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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to______________
Commission File Number: 1-7775
FLUOR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-0740960
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
3353 Michelson Drive, Irvine, CA 92698
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(Address of principal executive offices)
(949) 975-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 28, 1999 there were 75,791,463 shares of common stock
outstanding.
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FLUOR CORPORATION
FORM 10-Q
JANUARY 31, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
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<S> <C> <C>
Part I: Financial Information
Condensed Consolidated Statement of Earnings for the Three Months
Ended January 31, 1999 and 1998 ....................................... 2
Condensed Consolidated Balance Sheet at January 31, 1999 and
October 31, 1998....................................................... 3
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended January 31, 1999 and 1998 ................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 9
Changes in Backlog .................................................... 15
Part II: Other Information ..................................................... 16
Signatures ..................................................................... 17
</TABLE>
1
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PART I: FINANCIAL INFORMATION
FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Three Months Ended January 31, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
In thousands, except per share amounts 1999 1998
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<S> <C> <C>
REVENUES $ 3,384,065 $ 3,399,019
COSTS AND EXPENSES
Cost of revenues 3,291,204 3,309,279
Corporate administrative and general expense 9,558 448
Interest expense 13,004 9,422
Interest income (4,600) (4,588)
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Total Costs and Expenses 3,309,166 3,314,561
EARNINGS BEFORE INCOME TAXES 74,899 84,458
INCOME TAX EXPENSE 23,818 29,645
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NET EARNINGS $ 51,081 $ 54,813
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EARNINGS PER SHARE
BASIC $ .68 $ .66
=========== ===========
DILUTED $ .68 $ .66
=========== ===========
DIVIDENDS PER COMMON SHARE $ .20 $ .20
=========== ===========
SHARES USED TO CALCULATE
BASIC EARNINGS PER SHARE 75,119 82,575
=========== ===========
DILUTED EARNINGS PER SHARE 75,633 82,636
=========== ===========
</TABLE>
See Accompanying Notes.
2
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FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
January 31, 1999 and October 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1999 1998*
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 308,248 $ 340,544
Accounts and notes receivable 871,732 959,416
Contract work in progress 620,422 596,983
Deferred taxes 77,746 81,155
Inventory and other current assets 340,947 262,753
Net assets held for sale -- 36,300
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Total current assets 2,219,095 2,277,151
---------- ----------
Property, Plant and Equipment (net of accumulated
depreciation, depletion and amortization of
$1,180,185 and $1,132,923, respectively) 2,175,380 2,147,308
Investments and goodwill, net 271,024 276,653
Other 352,451 318,096
========== ==========
$5,017,950 $5,019,208
========== ==========
</TABLE>
(Continued On Next Page)
* Amounts at October 31, 1998 have been derived from audited financial
statements.
3
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FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
January 31, 1999 and October 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1999 1998*
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts and notes payable $ 945,558 $ 972,096
Commercial paper and loan notes 378,164 428,458
Advance billings on contracts 608,446 546,816
Accrued salaries, wages and benefit plans 282,968 324,412
Other accrued liabilities 235,249 223,596
Current portion of long-term debt 16 176
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Total current liabilities 2,450,401 2,495,554
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Long-term debt due after one year 300,000 300,428
Deferred taxes 99,379 105,515
Other noncurrent liabilities 602,494 592,102
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 $.625 par value; issued and
outstanding - 75,791,659 shares and
75,572,537 shares, respectively 47,370 47,233
Additional capital 207,955 199,077
Retained earnings 1,367,765 1,331,843
Unamortized executive stock plan expense (27,729) (22,633)
Accumulated other comprehensive income:
Cumulative translation adjustment (29,685) (29,911)
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Total shareholders' equity 1,565,676 1,525,609
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$ 5,017,950 $ 5,019,208
=========== ===========
</TABLE>
See Accompanying Notes.
* Amounts at October 31, 1998 have been derived from audited financial
statements.
4
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FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended January 31, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
$ in thousands 1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 51,081 $ 54,813
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation, depletion and amortization 77,917 69,663
Deferred taxes 469 (8,052)
Changes in operating assets and liabilities,
excluding effects of businesses acquired (51,277) 24,187
Other, net (27,997) 19,527
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Cash provided by operating activities 50,193 160,138
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (135,057) (100,656)
Proceeds from sale of subsidiary 36,300 --
Proceeds from sale of property, plant and equipment 42,272 12,942
Proceeds from sales/maturities of marketable securities -- 10,089
Investments, net (4,502) (5,454)
Other, net (4,629) (6,773)
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Cash utilized by investing activities (65,616) (89,852)
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CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings (41,135) (11,185)
Proceeds from issuance of notes payable to affiliate 38,500 --
Cash dividends paid (15,159) (16,694)
Stock options exercised 1,854 61
Purchases of common stock -- (35,204)
Other, net (933) (1,175)
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Cash utilized by financing activities (16,873) (64,197)
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(Decrease) increase in cash and cash equivalents (32,296) 6,089
Cash and cash equivalents at beginning of period 340,544 299,324
--------- ---------
Cash and cash equivalents at end of period $ 308,248 $ 305,413
========= =========
</TABLE>
See Accompanying Notes.
5
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FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(1) The condensed consolidated financial statements do not include footnotes
and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read
in conjunction with the Company's October 31, 1998 annual report on Form
10-K. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of
operations for the three months ended January 31, 1999 are not
necessarily indicative of results that can be expected for the full
year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
recurring accruals) which, in the opinion of the Company, are necessary
to present fairly its consolidated financial position at January 31,
1999 and its consolidated results of operations and cash flows for the
three months ended January 31, 1999 and 1998.
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
(2) Inventories comprise the following:
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1999 1998
-----------------------------------------------------------
<S> <C> <C>
Equipment for sale/rental $128,125 $ 94,179
Coal 72,388 52,628
Supplies and other 52,707 51,838
-------- --------
$253,220 $198,645
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</TABLE>
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FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
UNAUDITED
(3) Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). SFAS No. 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of
this Statement has no impact on the Company's net earnings or
shareholders' equity. SFAS No. 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
The components of comprehensive income, net of related tax, are as
follows:
<TABLE>
<CAPTION>
Three months ended
January 31,
------------------------
1999 1998
(in thousands) -------- --------
<S> <C> <C>
Net earnings $ 51,081 $ 54,813
Foreign currency translation adjustment 226 (7,707)
-------- --------
Comprehensive income $ 51,307 $ 47,106
======== ========
</TABLE>
(4) Cash paid for interest was $3.5 million and $3.8 million for the three
month periods ended January 31, 1999 and 1998, respectively. Income tax
payments, net of receipts, were $21.5 million during the three month
period ended January 31, 1999. Income tax receipts, net of payments,
were $15.6 million for the first quarter of 1998, reflecting the
receipt of a $30 million tax refund on January 30, 1998.
(5) During the fourth quarter of 1998, the Company entered into a forward
purchase contract for 1,850,000 shares of its common stock at a price
of $49 per share. The contract matures in October 1999 and gives the
Company the ultimate choice of settlement option, either physical
settlement or net share settlement. This contract effectively
incorporates and extends a number of prior contracts originally entered
into during the third quarter of 1998 as part of the Company's then
ongoing share repurchase program. As of January 31, 1999, the contract
settlement cost per share exceeded the current market price per share
by $11.67.
7
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Although the ultimate choice of settlement option resides with the
Company, if the average three-day closing price (as defined in the
contract) of the Company's common stock falls to $30 per share or
lower, the holder of the contract has the right to require the Company
to file a shelf registration statement with the Securities and Exchange
Commission for the issuance of shares necessary to settle the contract.
In addition, if the average three-day closing price (as defined in the
contract) of the Company's common stock falls to $25 per share or
lower, the holder of the contract has the right to require the Company
to immediately settle the contract, either by physical settlement or
net share settlement. The average closing price for the Company's
common stock for the three days ended March 16, 1999 was $29.67 per
share.
(6) On March 9, 1999, the company announced a new strategic direction,
including a reorganization of its current operating units and
administrative functions. A one-time, pre-tax charge of $130 million
will be taken in the Company's second quarter for the implementation of
the reorganization. The charge will be primarily for personnel and
facilities costs. See "Recent Events" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for
additional information regarding the March 9 announcement.
8
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FLUOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the condensed consolidated financial
statements and accompanying notes and the Company's October 31, 1998 annual
report on Form 10-K. For purposes of reviewing this document "operating profit"
is calculated as revenues less cost of revenues excluding: corporate
administrative and general expense; interest expense; interest income; domestic
and foreign income taxes; gain or loss on discontinued operations; the
cumulative effect of a change in accounting principles; and certain other
miscellaneous non-operating income and expense items which are immaterial.
FORWARD-LOOKING INFORMATION
Estimates or projections of the Company's future results, including estimated
and projected operating profits and earnings for the Company and its Engineering
and Construction and Coal segments, projected reductions in overhead expenses,
and estimates of new contract awards are forward-looking. Statements regarding
industry and competitive trends are also forward looking. Such forward looking
statements reflect current analysis of existing information. Caution must be
exercised in relying on forward looking statements. Due to known and unknown
risks, actual results may differ materially from expected or projected results.
Factors potentially contributing to such differences include, among others:
o Cost overruns on contracts and other contract performance risk
o The uncertain timing of awards and revenues under contracts
o Project financing risk, credit risk, risks associated with government
funding of contracts
o Market conditions impacting realization of investments
o Conditions affecting the domestic and international coal market, including
competition in the global market for steel and weather conditions
o Global economic and political conditions
o Unforeseen impediments to the Company's access to capital markets
o Year 2000 readiness
o Unforeseen impediments to the realization of the Company's strategic
initiatives
Additional information concerning these and other factors can be found in press
releases as well as the Company's public periodic filings with the Securities
and Exchange Commission, including the discussion under the heading "Item 1.
Business - Other Matters - Fluor Business Risks" in the Company's Form 10-K
filed January 22, 1999. These filings are available publicly and upon request
from Fluor's Investor Relations Department: (949) 975-3909. The Company
disclaims any intent or obligation to update its forward-looking statements.
9
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RECENT EVENTS
On March 9, 1999, the Company announced various initiatives to respond to
deteriorating business environments in its two principal business segments and
to strategically position the Company for profitability, growth and the creation
of shareholder value long term.
The Company plans to consolidate its Fluor Daniel organizational structure by
closing 15 offices and eliminating 5,000 positions by the end of 1999. A
one-time, pre-tax charge of $130 million will be recorded in the Company's 1999
second quarter for the implementation of these actions, primarily for personnel
and facilities costs. The Company anticipates the reduction in overhead
resulting from these actions will total $160 million annually.
Looking forward, the increasingly challenging business conditions will likely
reduce the Company's new awards for the year to approximately $6 billion.
Further, the Company's coal segment is experiencing price and volume
deterioration and expects to report 1999 operating profit approximately 13
percent below 1998 levels. Reflecting the lower earnings from the coal business,
the one-time charge discussed above and other non-accruable expenses associated
with strategic actions, the Company anticipates reporting 1999 net earnings from
continuing operations of $107 million, or $1.42 per share.
RESULTS OF OPERATIONS
Revenues for the three month period ended January 31, 1999 decreased slightly
compared with the same period of 1998. Net earnings for the three month period
ended January 31, 1999 were $51.1 million compared with $54.8 million for the
same period of 1998. The decrease in net earnings was primarily due to higher
interest expense and higher corporate administrative and general expense, which
were only partially offset by increases in operating profit for both the
Engineering and Construction and Coal segments and a lower effective tax rate.
ENGINEERING AND CONSTRUCTION
Revenues for the Engineering and Construction segment were essentially unchanged
for the three month period ended January 31, 1999 compared with the same period
of 1998, reflecting higher revenues from the segment's Diversified Services
Group, offset by lower work performed in the core engineering, procurement, and
construction (EPC) business. Operating profit for the three months ended January
31, 1999 increased 7 percent to $57.1 million, compared with $53.4 million
during the same period of 1998. Operating margins for EPC work improved slightly
during the quarter, primarily due to the Company's continuing emphasis on
improving margins through selectivity in new projects. Operating margins for the
Diversified Services Group, which contributed $14 million to first quarter
results in 1999 and $17 million in 1998, were down as a result of competitive
market conditions.
10
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New awards for the three months ended January 31, 1999 were $1.7 billion
compared with $2.6 billion for the three months ended January 31, 1998.
Approximately 59 percent of first quarter 1999 new awards were for projects
located outside the United States. There were no project awards in excess of
$350 million in the first quarter of 1999. The decrease in 1999 new awards as
compared to 1998 reflects a continued trend by clients to defer capital spending
on new projects as well as greater project selectivity by the Company.
Furthermore, given the ongoing weak global economic conditions and volatility in
capital markets, new awards may continue to decline for the remainder of 1999
and into 2000.
The following table sets forth backlog for each of the Engineering and
Construction business groups:
<TABLE>
<CAPTION>
January 31, October 31, January 31,
$ in millions 1999 1998 1998
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<S> <C> <C> <C>
Process $ 4,712 $ 5,345 $ 6,563
Industrial 3,966 4,761 4,677
Power/Government 1,114 1,272 1,630
Diversified Services 1,273 1,267 1,148
------- ------- -------
Total backlog $11,065 $12,645 $14,018
======= ======= =======
U.S. $ 5,058 $ 5,911 $ 5,761
Outside U.S. 6,007 6,734 8,257
------- ------- -------
Total backlog $11,065 $12,645 $14,018
======= ======= =======
</TABLE>
The decrease in total backlog is consistent with the slowing trends in new
awards. Approximately 54 percent of the Company's backlog is for projects
located outside of the United States. Due to the nature of the projects the
Company pursues and those included in backlog, the Company has not experienced
any significant disruption in ongoing project execution related to turmoil in
the global financial markets. Payments owed the company related to one project
in Indonesia, which had been temporarily delayed due to financial turmoil in the
region, have been received and the outstanding account balance has been
substantially reduced. 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.
COAL
Revenues decreased 6 percent for the three month period ended January 31, 1999
compared with the same period in 1998. The decrease was primarily due to lower
sales volume of metallurgical coal, partially offset by an increase in steam
coal volume. The metallurgical coal market is being adversely affected by steel
exports from Asia and Russia into American markets. Such exports have reduced
demand for steel produced in the U.S. and thereby reduced U.S. demand for
metallurgical coal, which is used in steel production. Additionally, the market
for steam coal,
11
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which is used to fire electric generating plants, is softening as a result of
mild weather conditions and the low price of oil, which offers a lower cost
alternative to steam coal. These market conditions are placing growing pressure
on both the sales volume and pricing outlook for 1999. Operating profit for the
three months ended January 31, 1999 was $38.7 million compared with $36.7
million for the same period in 1998. Gross profit and operating profit increased
slightly during the three months ended January 31, 1999 as compared with 1998,
primarily due to the decrease in production costs for both metallurgical and
steam coal.
OTHER
Interest expense for the three months ended January 31, 1999 increased compared
with the same period of 1998 primarily due to an increase in commercial paper
and loan notes used to fund the company's 1997-1998 share repurchase program.
Corporate administrative and general expense in the first quarter ended January
31, 1999 was higher compared with the same period in 1998 due primarily to a
credit in 1998 of approximately $10 million related to a long-term incentive
compensation plan. The Company accrues for certain long-term incentive awards
whose ultimate cost is dependent on attainment of various performance targets
set by the Organization and Compensation Committee (the "Committee") of the
Board of Directors. Under the long-term incentive compensation plan referred to
above, the performance target expired, without amendment or extension by the
Committee, on December 31, 1997.
The Company's effective tax rate decreased approximately 3 percentage points for
the three month period ended January 31, 1999 as compared with the same period
of 1998. The tax rate for the first quarter of 1998 reflects a higher level of
expense items which did not receive full tax benefit.
FINANCIAL POSITION AND LIQUIDITY
At January 31, 1999, the Company had cash and cash equivalents of $308.2 million
and a long-term debt to total capital ratio of 16.1 percent. At January 31,
1998, the Company had cash and cash equivalents of $305.4 million and a
long-term debt to total capital ratio of 14.7 percent.
Cash flow generated from operating activities was $50.2 million during the three
month period ended January 31, 1999, compared with $160.1 million during the
same period in 1998. The decrease in cash generated from operating activities is
primarily due to an increase in inventories for both the Diversified Services
Group (equipment for sale/rental) and the Coal segment. Inventories of equipment
for sale/rental are increasing primarily due to a slowing market resulting from
increased competition. The increase in coal inventories is in part due to a
reduction in sales volume. Cash flow in 1998 was positively impacted by the
receipt of a $30 million tax refund on January 30, 1998.
Financing activities during the first quarter of 1999 included capital
expenditures of $135.1 million, including $90.3 million for Massey Coal. Capital
expenditures, net of proceeds from the sale of property, plant, and equipment,
were slightly higher in 1999 than the comparable period in
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<PAGE> 14
1998, primarily in the Coal segment. The Company also completed the sale of its
ownership interest in Fluor Daniel GTI, Inc. during the quarter and received
proceeds totaling $36.3 million.
Investing activities during the first quarter of 1999 included a reduction in
commercial paper and loan notes of $55.0 million offset by the issuance of $38.5
million in notes payable to an affiliate and other miscellaneous short-term
borrowings. Dividends during the first quarter were $15.2 million ($.20 per
share) as compared with $16.7 million ($.20 per share) in 1998. The decrease in
the dividends paid is due to a lower number of shares outstanding as a result of
the Company's recently completed share repurchase program. Under this program,
during the first quarter of 1998 the Company repurchased 942,400 shares of its
common stock for a total of $35.2 million.
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 and loan note program. During January 1999, the Company filed a shelf
registration statement with the Securities and Exchange Commission for the sale
of up to $500 million in debt securities. The Company intends to use the
proceeds from the debt offerings under the shelf registration primarily to pay
down short-term debt incurred to fund the Company's share repurchase program.
Proceeds also may be used for general corporate purposes, which may include
working capital requirements and capital expenditures.
FINANCIAL INSTRUMENTS
During the fourth quarter of 1998, the Company entered into a forward purchase
contract for 1,850,000 shares of its common stock at a price of $49 per share.
The contract matures in October 1999 and gives the Company the ultimate choice
of settlement option, either physical settlement or net share settlement. This
contract effectively incorporates and extends a number of prior contracts
originally entered into during the third quarter of 1998 as part of the
Company's then ongoing share repurchase program. As of January 31, 1999, the
contract settlement cost per share exceeded the current market price per share
by $11.67.
Although the ultimate choice of settlement option resides with the Company, if
the average three-day closing price (as defined in the contract) of the
Company's common stock falls to $30 per share or lower, the holder of the
contract has the right to require the Company to file a shelf registration
statement with the Securities and Exchange Commission for the issuance of shares
necessary to settle the contract. In addition, if the average three-day closing
price (as defined in the contract) of the Company's common stock falls to $25
per share or lower, the holder of the contract has the right to require the
Company to immediately settle the contract, either by physical settlement or net
share settlement. The average closing price for the Company's common stock for
the three days ended March 16, 1999 was $29.67 per share.
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 January 31, 1999 and October 31, 1998, the Company
had forward foreign exchange contracts of less than one year duration, to
exchange principally Australian Dollars, Korean Won, Dutch Guilders and German
Marks for U.S. dollars. In addition, the Company has a forward currency contract
to exchange U.S. dollars for British pounds sterling to hedge annual lease
commitments which expire in 1999. The total gross notional amount of these
contracts at January 31, 1999 and October 31, 1998 was $67 million and $106
million, respectively. Forward contracts to purchase foreign currency
represented $56 million and $102 million and forward contracts to sell foreign
currency represented $11 million and $4 million, at January 31, 1999 and October
31, 1998, respectively.
THE YEAR 2000 ISSUE - READINESS DISCLOSURE - UPDATE
The Year 2000 issue is the result of computer systems and other equipment with
processors that use only two digits to identify a year rather than four. If not
corrected, many computer applications and date sensitive equipment could fail or
create erroneous results before, during and after the Year 2000. The Company
utilizes information technology ("IT") systems such as computer networking
systems and non-IT devices which may contain embedded circuits such as building
security equipment. The Year 2000 issue could affect the systems, transaction
processing, computer applications and devices used by the Company to operate and
monitor all major aspects of its business, including financial systems,
marketing services, proprietary engineering and procurement systems, technical
reference databases and facilities operating systems. Both IT systems and non-IT
devices are subject to potential failure due to the Year 2000 issue.
The Company has developed and implemented a plan to achieve year 2000 readiness
(the "Y2K Program"). The Company has implemented its Y2K Program through teams
located at the Company's operating units throughout the world. Senior corporate
staff oversee and coordinate such implementation efforts. Progress reports on
the Y2K Program are presented regularly to the Company's senior management and
periodically to the Audit Committee of the Company's Board of Directors. The
Audit Committee reviews the Company's Year 2000 processes and procedures to
assess the appropriateness of its risk analysis process and results.
The Company has divided systems potentially affected by the Year 2000 issue into
the following broad categories:
o Business Systems, including general ledger, accounting , human resources
and other ancillary business systems software that runs on mainframe
computers and various servers and is used throughout the Company's
facilities;
o Hardware, Network and Operating Systems, including mainframe computers
running Business Systems and other applications software, servers for local
area networks and wide area networks, hubs, routers, switches, and various
operating systems located on servers and personal computers;
o Engineering Systems, including engineering applications running primarily
on personal computers and local area networks;
o Major Site Specific Systems, including software and hardware which is not
shared throughout the Company's facilities but is used at the Department of
Energy's Hanford and Fernald Project Sites and at specific coal facilities
and processing plants of the Company;
o Other Site Specific Systems, including hardware and software used by the
Company at other project sites;
o Customer Systems, including equipment and software provided by the
Company to its customers; and
o Other Non-Mission Critical Systems, including, for the most part,
applications software for specific disciplines or projects.
In each category (excluding Other Non-Mission Critical Systems), the Company has
identified and assigned priority to certain mission critical systems. The
Company defines mission critical systems as those that might have a significant
adverse effect in one or more of the following areas: safety, environmental,
legal or financial exposure and Company credibility and image.
In relation to existing systems, the Company's Y2K Program has been implemented
in the following three phases: (1) identification and assessment of Year 2000
problems requiring systems modifications or replacements; (2) the remediation or
replacement and testing of systems having Year 2000 problems ; and (3)
development of contingency and business continuity plans to mitigate the effect
of any system or equipment failure. The timeframe for each phase of the Y2K
Program, without respect to distinctions between mission critical systems and
non-mission critical systems, are represented in the following table:
PHASES OF THE PROJECT START DATE END DATE
Identification and
assessment of IT and
non-IT systems Early 1996 December 31, 1998
Remediation or
replacement and testing Late 1996 October 31, 1999
Contingency planning Late 1998 Ongoing into 2000
With respect to systems that are being acquired by the Company for its own
account or the account of customers, the Company uses standard compliance
processes to certify Year 2000 compliance. The Company maintains relationships
with thousands of suppliers, some of whom supply software, hardware and systems
that must be assessed for Year 2000 compliance. The Company has identified
approximately 2,000 critical suppliers. The Company requires that all suppliers
certify and, where appropriate, guarantee that the systems and equipment they
provide to the Company for its own account and the account of its customers are
Year 2000 compliant. In addition to requiring such certifications, the Company
has also established a procedure for reviewing Year 2000 compliance by critical
suppliers. Actions include the review of remediation and testing of specific
equipment, review of suppliers' corporate Year 2000 progress and confirmation of
electronic exchange formats. Where appropriate, the Company may follow up its
review of supplier information with on-site visits. Where a supplier does not,
or cannot, satisfy the Company's Year 2000 requirements, the Company seeks
alternate suppliers, subject to customer requirements and contract
specifications. Given the number of suppliers utilized by the Company,
compliance assessment is ongoing. Although initial reviews indicate that Year
2000 compliance by the Company's suppliers should not have a material adverse
affect on the Company's operations, there can be no assurance that suppliers
will resolve all Year 2000 issues in their systems and equipment in a timely
manner.
Generally, the Company has substantially completed phase 1 (identification and
assessment) and phase 2 (remediation or replacement and testing) with respect to
all of its Business Systems, except for certain field accounting software and
certain systems used by the Company's equipment operations, as to which
remediation is scheduled to be complete by the end of August 1999.
At this time, the Company believes its mainframe system is Year 2000 ready. The
Company is using an automated tool to test servers and approximately 18,000
personal computers with standard connections to servers. Approximately 60% of
those computers have been tested, and approximately 75% of the personal
computers tested (or approximately 38% of the total) have been found to be Year
2000 compliant. Approximately 25% of the computers tested require upgrading and
are being upgraded. Remaining hardware, including personal computers that are
not connected to servers, is predominately located at project sites or smaller
offices. Such hardware is not likely to be mission critical and is being
assessed through manual procedures. The Company is migrating its personal
computers to new operating systems (Windows 95 and Windows NT), which migration
is expected to address Year 2000 problems in various operating systems that are
being replaced. All upgrades and remediation are expected to be complete by
August 1999.
With respect to Engineering Systems, the Company plans to retire approximately
40% of its engineering applications software to streamline its operations,
reduce support costs and avoid costs of Year 2000 remediation. The cost of such
software, to the extent originally capitalized, has been fully amortized and the
Company does not expect any significant write off as the result of such
retirement. The remediation of remaining applications software is largely being
addressed via upgrades. At this time, approximately 66% of the engineering
applications software that will remain in use has been upgraded. With respect
the remaining engineering applications, remediation and testing are proceeding
in accordance with the schedule and are generally expected to be complete by
June 1999.
The assessment of mission critical Major Site Specific Systems is substantially
complete. Remediation or replacement and testing of approximately 85% of the
systems and equipment the Company has identified at the Department of Energy's
projects has been completed. The remaining remediation at such sites is
scheduled to be complete in April 1999. The assessment of site specific control
systems used at the Company's coal plants is substantially complete.
Approximately 37% of those systems are Year 2000 ready, remediation of the
remaining systems is expected to be complete by October 1999.
Other Site Specific Systems have been assessed. The Company has identified
approximately 330 applications falling in this category. Approximately 140 will
be retired, and approximately 150 of those systems that will remain in use are
Year 2000 ready. The balance are scheduled to be remediated by June 1999.
With respect to Customer Systems and current customer projects generally, the
Company is making evaluations to determine whether or not any action is required
to ensure Year 2000 readiness. At any time, the Company may have approximately
2,000 ongoing customer projects. The Company has screened those projects where
it has ongoing warranty or performance obligations for Year 2000 issues and has
targeted approximately 900 projects for additional Year 2000 assessments. Based
on those assessments, the Company has determined that Year 2000 issues do not
impact approximately 70% of the projects targeted for such assessments. At those
projects where Year 2000 problems have been identified, the Company has
typically not provided its own warranties but has passed through to its
customers the warranties provided by its suppliers. Accordingly, the Company is
contacting suppliers of the systems affected by Year 2000 issues and monitoring
their remediation efforts. The Company relies directly and indirectly on
external systems utilized by its suppliers and on equipment and materials
provided by those suppliers and used for the Company's business. As discussed
above, the Company has implemented a procedure for reviewing Year 2000
compliance by its suppliers.
With respect to systems and equipment previously provided to clients, the
Company does not control the upgrades, additions and/or changes made by its
clients, or by others for its clients to those systems and equipment.
Accordingly, the Company does not provide any assurances, nor current
information about Year 2000 capabilities, nor potential Year 2000 problems, with
respect to past projects. Each project is performed under an agreement with the
Company's client. Those agreements specifically outline the extent of the
Company's obligations and warranties and the limitations that may apply.
Other Non-Mission Critical Systems are comprised, for the most part, of
approximately 600 specific applications software programs. Such software is not
critical to the Company's operations and is being reviewed and remediated in
accordance with the schedule.
The Company has investments in various joint ventures and is monitoring the Year
2000 efforts of such joint ventures. Based on available information, the Company
believes, that with a few exceptions, business systems used in such joint
ventures are Year 2000 ready.
The Company uses both internal and external resources in its Y2K Program. The
Company estimates that, from 1996 to date, it has spent approximately $8.7
million to $9.7 million on the Year 2000 issue. It anticipates spending an
additional $4.9 million to $6.2 million in the next year and running into the
first quarter of 2000. This estimate of additional spending was derived
utilizing numerous assumptions, including the assumption that the Company has
already identified its most significant Year 2000 issues and that plans of its
third party suppliers will be fulfilled in a timely manner without cost to the
Company. These costs are the Company's best estimate given other systems
initiatives that were ongoing irrespective of the Year 2000 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 estimates that 45% of the total costs incurred in the Y2K Program
have been and will be incurred to remediate systems (including software
upgrades); the remaining 55% will be incurred to replace problem systems and
equipment. In addition to the direct costs of the Y2K Program, the Company has
accelerated its program of replacing out-of-date personal computers and
operating systems. Such computers may or may not be Year 2000 compliant, and the
Company does not track their costs as costs incurred to obtain Year 2000
compliance. The implementation of such program was accelerated, however, in
response to Year 2000 concerns. This replacement program will continue into
October 1999. The Y2K Program has been funded under the Company's general IT and
operating budgets. In 1998, Y2K Program costs were estimated to have been 15% 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
capitalized and amortized under generally accepted accounting principles. No
significant internal systems projects are being deferred due to the Year 2000
program efforts.
The Company is developing contingency plans to address the Year 2000 issues that
may pose a significant risk to its ongoing operations and existing projects.
Such plans will include the implementation of alternate procedures to compensate
for any system and equipment malfunctions or deficiencies with the Company's
internal systems and equipment, with systems and equipment utilized at the
Company's project sites and with systems and equipment provided to clients.
During the remediation phase of the internal business systems, the Company has
been and will be evaluating potential failures and attempt to develop responses
in a timely manner. However, there can be no assurance that any contingency
plans implemented by the Company would be adequate to meet the Company's needs
without materially impacting its operations, that any such plan would be
successful or that the Company's results of operations would not be materially
and adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
The Company's Y2K Program is subject to a variety of risks and uncertainties
some of which are beyond the Company's control. Those risks and uncertainties
include, but are not limited to, the availability of qualified computer
personnel, the Year 2000 readiness of third parties and the Year 2000 compliance
of systems and equipment provided by suppliers.
The Company believes that its most reasonably likely worst case Year 2000
scenarios would relate to problems with the systems of third parties, rather
than with the Company's internal systems. In this regard, the Company believes
that risks are greatest in the area of utilities. Each of the Company's
locations relies on local private and governmental suppliers for electricity,
water, sewer, telecommunication and other basic utility services. If the supply
of such necessary utilities were to fail at any location, the Company's
operations at that location, whether consisting of engineering, design or
construction activities, maintenance services or coal mining and processing,
would essentially be shut down or disrupted until such utilities were restored.
Depending on the location, the Company could suffer delays in performing
contracts and in otherwise fulfilling its commitments. Such delays could
materially adversely impact the Company's receipt of payments due from customers
upon its tender of contract deliverables or upon achievement of contract
milestones. At facilities located in developing countries, the risk of sustained
infrastructure failures is accentuated by the lack of transparency in government
and private enterprises and general constraints on infrastructure spending. The
Company is working to assess its exposure to utility providers and other
infrastructure risks. The Company believes that the geographical dispersion of
the Company's facilities mitigates the risk that infrastructure failures in any
locale will result in the simultaneous closure of, or sustained suspension of
operations at, multiple Company facilities. Consequently, to the extent
practical, the Company expects to mitigate any interruption in its business
operations in one locale by shifting the performance of the constrained activity
to a functioning office or facility. There may be instances, however, where the
activity cannot be performed elsewhere or on a timely basis given the disruption
caused by the Year 2000 problems in any locale. In such instances, the Company
will assess the relevant provisions of its contracts and, where it deems
appropriate, work with its customers to resolve performance and schedule delays
and any resulting financial consequences on a mutually satisfactory basis to the
extent possible under then prevailing circumstances.
Contingency plans are being developed to address issues related to third parties
that are not considered to be making sufficient progress in becoming Year 2000
ready in a timely manner. Due to the large number of variables involved with
estimating resultant lost revenues should there be a third party failure, the
Company cannot provide an estimate of damage if any of the scenarios were to
occur.
No assurance can be given that the Company will achieve Year 2000 readiness.
Further, there is the possibility that significant litigation may occur due to
business and equipment failures caused by the Year 2000 issue. It is uncertain
whether, or to what extent, the Company may be affected by such litigation. The
failure of the Company, its clients (including governmental agencies), suppliers
of computer systems and equipment, joint venture partners and other third
parties upon whom the Company relies, to achieve Year 2000 readiness could
materially and adversely affect the Company's results from operations.
EURO CONVERSION - UPDATE
Given the nature and size of the Company's European operations, the Company does
not perceive the conversion to the Euro as a significant risk area. The
Company's businesses operate under long-term contracts, typically denominated in
U.S. Dollars, as compared to more traditional retail or manufacturing
environments. If required, the Company is currently able to bid, price and
13
<PAGE> 15
negotiate contracts using the Euro. The Company's treasury function is also
capable of operating with the Euro. Specifically, the Company is able to:
establish bank accounts; obtain financing; obtain bank guarantees or letters of
credit; trade foreign currency; and hedge transactions. The Company's ongoing
Euro conversion effort will be primarily concentrated in the systems area.
Conversion to the Euro impacts the Company's subsidiaries in The Netherlands,
Germany and Belgium. 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 Euro-based database is anticipated to be
available by June 1, 1999, with testing complete by the end of July 1999. Full
conversion is anticipated to completed by the start of fiscal year 2000.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 will
be adopted by the Company in 1999. As discussed elsewhere in this Form 10-Q, the
Company is undertaking a complete reorganization of its current operating units
and administrative functions. Although management has not completed its review
of SFAS No. 131 in light of the new organizational structure, management
anticipates that under the new standard the number of its identifiable segments
will increase over that currently being reported.
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording
derivatives in interim and annual financial statements. This statement is
effective for the Company's fiscal year 2000. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
statement will have a significant impact on the results of operations or the
financial position of the Company.
14
<PAGE> 16
FLUOR CORPORATION
CHANGES IN BACKLOG
Three Months Ended January 31, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
$ in millions 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Backlog - beginning of period $12,645.3 $14,370.0
New awards 1,700.9 2,602.1
Adjustments and cancellations, net (391.5) 2.6
Work Performed (2,890.2) (2,956.6)
--------- ---------
Backlog - end of period $11,064.5 $14,018.1
========= =========
</TABLE>
15
<PAGE> 17
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K filed December 9, 1998 -- Restated
Bylaws (as amended December 9, 1998) of Fluor Corporation
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLUOR CORPORATION
(Registrant)
Date: March 17, 1999 /s/ J.O. Rollans
-------------- -------------------------------------
J.O. Rollans, Senior Vice President
and Chief Financial Officer
/s/ V.L. Prechtl
-------------------------------------
V.L. Prechtl, Vice President and
Controller
17
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 308,248
<SECURITIES> 0
<RECEIVABLES> 871,732
<ALLOWANCES> 0
<INVENTORY> 253,220
<CURRENT-ASSETS> 2,219,095
<PP&E> 3,355,565
<DEPRECIATION> 1,180,185
<TOTAL-ASSETS> 5,017,950
<CURRENT-LIABILITIES> 2,450,401
<BONDS> 0
0
0
<COMMON> 47,370
<OTHER-SE> 1,518,306
<TOTAL-LIABILITY-AND-EQUITY> 5,017,950
<SALES> 0
<TOTAL-REVENUES> 3,384,065
<CGS> 0
<TOTAL-COSTS> 3,291,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,004
<INCOME-PRETAX> 74,899
<INCOME-TAX> 23,818
<INCOME-CONTINUING> 51,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,081
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
