordingly, gross margin related to each activity is
recognized as those separate services are rendered. Changes to total estimated
contract costs or losses, if any, are recognized in the period in which they are
determined. Revenues recognized in excess of amounts billed are classified as
current assets under contract work in progress. Amounts billed to clients in
excess of revenues recognized to date are classified as current liabilities
under advance billings on contracts. The company anticipates that substantially
all incurred costs associated with contract work in progress at October 31, 1999
will be billed and collected in 2000.
Depreciation, Depletion and Amortization
Additions to property, plant and equipment are recorded at cost. Assets other
than mining properties and mineral rights are depreciated principally using the
straight-line method over the following estimated useful lives: buildings and
improvements -- three to 50 years and machinery and equipment -- two to 30
years. Mining properties and mineral rights are depleted on the
units-of-production method. Leasehold improvements are amortized over the lives
of the respective leases. Goodwill is amortized on the straight-line method over
periods not longer than 40 years.
Exploration, Development and Reclamation
Coal exploration costs are expensed as incurred. Development and acquisition
costs of coal properties, when significant, are capitalized in mining
properties and depleted. The company accrues for post-mining reclamation costs
as coal is mined. Reclamation of disturbed surface acreage is performed as a
normal part of the mining process.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the company's financial
statements or tax returns.
Earnings per Share
Basic earnings per share (EPS) is calculated by dividing net earnings by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the assumed conversion of all dilutive securities, consisting of
employee stock options and restricted stock, and equity forward contracts.
The impact of dilutive securities on the company's EPS calculation is as
follows:
Year ended October 31, 1999 1998 1997
- ---------------------------------------------------------
Employee stock options/
restricted stock 107,000 231,000 387,000
Equity forward contracts 594,000 103,000 --
- ---------------------------------------------------------
701,000 334,000 387,000
=========================
Inventories
Inventories are stated at the lower of cost or market using specific
identification or the average cost method. Inventories comprise:
At October 31, 1999 1998
- ---------------------------------------------------
(in thousands)
Equipment for sale/rental $131,781 $ 94,179
Coal 72,070 52,628
Supplies and other 44,267 51,838
- ---------------------------------------------------
$248,118 $198,645
===================
Internal Use Software
Effective for fiscal year 1999, the company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including external direct material and service costs,
PAGE 42
19
employee payroll and payroll-related costs. Prior to the adoption of SOP 98-1,
the company capitalized only purchased software which was ready for service; all
other costs were expensed as incurred. The adoption of this statement did not
have a material effect on the company's financial statements.
Foreign Currency
The company uses forward exchange contracts to hedge certain foreign currency
transactions entered into in the ordinary course of business. The company does
not engage in currency speculation. The company's forward exchange contracts do
not subject the company to significant risk from exchange rate movements because
gains and losses on such contracts offset losses and gains, respectively, on the
assets, liabilities or transactions being hedged. Accordingly, the unrealized
gains and losses are deferred and included in the measurement of the related
foreign currency transaction. At October 31, 1999, the company had approximately
$124 million of foreign exchange contracts outstanding relating to lease
commitments and contract obligations. The forward exchange contracts generally
require the company to exchange U.S. Dollars for foreign currencies at maturity,
at rates agreed to at inception of the contracts. If the counterparties to the
exchange contracts (AA rated banks) do not fulfill their obligations to deliver
the contracted currencies, the company could be at risk for any currency related
fluctuations. The amount of any gain or loss on these contracts in 1999, 1998
and 1997 was immaterial. The contracts are of varying duration, none of which
extend beyond December 2000. The company limits exposure to foreign currency
fluctuations in most of its engineering and construction contracts through
provisions that require client payments in U.S. Dollars or other currencies
corresponding to the currency in which costs are incurred. As a result, the
company generally does not need to hedge foreign currency cash flows for
contract work performed. The functional currency of all significant foreign
operations is the local currency.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial 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.
This statement, as amended, is effective for the company's fiscal year 2001.
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.
Concentrations of Credit Risk
The majority of accounts receivable and all contract work in progress are from
engineering and construction clients in various industries and locations
throughout the world. Most contracts require payments as the projects progress
or in certain cases advance payments. The company generally does not require
collateral, but in most cases can place liens against the property, plant or
equipment constructed or terminate the contract if a material default occurs.
Accounts receivable from customers of the company's coal operations are
primarily concentrated in the steel and utility industries. The company
maintains adequate reserves for potential credit losses and such losses have
been minimal and within management's estimates.
Stock Plans
The company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation cost for
stock appreciation rights and performance equity units is recorded based on the
quoted market price of the company's stock at the end of the period.
Comprehensive Income
Effective November 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of total comprehensive
income and its components in financial statements. The adoption of this
statement had no effect on the company's net earnings or total shareholders'
equity.
Total comprehensive income represents the net change in shareholders'
equity during a period from sources other than transactions with shareholders
and as such, includes net earnings. For the company, the only other component of
total comprehensive income is the change in the cumulative foreign currency
translation adjustments recorded in shareholders' equity. Prior period financial
statements have been reclassified to conform with the provisions of the new
standard.
CONSOLIDATED STATEMENT OF CASH FLOWS
Securities with maturities of 90 days or less at the date of purchase are
classified as cash equivalents. Securities with maturities beyond 90 days, when
present, are classified as marketable securities and are carried at fair value.
The changes in operating assets and liabilities as shown in the
PAGE 43
20
Consolidated Statement of Cash Flows comprise:
Year ended October 31, 1999 1998 1997
- -----------------------------------------------------------------------------
(in thousands)
Decrease (increase) in:
Accounts and notes receivable $ 25,972 $ (84,394) $(113,454)
Contract work in progress 180,698 73,575 (130,257)
Inventories (49,473) (23,197) (40,303)
Other current assets (16,054) (192) (17,028)
(Decrease) increase in:
Accounts payable (173,345) 127,229 130,992
Advance billings on contracts 18,557 21,298 79,510
Accrued liabilities (8,906) 54,257 23,316
- -----------------------------------------------------------------------------
(Increase) decrease in operating
assets and liabilities $ (22,551) $ 168,576 $ (67,224)
=======================================
Cash paid during the year for:
Interest expense $ 47,558 $ 44,057 $ 25,491
Income tax payments, net $ 52,025 $ 52,346 $ 75,967
BUSINESS ACQUISITIONS
The following summarizes major engineering and construction related acquisitions
completed during 1997. All of these acquisitions were in the Fluor Global
Services segment. There were no major engineering and construction related
acquisitions in 1999 and 1998.
- - ConSol Group, a privately held U.S. company headquartered in New
Hampshire, that provides staffing personnel in the fields of information
technology and allied health.
- - J.W. Burress, Inc., a privately held U.S. company headquartered in
Virginia, that provides product support services and sells, rents and
services new and used construction and industrial machinery.
- - SMA Companies, privately held U.S. companies headquartered in California
and Georgia. These companies sell, rent and service heavy construction
and industrial equipment and provide proprietary software to other
equipment distributors throughout the U.S.
These businesses and other smaller acquisitions were purchased for a
total of $142 million. The fair value of assets acquired, including working
capital of $42 million and goodwill of $67 million, was $196 million, and
liabilities assumed totaled $54 million.
In 1998, the company's coal segment, through its Massey Coal Company
("Massey"), acquired coal reserves for an aggregate cost of $12 million. Massey
purchased two coal mining companies during 1997. The aggregate purchase price
was $39 million and included the fair value of assets acquired, consisting of
$55 million of property, plant and equipment, and mining rights, $13 million of
working capital and other assets, net of other liabilities assumed of $29
million. These acquisitions, along with capital expenditures, have been directed
primarily towards acquiring additional coal reserves. There were no coal related
acquisitions in 1999.
All of the above acquisitions have been accounted for under the purchase
method of accounting and their results of operations have been included in the
company's consolidated financial statements from the respective acquisition
dates. If these acquisitions had been made at the beginning of the respective
year acquired, pro forma results of operations would not have differed
materially from actual results.
From time to time, the company enters into investment arrangements,
including joint ventures, that are related to its engineering and construction
business. During 1997 through 1999, the majority of these expenditures related
to ongoing investments in an equity fund that focuses on energy related projects
and a number of smaller, diversified ventures.
BUSINESS DISPOSITIONS
On October 28, 1998, the company entered into an agreement to sell its ownership
interest in Fluor Daniel GTI, Inc. (FD/GTI). Under terms of the agreement, the
company sold its 4,400,000 shares in FD/GTI for $8.25 per share, or $36.3
million in cash, on December 3, 1998. The net assets of FD/GTI were reflected on
the 1998 consolidated balance sheet at net realizable value and included $26.4
million in cash and cash equivalents. This transaction did not have a material
impact on the company's results of operations or financial position.
During 1997, the company completed the sale of ACQUION, a global
provider of supply chain management services, for $12 million in cash, resulting
in a pre-tax gain of $7 million.
SPECIAL PROVISION AND COST REDUCTION INITIATIVES
In March 1999, the company announced a new strategic direction, including a
reorganization of the operating units and administrative functions of its
engineering and construction segment. In connection with this reorganization,
the company recorded in the second quarter a special provision of $136.5 million
pre-tax to cover direct and other reorganization related costs, primarily for
personnel, facilities and asset impairment adjustments.
Under the reorganization plan, approximately 5,000 jobs are expected to be
eliminated. The provision includes amounts for personnel costs for certain
affected employees that are entitled to receive severance benefits under
established severance policies or by government 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
PAGE 44
21
property, plant and equipment; intangible assets (goodwill); and certain
investments. 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 were also included in
the special provision. 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.
As of October 31, 1999, the company has reduced headcount by
approximately 5,000 employees and has closed 13 offices. The company anticipates
closing two additional offices within the next six months. In October 1999,
$19.3 million of the special provision was reversed into earnings as a result of
lower than anticipated severance costs for personnel reductions in certain
overseas offices. Both the actual number of employee terminations as well as the
cost per employee termination were lower than originally estimated.
The following table summarizes the status of the company's
reorganization plan as of October 31, 1999:
Lease
Personnel Asset Termination
Costs Impairments Costs Other Total
- ---------------------------------------------------------------------------------------------
(in thousands)
Special provision $ 72,200 $ 48,800 $ 14,500 $ 1,000 $ 136,500
Cash expenditures (25,089) (1,094) (4,793) (814) (31,790)
Non-cash activities (2,576) (24,360) -- -- (26,936)
Provision reversal (19,300) -- -- -- (19,300)
- ---------------------------------------------------------------------------------------------
Balance at October
31, 1999 $ 25,235 $ 23,346 $ 9,707 $ 186 $ 58,474
=====================================================================
The special provision liability as of October 31, 1999 is included in
other accrued liabilities. The liability for personnel costs and asset
impairments will be substantially utilized by April 30, 2000. The liability
associated with abandoned lease space will be amortized as an offset to lease
expense over the remaining life of the respective leases starting on the date of
abandonment.
During 1997, the company recorded $25.4 million in charges related to
the implementation of certain cost reduction initiatives. These charges provided
for personnel and facility related costs. As of October 31, 1999, substantially
all of these costs had been incurred.
INCOME TAXES
The income tax expense (benefit) included in the Consolidated Statement of
Earnings is as follows:
Year ended October 31, 1999 1998 1997
- --------------------------------------------------------------------
(in thousands)
Current:
Federal $ 5,931 $ 38,700 $ 50,906
Foreign 43,012 52,021 25,801
State and local 3,255 7,781 6,947
- --------------------------------------------------------------------
Total current 52,198 98,502 83,654
- --------------------------------------------------------------------
Deferred:
Federal 26,872 43,369 19,972
Foreign (2,641) (19,295) 3,908
State and local 5,037 4,706 1,548
- --------------------------------------------------------------------
Total deferred 29,268 28,780 25,428
- --------------------------------------------------------------------
Total income tax expense $ 81,466 $127,282 $109,082
=======================================
A reconciliation of U.S. statutory federal income tax expense to the
company's income tax expense on earnings is as follows:
Year ended October 31, 1999 1998 1997
- --------------------------------------------------------------------------
(in thousands)
U.S. statutory federal tax expense $ 64,979 $126,919 $ 89,344
Increase (decrease) in taxes
resulting from:
Items without tax effect, net 26,158 888 13,307
State and local income taxes 5,048 7,868 5,337
Depletion (9,625) (12,273) (10,051)
Effect of non-U.S. tax rates (396) 3,433 10,620
Other, net (4,698) 447 525
- --------------------------------------------------------------------------
Total income tax expense $ 81,466 $127,282 $109,082
===================================
Deferred taxes reflect the tax effects of differences between the amounts
recorded as assets and liabilities for financial reporting purposes and the
amounts recorded for income tax purposes. The tax effects of significant
temporary differences giving rise to deferred tax assets and liabilities are as
follows:
PAGE 45
22
At October 31, 1999 1998
- ------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued liabilities not currently
deductible $ 249,987 $ 224,319
Alternative minimum tax
credit carryforwards 44,287 32,505
Net operating loss carryforwards of
non-U.S. companies 29,133 22,441
Translation adjustments 23,955 19,045
Tax basis of building in excess of
book basis 16,408 16,187
Net operating loss carryforwards of
acquired companies 6,503 7,177
Other 71,926 73,599
- ------------------------------------------------------------------------------------
Total deferred tax assets 442,199 395,273
Valuation allowance for deferred tax assets (127,085) (100,007)
- ------------------------------------------------------------------------------------
Deferred tax assets, net 315,114 295,266
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
Book basis of property, equipment and
other capital costs in excess of tax basis (294,628) (254,008)
Tax on unremitted non-U.S. earnings (16,361) (15,806)
Other (60,833) (49,812)
- ------------------------------------------------------------------------------------
Total deferred tax liabilities (371,822) (319,626)
- ------------------------------------------------------------------------------------
Net deferred tax liabilities $ (56,708) $ (24,360)
=================================
The company has net operating loss carryforwards from non-U.S.
operations of approximately $80 million which can be carried forward
indefinitely until fully utilized. These losses primarily relate to the
company's operations in Australia, Chile, Germany and the United Kingdom.
Deferred tax assets established for these losses aggregate $29 million and $22
million at October 31, 1999 and 1998, respectively.
In 1997, the company acquired the SMA Companies which had net operating
loss carryforwards of approximately $47 million. The company has utilized
approximately $5 million of the loss carryforwards, and made an election in its
1998 consolidated federal tax return to waive approximately $23 million of
losses which otherwise would have expired without future tax benefit. The
remaining loss carryforwards of approximately $19 million expire in the years
2004 through 2008. The utilization of such loss carryforwards is subject to
stringent limitations under the Internal Revenue Code. Deferred tax assets
established for these losses aggregate $7 million for both 1999 and 1998.
Substantially all of the company's alternative minimum tax credits are
associated with the coal business operated by Massey. These credits can be
carried forward indefinitely until fully utilized.
The company maintains a valuation allowance to reduce certain deferred
tax assets to amounts that are more likely than not to be realized. This
allowance primarily relates to the deferred tax assets established for the
special provision, net operating loss carryforwards and alternative minimum tax
credits. In 1999, increases in the valuation allowance are principally the
result of the company's special provision which did not receive full tax
benefit. Any reductions in the allowance resulting from realization of the loss
carryforwards of acquired companies will result in a reduction of goodwill.
Residual income taxes of approximately $8 million have not been provided
on approximately $20 million of undistributed earnings of certain foreign
subsidiaries at October 31, 1999, because the company intends to keep those
earnings reinvested indefinitely.
United States and foreign earnings before taxes are as follows:
Year ended October 31, 1999 1998 1997
- ---------------------------------------------------------
(in thousands)
United States $168,698 $240,645 $231,921
Foreign 16,955 121,981 23,348
- ---------------------------------------------------------
Total $185,653 $362,626 $255,269
==================================
RETIREMENT BENEFITS
The company sponsors contributory and non-contributory defined contribution
retirement and defined benefit pension plans for eligible employees.
Contributions to defined contribution retirement plans are based on a percentage
of the employee's compensation. Expense recognized for these plans of
approximately $56 million in 1999, $79 million in 1998, and $84 million in 1997,
is primarily related to domestic engineering and construction operations.
Effective January 1, 1999, the company replaced its domestic defined
contribution retirement plan with a defined benefit cash balance plan.
Contributions to defined benefit pension plans are generally at the minimum
annual amount required by applicable regulations. Payments to retired employees
under these plans are generally based upon length of service, age and/or a
percentage of qualifying compensation. The defined benefit pension plans are
primarily related to international engineering and construction operations,
U.S. craft employees and coal operations.
Net periodic pension expense (income) for defined benefit pension plans
includes the following components:
Year ended October 31, 1999 1998 1997
- -----------------------------------------------------------------------------
(in thousands)
Service cost $ 35,370 $ 15,792 $ 15,301
Interest cost 25,088 24,220 23,743
Expected return on assets (49,032) (48,236) (44,334)
Amortization of transition asset (2,132) (2,196) (2,296)
Amortization of prior service cost 337 355 347
Recognized net actuarial loss (gain) 58 (1,444) (1,288)
- -----------------------------------------------------------------------------
Net periodic pension expense (income) $ 9,689 $(11,509) $ (8,527)
====================================
PAGE 46
23
The ranges of assumptions indicated below cover defined benefit pension
plans in Australia, Germany, the United Kingdom, The Netherlands and the United
States. These assumptions are as of each respective fiscal year-end based on the
then current economic environment in each host country.
At October 31, 1999 1998
- ----------------------------------------------------------------------
Discount rates 6.0-7.75% 5.0-6.75%
Rates of increase in compensation levels 3.5-4.00% 2.5-4.00%
Expected long-term rates of return on assets 5.0-9.50% 5.0-9.50%
The following table sets forth the change in benefit obligation, plan
assets and funded status of the company's defined benefit pension plans:
At October 31, 1999 1998
- ------------------------------------------------------------------------------
(in thousands)
Change in pension benefit obligation
Benefit obligation at beginning of year $ 438,866 $ 358,539
Service cost 35,370 15,792
Interest cost 25,088 24,220
Employee contributions 1,626 1,775
Currency translation (19,068) 12,454
Actuarial (gain) loss (22,808) 52,498
Benefits paid (27,319) (26,412)
- ------------------------------------------------------------------------------
Benefit obligation at end of year $ 431,755 $ 438,866
================================
Change in plan assets
Fair value at beginning of year $ 576,019 $ 539,814
Actual return on plan assets 103,938 42,324
Company contributions 5,646 4,711
Employee contributions 1,626 1,775
Currency translation (17,154) 13,999
Benefits paid (27,319) (26,412)
Plan amendments (3,945) (192)
- ------------------------------------------------------------------------------
Fair value at end of year $ 638,811 $ 576,019
================================
Funded status $ 207,056 $ 137,153
Unrecognized net actuarial (gain) loss (61,372) 16,579
Unrecognized prior service cost 170 601
Unrecognized net asset (8,002) (11,737)
- ------------------------------------------------------------------------------
Pension assets $ 137,852 $ 142,596
================================
Amounts shown above at October 31, 1999 and 1998 exclude the projected
benefit obligation of approximately $101 million and $113 million, respectively,
and an equal amount of associated plan assets relating to discontinued
operations.
Massey participates in multiemployer defined benefit pension plans for
its union employees. Pension expense was less than $1 million in each of the
years ended October 31, 1999, 1998 and 1997. Under the Coal Industry Retiree
Health Benefits Act of 1992, Massey is required to fund medical and death
benefits of certain beneficiaries. Massey's obligation under the Act is
estimated to aggregate approximately $56 million at October 31, 1999, which will
be recognized as expense as payments are assessed. The expense recorded for such
benefits was $4 million in 1999 and 1998 and $7 million in 1997.
In addition to the company's defined benefit pension plans, the company
and certain of its subsidiaries provide health care and life insurance benefits
for certain retired employees. The health care and life insurance plans are
generally contributory, with retiree contributions adjusted annually. Service
costs are accrued currently. The accumulated postretirement benefit obligation
at October 31, 1999 and 1998 was determined in accordance with the current terms
of the company's health care plans, together with relevant actuarial assumptions
and health care cost trend rates projected at annual rates ranging from 7.8
percent in 2000 down to 5 percent in 2004 and beyond. The effect of a one
percent annual increase in these assumed cost trend rates would increase the
accumulated postretirement benefit obligation and the aggregate of the annual
service and interest costs by approximately $11.8 million and $1.7 million,
respectively. The effect of a one percent annual decrease in these assumed cost
trend rates would decrease the accumulated postretirement benefit obligation and
the aggregate of the annual service and interest costs by approximately $8.9
million and $2.5 million, respectively.
Net periodic postretirement benefit cost includes the following
components:
Year ended October 31, 1999 1998 1997
- ---------------------------------------------------------------------------
(in thousands)
Service cost $ 3,850 $ 3,506 $ 3,107
Interest cost 5,724 5,820 6,338
Expected return on assets -- -- --
Amortization of prior service cost 140 124 --
Recognized net actuarial (gain) loss (458) (595) 142
- ---------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 9,256 $ 8,855 $ 9,587
=================================
The following table sets forth the change in benefit obligation of the
company's postretirement benefit plans:
At October 31, 1999 1998
- ----------------------------------------------------------------------
(in thousands)
Change in postretirement benefit obligation
Benefit obligation at beginning of year $ 93,975 $ 86,187
Service cost 3,850 3,506
Interest cost 5,724 5,820
Employee contributions 270 269
Actuarial (gain) loss (15,303) 2,473
Benefits paid (4,655) (4,280)
- ----------------------------------------------------------------------
Benefit obligation at end of year $ 83,861 $ 93,975
======================
Funded status $(83,861) $(93,975)
Unrecognized net actuarial (gain) loss (11,650) 3,195
Unrecognized prior service cost 1,776 1,916
- ----------------------------------------------------------------------
Accrued postretirement benefit obligation $(93,735) $(88,864)
======================
PAGE 47
24
The discount rate used in determining the postretirement benefit
obligation was 7.75 percent and 6.75 percent at October 31, 1999 and 1998,
respectively.
The preceding information does not include amounts related to benefit
plans applicable to employees associated with certain contracts with the U.S.
Department of Energy because the company is not responsible for the current or
future funded status of these plans.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the company's financial instruments are as follows:
1999 1998
Carrying Fair Carrying Fair
Year ended October 31, Amount Value Amount Value
- -------------------------------------------------------------------------------------------------
(in thousands)
Assets:
Cash and cash
equivalents $ 209,614 $ 209,614 $ 340,544 $ 340,544
Notes receivable
including noncurrent
portion 47,444 54,387 41,854 48,953
Long-term investments 60,609 72,667 59,734 76,064
Liabilities:
Commercial paper,
loan notes and
notes payable 247,911 247,911 430,508 430,508
Long-term debt
including current
portion 317,555 312,580 300,604 319,654
Other noncurrent
financial liabilities 9,789 9,789 8,486 8,486
Off-balance sheet financial instruments:
Forward contracts to
purchase common stock -- (21,170) -- (18,793)
Foreign currency
contract obligations -- (1,311) -- 1,964
Letters of credit -- 546 -- 720
Lines of credit -- 965 -- 1,077
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, short-term notes
receivable, commercial paper, loan notes and notes payable approximate fair
value because of the short-term maturity of these instruments.
Long-term investments are based on quoted market prices for these or
similar instruments. Long-term notes receivable are estimated by discounting
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings.
The fair value of long-term debt, including current portion, is
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to the company for debt of the same maturities.
Other noncurrent financial liabilities consist primarily of deferred
payments, for which cost approximates fair value.
Forward contracts to purchase common stock are based on the estimated
cost to terminate or settle the obligation.
Foreign currency contract obligations are estimated by obtaining quotes
from brokers.
Letters of credit and lines of credit amounts are based on fees
currently charged for similar agreements or on the estimated cost to terminate
or settle the obligations.
FINANCING ARRANGEMENTS
The company has unsecured committed revolving short- and long-term lines of
credit with banks from which it may borrow for general corporate purposes up to
a maximum of $600 million. Commitment and facility fees are paid on these lines.
In addition, the company has $1.0 billion in short-term uncommitted lines of
credit to support letters of credit, foreign currency contracts and loan notes.
Borrowings under both committed and uncommitted lines of credit bear interest at
prime or rates based on the London Interbank Offered Rate ("LIBOR"), domestic
certificates of deposit or other rates which are mutually acceptable to the
banks and the company. At October 31, 1999, no amounts were outstanding under
the committed lines of credit. As of that date, $235 million of the short-term
uncommitted lines of credit were used to support undrawn letters of credit and
foreign currency contracts issued in the ordinary course of business and $16
million were used for outstanding loan notes.
The company had $114 million and $245 million in unsecured commercial
paper outstanding at October 31, 1999 and 1998, respectively. The commercial
paper was issued at a discount with a weighted-average effective interest rate
of 5.9 percent at October 31, 1999 and 5.3 percent at October 31, 1998.
At October 31, 1999 the company had a $113 million note payable to an
affiliated entity. The note is due on demand and bears interest at the rate of
5.41 percent as of October 31, 1999.
Long-term debt comprises:
At October 31, 1999 1998
- --------------------------------------------------------------
(in thousands)
6.95% Senior Notes due March 1, 2007 $300,000 $300,000
Other bonds and notes 17,555 604
- --------------------------------------------------------------
317,555 300,604
Less: Current portion -- 176
- --------------------------------------------------------------
Long-term debt due after one year $317,555 $300,428
=====================
PAGE 48
25
In March 1997, the company issued $300 million of 6.95% Senior Notes
(the Notes) due March 1, 2007 with interest payable semiannually on March 1 and
September 1 of each year, commencing September 1, 1997. The Notes were sold at a
discount for an aggregate price of $296.7 million. The Notes are redeemable, in
whole or in part, at the option of the company at any time at a redemption price
equal to the greater of (i) 100 percent of the principal amount of the Notes or
(ii) as determined by a Quotation Agent as defined in the offering prospectus.
Included in other bonds and notes are $18 million of 5.625% municipal
bonds issued in July 1999. The bonds are due June 1, 2019 with interest payable
semiannually on June 1 and December 1 of each year, commencing December 1, 1999.
The bonds are redeemable, in whole or in part, at the option of the company at a
redemption price ranging from 100 percent to 102 percent of the principal amount
of the bonds on or after June 1, 2009. In addition, the bonds are subject to
other redemption clauses, at the option of the holder, should certain events
occur, as defined in the offering prospectus.
OTHER NONCURRENT LIABILITIES
The company maintains appropriate levels of insurance for business risks.
Insurance coverages contain various deductible amounts for which the company
provides accruals based on the aggregate of the liability for reported claims
and an actuarially determined estimated liability for claims incurred but not
reported. Other noncurrent liabilities include $61 million and $64 million at
October 31, 1999 and 1998, respectively, relating to these liabilities.
STOCK PLANS
The company's executive stock plans, approved by the shareholders, provide for
grants of nonqualified or incentive stock options, restricted stock awards and
stock appreciation rights ("SARS"). All executive stock plans are administered
by the Organization and Compensation Committee of the Board of Directors
("Committee") comprised of outside directors, none of whom are eligible to
participate in the plans. Option grant prices are determined by the Committee
and are established at the fair value of the company's common stock at the date
of grant. Options and SARS normally extend for 10 years and become exercisable
over a vesting period determined by the Committee, which can include accelerated
vesting for achievement of performance or stock price objectives. During 1998,
the company issued 1,696,420 options and 1,502,910 SARS that vest over three to
four year periods and expire in five years. The majority of these awards have
accelerated vesting provisions based on the price of the company's stock.
Additionally, 58,000 and 189,075 nonqualified stock options were issued during
1999 and 1998, respectively, and 10,925 incentive stock options were issued
during 1998, with 20 percent to 25 percent vesting upon issuance and the
remaining awards vesting in installments of 20 percent to 25 percent per year
commencing one year from the date of grant.
Restricted stock awards issued under the plans provide that shares
awarded may not be sold or otherwise transferred until restrictions have lapsed
or performance objectives have been attained as established by the Committee.
Upon termination of employment, shares upon which restrictions have not lapsed
must be returned to the company. Restricted stock issued under the plans totaled
197,257 shares, 4,500 shares and 186,390 shares in 1999, 1998 and 1997,
respectively.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the company has
elected to continue following the guidance of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," for measurement and recognition of stock-based
transactions with employees. Recorded compensation cost for these plans totaled
$8 million in 1999. During 1998, the company recognized a net credit of $9
million for performance-based stock plans. This amount includes $10 million of
expenses accrued in prior years which were reversed in 1998 as a result of not
achieving prescribed performance targets. Compensation cost recognized for such
plans totaled less than $1 million in 1997. Under APB Opinion No. 25, no
compensation cost is recognized for the option plans where vesting provisions
are based only on the passage of time. Had the company recorded compensation
expense using the accounting method recommended by SFAS No. 123, net earnings
and diluted earnings per share would have been reduced to the pro forma amounts
as follows:
Year ended October 31, 1999 1998 1997
- --------------------------------------------------------------------
(in thousands, except per share amounts)
Net earnings
As Reported $104,187 $ 235,344 $146,187
Pro Forma 95,297 218,958 143,663
Diluted earnings per share
As Reported $ 1.37 $ 2.97 $ 1.75
Pro Forma 1.26 2.77 1.72
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for new grants:
1999 1998 1997
- ------------------------------------------------------------------
Expected option lives (years) 6 5 6
Risk-free interest rates 4.51% 5.83% 6.30%
Expected dividend yield 1.38% 1.19% 1.15%
Expected volatility 33.76% 29.85% 24.58%
PAGE 49
26
The weighted-average fair value of options granted during 1999, 1998 and
1997 was $15, $12 and $17, respectively.
The following table summarizes stock option activity:
Weighted Average
Stock Exercise Price
Options Per Share
- -----------------------------------------------------------------
Outstanding at October 31, 1996 4,339,378 $ 50
- -----------------------------------------------------------------
Granted 114,060 61
Expired or canceled (117,404) 53
Exercised (414,731) 39
- -----------------------------------------------------------------
Outstanding at October 31, 1997 3,921,303 51
- -----------------------------------------------------------------
Granted 1,898,420 36
Expired or canceled (844,664) 47
Exercised (267,602) 37
- -----------------------------------------------------------------
Outstanding at October 31, 1998 4,707,457 47
- -----------------------------------------------------------------
Granted 1,079,810 43
Expired or canceled (256,145) 47
Exercised (303,736) 35
- -----------------------------------------------------------------
Outstanding at October 31, 1999 5,227,386 $ 47
============================
Exercisable at:
October 31, 1999 3,407,398
October 31, 1998 3,210,580
October 31, 1997 1,964,137
At October 31, 1999, there are 1,089,902 shares available for future
grant. Available for grant includes shares which may be granted as either stock
options or restricted stock, as determined by the Committee under the 1996 and
1988 Fluor Executive Stock Plans.
At October 31, 1999, there are 5,227,386 options outstanding with
exercise prices between $35 and $68, with a weighted-average exercise price of
$47 and a weighted-average remaining contractual life of 5.7 years; 3,407,398 of
these options are exercisable with a weighted-average exercise price of $49.
At October 31, 1999, 3,674,875 of the 5,227,386 options outstanding have
exercise prices between $35 and $49, with a weighted-average exercise price of
$40 and a weighted-average remaining contractual life of 5.3 years; 2,010,480 of
these options are exercisable with a weighted-average exercise price of $41. The
remaining 1,552,511 outstanding options have exercise prices between $50 and
$68, with a weighted-average exercise price of $61 and a weighted-average
remaining contractual life of 6.4 years; 1,396,918 of these options are
exercisable with a weighted-average exercise price of $61.
LEASE OBLIGATIONS
Net rental expense amounted to approximately $98 million, $92 million and $93
million in 1999, 1998 and 1997, respectively. The company's lease obligations
relate primarily to office facilities, equipment used in connection with
long-term construction contracts and other personal property.
During 1998, the company entered into a $100 million operating lease
facility to fund the construction cost of its corporate headquarters and
engineering center. The facility expires in 2004. Lease payments are calculated
based on LIBOR plus approximately .35 percent. The lease contains an option to
purchase these properties during the term of the lease and contains a residual
value guarantee of $82 million. In addition, during 1999 the company entered
into a similar transaction to fund construction of its Calgary office. The total
commitment under this transaction is approximately $25 million.
The company's obligations for minimum rentals under noncancelable leases
are as follows:
At October 31,
- ----------------------
(in thousands)
2000 $46,358
2001 43,531
2002 38,140
2003 34,595
2004 22,264
Thereafter 62,067
CONTINGENCIES AND COMMITMENTS
The company and certain of its subsidiaries are involved in litigation in the
ordinary course of business. The company and certain of its engineering and
construction subsidiaries are contingently liable for commitments and
performance guarantees arising in the ordinary course of business. Claims
arising from engineering and construction contracts have been made against the
company by clients, and the company has made certain claims against clients for
costs incurred in excess of the current contract provisions. The company does
not expect that the foregoing matters will have a material adverse effect on its
consolidated financial position or results of operations.
Disputes have arisen between a Fluor Daniel subsidiary and its client,
Anaconda Nickel, which primarily relate to the process design of the Murrin
Murrin Nickel Cobalt project located in Western Australia. Both parties have
initiated the dispute resolution process under the contract. Results for the
year ended October 31, 1999 for the Fluor Daniel segment include a provision
totaling $84 million for the alleged process design problems. If and to the
extent that these problems are ultimately determined to be the responsibility of
the company, the company anticipates recovering a substantial portion of this
amount from available insurance and, accordingly, has also recorded $64 million
in expected insurance recoveries. The company vigorously disputes and denies
Anaconda's allegations of inadequate process design.
PAGE 50
27
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. As of October 31, 1999, the company had extended
financial guarantees on behalf of certain clients and other unrelated third
parties totaling approximately $29 million.
In connection with its 1997/1998 share repurchase program, 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 2000 and
gives the company the ultimate choice of settlement option, either physical
settlement or net share settlement. As of October 31, 1999, the contract
settlement cost per share exceeded the current market price per share by $11.44.
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's operations are subject to and affected by federal, state
and local laws and regulations regarding the protection of the environment. The
company maintains reserves for potential future environmental costs where such
obligations are either known or considered probable, and can be reasonably
estimated.
On October 20, 1999, the U.S. District Court for the Southern District
of West Virginia issued an injunction which prohibits the construction of valley
fills over both intermittent and perennial stream segments as a part of mining
operations. While Massey is not a party to this litigation, virtually all mining
operations, including Massey, utilize valley fills to dispose of excess
materials. This decision is now under appeal to the Fourth Circuit Court of
Appeals and the District Court has issued a stay of its decision pending the
outcome of the appeal. Based upon the current state of the appeal, the company
does not believe that Massey mining operations will be materially affected
during the pendency of the appeal. If and to the extent that the District
Court's decision is upheld and legislation is not passed which limits the impact
of the decision, then all or a portion of Massey's mining operations could be
affected. The potential impact to Massey arising from this proceeding is not
currently estimable.
The company believes, based upon present information available to it,
that its reserves with respect to future environmental costs are adequate and
such future costs will not have a material effect on the company's consolidated
financial position, results of operations or liquidity. However, the imposition
of more stringent requirements under environmental laws or regulations, new
developments or changes regarding site cleanup costs or the allocation of such
costs among potentially responsible parties, or a determination that the company
is potentially responsible for the release of hazardous substances at sites
other than those currently identified, could result in additional expenditures,
or the provision of additional reserves in expectation of such expenditures.
OPERATIONS BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA
In the fourth quarter of 1999, the company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). The statement establishes new standards for
the way that business enterprises report information about operating segments as
well as the related disclosures about products and services, geographical areas
and major customers. The adoption of SFAS No. 131 did not affect the
consolidated results of operations or financial position of the company, but did
affect the business segments that are disclosed. Prior year disclosures have
been restated to conform to the new basis of reporting.
Fluor Daniel consists of five business units: Chemicals & Life Sciences;
Oil, Gas and Power; Mining; Manufacturing; and Infrastructure. These units
provide design, engineering, procurement and construction services on a
worldwide basis to an extensive range of industrial, commercial, utility,
natural resources and energy clients. The types of services provided by Fluor
Daniel include: feasibility studies, conceptual design, detail engineering,
procurement, project and construction management and construction.
Fluor Global Services consists of six business units: American Equipment
Company; TRS Staffing Solutions; Fluor Federal Services; Telecommunications;
Operations & Maintenance; and Consulting Services. These units provide a variety
of services to clients in a wide range of industries. The types of services
provided by Fluor Global Services include: equipment sales, leasing, services
and outsourcing for construction and industrial needs; temporary technical and
non-technical staffing specializing in technical, professional and
administrative personnel; services to the United States government; repair,
renovation, replacement, predictive and preventative services to commercial and
industrial facilities; and productivity consulting services and maintenance
management to the manufacturing and process industries.
PAGE 51
28
Massey Coal is a single business unit which produces, processes and
sells high-quality, low-sulfur steam coal to the utility industry as well as
industrial customers, and metallurgical coal for the steel industry.
Fluor Signature Services is a single business unit established primarily
to provide traditional business services and business infrastructure support to
the company. Ultimately, such services may be marketed to external customers.
Although operations for this segment did not start until November 1, 1999,
historical total asset data has been presented for information purposes only.
The reportable segments follow the same accounting policies as those
described in the summary of major accounting policies. Management evaluates a
segment's performance based upon operating profit and operating return on
assets. Intersegment revenues are insignificant. The company incurs costs and
expenses and holds certain assets at the corporate level which relate to its
business as a whole. Certain of these amounts have been charged to the company's
business segments by various methods, largely on the basis of usage.
Engineering services for international projects are often performed
within the United States or a country other than where the project is located.
Revenues associated with these services have been classified within the
geographic area where the work was performed.
OPERATING INFORMATION BY SEGMENT
Fluor Fluor
Fluor Global Massey Signature
(in millions) Daniel Services Coal Services Total
- -----------------------------------------------------------------------------------------------------
1999
External revenues $ 8,403 $ 2,931 $ 1,083 -- $12,417
Depreciation, depletion and amortization 61 90 167 -- 318
Operating profit before special provision 160 92 147 -- 399
Total assets 1,017 1,041 1,956 $ 454 4,468
Capital expenditures $ 51 $ 226 $ 227 -- $ 504
1998
External revenues $ 9,736 $ 2,642 $ 1,127 -- $13,505
Depreciation, depletion and amortization 67 72 150 -- 289
Operating profit 161 81 173 -- 415
Total assets 1,270 968 1,801 $ 465 4,504
Capital expenditures $ 91 $ 214 $ 296 -- $ 601
1997
External revenues $10,180 $ 3,038 $ 1,081 -- $14,299
Depreciation, depletion and amortization 68 49 131 -- 248
Operating profit 70 52 155 -- 277
Total assets 1,259 894 1,619 $ 509 4,281
Capital expenditures $ 83 $ 116 $ 267 -- $ 466
PAGE 52
29
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
OPERATING PROFIT
Total segment operating profit before special provision $ 399 $ 415 $ 277
Special provision (117) -- --
Corporate administrative and general expense (55) (23) (13)
Interest (expense) income, net (33) (24) (8)
Other items, net (8) (5) (1)
- ---------------------------------------------------------------------------------------------
Earnings before taxes $ 186 $ 363 $ 255
=================================
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS
Total assets for reportable segments $ 4,468 $ 4,504 $ 4,281
Cash, cash equivalents and marketable securities 210 341 309
Other items, net 208 174 95
- ---------------------------------------------------------------------------------------------
Total assets $ 4,886 $ 5,019 $ 4,685
=================================
ENTERPRISE-WIDE DISCLOSURES
Revenues Total Assets
(in millions) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------
United States* $ 7,139 $ 8,324 $ 9,347 $3,995 $4,082 $3,789
Europe 1,228 1,196 1,420 196 255 225
Central and South America 825 1,242 1,110 221 256 210
Asia Pacific (includes Australia) 1,575 1,435 1,545 265 252 315
Middle East and Africa 795 993 549 68 77 78
Canada 855 315 328 141 97 68
- ----------------------------------------------------------------------------------------------
$12,417 $13,505 $14,299 $4,886 $5,019 $4,685
========================================================
*Includes export revenues to unaffiliated customers of $1.6 billion in 1999,
$1.5 billion in 1998 and $1.8 billion in 1997.
PAGE 53
30
MANAGEMENT'S AND INDEPENDENT AUDITORS' REPORTS
MANAGEMENT
The company is responsible for preparation of the accompanying consolidated
balance sheet and the related consolidated statements of earnings, cash flows
and shareholders' equity. These statements have been prepared in conformity with
generally accepted accounting principles and management believes that they
present fairly the company's consolidated financial position and results of
operations. The integrity of the information presented in the financial
statements, including estimates and judgments relating to matters not concluded
by fiscal year end, is the responsibility of management. To fulfill this
responsibility, an internal control structure designed to protect the company's
assets and properly record transactions and events as they occur has been
developed, placed in operation and maintained. The internal control structure is
supported by an extensive program of internal audits and is tested and
evaluated by the independent auditors in connection with their annual audit. The
Board of Directors pursues its responsibility for financial information through
an Audit Committee of Directors who are not employees. The internal auditors
and the independent auditors have full and free access to the Committee.
Periodically, the Committee meets with the independent auditors without
management present to discuss the results of their audits, the adequacy of the
internal control structure and the quality of financial reporting.
/s/ Philip J. Carroll, Jr /s/ Ralph F. Hake
- ------------------------------ ----------------------------------------
Philip J. Carroll, Jr. Ralph F. Hake
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS
Board of Directors and Shareholders
Fluor Corporation
We have audited the accompanying consolidated balance sheet of Fluor Corporation
as of October 31, 1999 and 1998, and the related consolidated statements of
earnings, cash flows, and shareholders' equity for each of the three years in
the period ended October 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Fluor
Corporation at October 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1999, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
November 19, 1999
page 54
31
QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations:
First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
1999
Revenues $ 3,384,065 $ 3,091,307 $ 3,069,444 $ 2,872,569
Cost of revenues 3,291,204 3,001,212 2,967,562 2,766,715
Special provision -- 136,500 -- (19,300)
Earnings (loss) before taxes 74,899 (64,523) 73,537 101,740
Net earnings (loss) 51,081 (72,895) 50,152 75,849
Earnings (loss) per share
Basic .68 (.97) .67 1.01
Diluted $ .68 $ (.97) $ .66 $ 1.00
============================================================
1998
Revenues $ 3,399,019 $ 3,282,079 $ 3,528,852 $ 3,294,823
Cost of revenues 3,309,279 3,184,891 3,421,976 3,179,290
Earnings before taxes 84,458 83,650 96,232 98,286
Net earnings 54,813 54,289 62,437 63,805
Earnings per share
Basic .66 .67 .81 .85
Diluted $ .66 $ .67 $ .81 $ .84
============================================================
PAGE 55
32
SHAREHOLDERS' REFERENCE
COMMON STOCK INFORMATION
At December 31, 1999, there were 76,246,247 shares outstanding and approximately
12,099 shareholders of record of Fluor's common stock.
The following table sets forth for the periods indicated the cash
dividends paid per share of common stock and the high and low sales prices of
such common stock as reported in the Consolidated Transactions Reporting System.
COMMON STOCK AND DIVIDEND INFORMATION
Dividends Price Range
Per Share High Low
- ------------------------------------------------
Fiscal 1999
First Quarter $0.20 45 1/16 37 11/16
Second Quarter 0.20 37 7/16 26 1/4
Third Quarter 0.20 42 7/8 35 1/4
Fourth Quarter 0.20 42 5/16 37 1/2
=====
$0.80
Fiscal 1998
First Quarter $0.20 39 3/4 33 15/16
Second Quarter 0.20 52 1/4 37 13/16
Third Quarter 0.20 51 1/2 40 11/16
Fourth Quarter 0.20 46 7/8 34 5/8
=====
$0.80
FORM 10-K
A copy of the Form 10-K, which is filed with the Securities and Exchange
Commission, is available upon request. Write to:
Senior Vice President-Law & Secretary
Fluor Corporation
One Enterprise Drive
Aliso Viejo, California 92656
(949) 349-2000
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
400 South Hope Street, Fourth Floor
Los Angeles, California 90071
and
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
For change of address, lost dividends, or lost stock certificates, write or
telephone:
ChaseMellon Shareholder Services, L.L.C.
P. O. Box 3315
South Hackensack, NJ 07606-1915
Attn: Securityholder Relations
(800) 813-2847
Requests may also be submitted via e-mail by visiting their web site at
www.chasemellon.com
INDEPENDENT AUDITORS
Ernst & Young LLP
18400 Von Karman Avenue
Irvine, California 92612
ANNUAL SHAREHOLDERS' MEETING
Annual report and proxy statement are mailed on or about February 1. Fluor's
annual meeting of shareholders will be held at 9:00 a.m. on March 8, 2000 at:
The Hyatt Regency Greenville
220 North Main Street
Greenville, South Carolina
STOCK TRADING
Fluor's stock is traded on the New York, Chicago, Pacific, Amsterdam, London and
Swiss Stock Exchanges. Common stock domestic trading symbol: FLR.
DIVIDEND REINVESTMENT PLAN
Fluor's Dividend Reinvestment Plan provides shareholders of record with the
opportunity to conveniently and economically increase their ownership in Fluor.
Through the Plan, shareholders can automatically reinvest their cash dividends
in shares of Fluor common stock. A minimum balance of 50 shares is required for
enrollment. Optional cash investments may also be made in additional Fluor
shares ranging from a minimum of $100 per month to a maximum of $10,000 per
quarter. For details on the Plan, contact Fluor's agent, ChaseMellon Shareholder
Services (800) 813-2847.
DUPLICATE MAILINGS
Shares owned by one person but held in different forms of the same name result
in duplicate mailing of shareholder information at added expense to the company.
Such duplication can be eliminated only at the direction of the shareholder.
Please notify ChaseMellon Shareholder Services in order to eliminate
duplication.
Fluor is a registered service mark of Fluor Corporation. Fluor Daniel, Fluor
Global Services, Fluor Signature Services, Knowledge@Work and Fluor Federal
Services are service marks of Fluor Corporation. AMECO is a registered service
mark of American Equipment Company.
HISTORY OF STOCK DIVIDENDS AND SPLITS SINCE GOING PUBLIC IN 1950
08/23/57 20% Stock Dividend
12/15/61 5% Stock Dividend
03/11/63 5% Stock Dividend
03/09/64 5% Stock Dividend
03/08/65 5% Stock Dividend
02/14/66 5% Stock Dividend
03/24/66 2 for 1 Stock Split
03/27/67 5% Stock Dividend
02/09/68 5% Stock Dividend
03/22/68 2 for 1 Stock Split
05/16/69 5% Stock Dividend
03/06/70 5% Stock Dividend
03/05/71 5% Stock Dividend
03/10/72 5% Stock Dividend
03/12/73 5% Stock Dividend
03/11/74 3 for 2 Stock Split
08/13/79 3 for 2 Stock Split
07/18/80 2 for 1 Stock Split
COMPANY CONTACTS
Shareholders may call
(888) 432-1745
SHAREHOLDER SERVICES:
Lawrence N. Fisher
(949) 349-6961
INVESTOR RELATIONS:
Lila J. Churney
(949) 349-3909
[PHOTOGRAPH]
Fluor's investor relations activities are dedicated to providing investors with
complete and timely information. All investor questions are welcome.
WEB SITE ADDRESS
www.fluor.com
INVESTOR E-MAIL
Investor@fluor.com
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