Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

or

 

o  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: 1-16129

 

FLUOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0927079

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

6700 Las Colinas Boulevard

 

 

Irving, Texas

 

75039

(Address of principal executive offices)

 

(Zip Code)

 

469-398-7000

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of July 27, 2012, 166,968,452 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

June 30, 2012

 

TABLE OF CONTENTS

 

 

PAGE

 

 

 

Part I:

Financial Information

 

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

27

 

 

 

 

 

Item 4:

Controls and Procedures

28

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

29

 

 

 

 

Part II:

Other Information

 

 

 

 

 

 

Item 1:

Legal Proceedings

30

 

 

 

 

 

Item 1A:

Risk Factors

30

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

 

Item 5:

Other Information

30

 

 

 

 

 

Item 6:

Exhibits

31

 

 

 

 

Signatures

34

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

7,128,249

 

$

6,033,876

 

$

13,418,357

 

$

11,091,652

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

6,809,783

 

5,727,032

 

12,823,993

 

10,514,575

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

31,206

 

31,106

 

69,048

 

64,931

 

Interest expense

 

6,610

 

3,558

 

13,491

 

6,107

 

Interest income

 

(7,531

)

(9,012

)

(17,156

)

(16,231

)

Total cost and expenses

 

6,840,068

 

5,752,684

 

12,889,376

 

10,569,382

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

288,181

 

281,192

 

528,981

 

522,270

 

INCOME TAX EXPENSE

 

95,660

 

89,733

 

159,285

 

169,598

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

192,521

 

191,459

 

369,696

 

352,672

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

31,331

 

25,960

 

53,624

 

47,462

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

161,190

 

$

165,499

 

$

316,072

 

$

305,210

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.96

 

$

0.95

 

$

1.88

 

$

1.75

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.95

 

$

0.94

 

$

1.86

 

$

1.72

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

168,264

 

173,425

 

168,558

 

174,622

 

DILUTED

 

169,440

 

175,257

 

169,924

 

177,140

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.16

 

$

0.125

 

$

0.32

 

$

0.25

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

192,521

 

$

191,459

 

$

369,696

 

$

352,672

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(22,680

)

23,110

 

3,248

 

42,716

 

Ownership share of equity method investees’ other comprehensive gain (loss)

 

(6,998

)

(450

)

(1,489

)

703

 

Pension plan adjustment

 

4,527

 

12,421

 

5,340

 

11,639

 

Unrealized gain (loss) on derivative contracts

 

(1,670

)

(3,548

)

1,589

 

1,977

 

Unrealized gain (loss) on debt securities

 

(241

)

524

 

(108

)

211

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

(27,062

)

32,057

 

8,580

 

57,246

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

165,459

 

223,516

 

378,276

 

409,918

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

31,040

 

31,799

 

53,287

 

55,462

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

134,419

 

$

191,717

 

$

324,989

 

$

354,456

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

(in thousands, except share amounts)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($383,706 and $472,597 related to variable interest entities (“VIEs”))

 

$

1,803,569

 

$

2,161,411

 

Marketable securities, current ($75,402 and $0 related to VIEs)

 

427,050

 

96,438

 

Accounts and notes receivable, net ($211,266 and $167,238 related to VIEs)

 

1,270,842

 

1,235,935

 

Contract work in progress ($199,043 and $264,014 related to VIEs)

 

2,212,634

 

1,946,747

 

Deferred taxes

 

177,343

 

207,674

 

Other current assets

 

279,735

 

232,418

 

Total current assets

 

6,171,173

 

5,880,623

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

318,740

 

503,550

 

Property, plant and equipment (net of accumulated depreciation of $997,274 and $947,223)

 

913,196

 

921,585

 

Investments and goodwill

 

238,351

 

225,246

 

Deferred taxes

 

160,424

 

167,387

 

Deferred compensation trusts

 

317,051

 

303,016

 

Other

 

273,201

 

268,869

 

TOTAL ASSETS

 

$

8,392,136

 

$

8,270,276

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($305,589 and $239,522 related to VIEs)

 

$

1,896,809

 

$

1,734,686

 

Convertible senior notes

 

19,155

 

19,458

 

Advance billings on contracts ($337,209 and $469,644 related to VIEs)

 

894,452

 

1,107,559

 

Accrued salaries, wages and benefits ($44,324 and $39,581 related to VIEs)

 

641,464

 

668,107

 

Other accrued liabilities ($10,657 and $23,427 related to VIEs)

 

292,061

 

310,301

 

Total current liabilities

 

3,743,941

 

3,840,111

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

513,730

 

513,500

 

NONCURRENT LIABILITIES

 

495,993

 

456,759

 

CONTINGENCIES AND COMMITMENTS

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Capital stock

 

 

 

 

 

Preferred — authorized 20,000,000 shares ($0.01 par value); none issued

 

 

 

Common — authorized 375,000,000 shares ($0.01 par value); issued and outstanding — 166,962,018 and 168,979,199 shares in 2012 and 2011, respectively

 

1,670

 

1,690

 

Additional paid-in capital

 

 

2,574

 

Accumulated other comprehensive loss

 

(190,375

)

(199,292

)

Retained earnings

 

3,743,262

 

3,590,553

 

Total shareholders’ equity

 

3,554,557

 

3,395,525

 

 

 

 

 

 

 

Noncontrolling interests

 

83,915

 

64,381

 

 

 

 

 

 

 

Total equity

 

3,638,472

 

3,459,906

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

8,392,136

 

$

8,270,276

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Six Months Ended
June 30,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

369,696

 

$

352,672

 

Adjustments to reconcile net earnings to cash (utilized) provided by operating activities:

 

 

 

 

 

Depreciation of fixed assets

 

103,025

 

97,675

 

Amortization of intangibles

 

804

 

1,942

 

Restricted stock and stock option amortization

 

18,722

 

19,933

 

Deferred compensation trust

 

(14,034

)

(8,904

)

Deferred compensation obligation

 

15,315

 

9,098

 

Deferred taxes

 

30,881

 

37,589

 

Excess tax benefit from stock-based plans

 

(3,924

)

(12,269

)

Retirement plan accrual, net of contributions

 

4,401

 

16,297

 

Changes in operating assets and liabilities

 

(440,461

)

(94,670

)

Equity in (earnings) of investees, net of dividends

 

(9,593

)

5,462

 

Other items

 

6,831

 

3,085

 

Cash provided by operating activities

 

81,663

 

427,910

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

(645,202

)

(407,043

)

Proceeds from the sales and maturities of marketable securities

 

492,861

 

335,541

 

Capital expenditures

 

(120,425

)

(157,961

)

Proceeds from disposal of property, plant and equipment

 

50,612

 

28,691

 

Investments in partnerships and joint ventures

 

(3,203

)

(4,161

)

Proceeds from the sale of assets

 

 

11,016

 

Other items

 

(4,493

)

2,363

 

Cash utilized by investing activities

 

(229,850

)

(191,554

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

(132,889

)

(358,655

)

Dividends paid

 

(48,573

)

(43,911

)

Repayment of convertible debt

 

(303

)

(71,196

)

Distributions paid to noncontrolling interests

 

(40,172

)

(40,545

)

Capital contribution by joint venture partners

 

3,387

 

22,589

 

Taxes paid on vested restricted stock

 

(11,603

)

(18,627

)

Stock options exercised

 

5,691

 

25,343

 

Excess tax benefit from stock-based plans

 

3,924

 

12,269

 

Other items

 

5,817

 

(3,122

)

Cash utilized by financing activities

 

(214,721

)

(475,855

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

5,066

 

50,467

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(357,842

)

(189,032

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,161,411

 

2,134,997

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,803,569

 

$

1,945,965

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

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 accounting principles generally accepted in the United States and, therefore, should be read in conjunction with the company’s December 31, 2011 Annual Report on Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended June 30, 2012 may not necessarily be 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 of a normal recurring nature which, in the opinion of management, are necessary to present fairly its consolidated financial position as of June 30, 2012 and its consolidated results of operations and cash flows for the interim periods presented. All significant intercompany transactions of consolidated subsidiaries are eliminated. Certain amounts in 2011 have been reclassified to conform to the 2012 presentation. Management has evaluated all material events occurring subsequent to the date of the financial statements up to the date and time this quarterly report is filed on Form 10-Q.

 

(2)                    New accounting pronouncements implemented by the company during the six months ended June 30, 2012 or requiring implementation in future periods are discussed below or in the notes, where applicable.

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of ASU 2011-11 is to make financial statements that are prepared under U.S. generally accepted accounting principles (“GAAP”) more comparable to those prepared under International Financial Reporting Standards (“IFRS”). The new disclosures will give financial statement users information about both gross and net exposures. ASU 2011-11 is effective for interim and annual reporting periods beginning after January 1, 2013 and will be applied on a retrospective basis.

 

In the first quarter of 2012, the company adopted FASB ASU 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 allows entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit (i.e., the first step of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. The adoption of ASU 2011-08 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

(3)                   In the first quarter of 2012, the company adopted FASB ASU 2011-05, “Presentation of Comprehensive Income,” which amends certain guidance in Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. ASU 2011-05 requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. As a result of the adoption of ASU 2011-05, the company’s financial statements now include a Condensed Consolidated Statement of Comprehensive Income.

 

The company also adopted FASB ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05” in the first quarter of 2012. ASU 2011-12 indefinitely deferred the provisions of ASU 2011-05 that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement will be further deliberated by the FASB at a future date.

 

6



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The tax effects of the components of other comprehensive income for the three months ended June 30, 2012 and 2011 are as follows:

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

(in thousands)

 

Before-
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net-of-
Tax
Amount

 

Before-
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net-of-
Tax
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(36,516

)

$

13,836

 

$

(22,680

)

$

32,734

 

$

(9,624

)

$

23,110

 

Ownership share of equity method investees’ other comprehensive (loss)

 

(10,201

)

3,203

 

(6,998

)

(720

)

270

 

(450

)

Pension plan adjustment

 

7,244

 

(2,717

)

4,527

 

19,874

 

(7,453

)

12,421

 

Unrealized (loss) on derivative contracts

 

(2,274

)

604

 

(1,670

)

(4,609

)

1,061

 

(3,548

)

Unrealized gain (loss) on debt securities

 

(386

)

145

 

(241

)

838

 

(314

)

524

 

Total other comprehensive income (loss)

 

(42,133

)

15,071

 

(27,062

)

48,117

 

(16,060

)

32,057

 

Less: Other comprehensive income (loss) attributable to noncontrolling interests

 

(291

)

 

(291

)

5,839

 

 

5,839

 

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

(41,842

)

$

15,071

 

$

(26,771

)

$

42,278

 

$

(16,060

)

$

26,218

 

 

The tax effects of the components of other comprehensive income for the six months ended June 30, 2012 and 2011 are as follows:

 

 

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

(in thousands)

 

Before-
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net-of-
Tax
Amount

 

Before-
Tax
Amount

 

Tax
Expense

 

Net-of-
Tax
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

5,154

 

$

(1,906

)

$

3,248

 

$

63,714

 

$

(20,998

)

$

42,716

 

Ownership share of equity method investees’ other comprehensive gain (loss)

 

(1,303

)

(186

)

(1,489

)

1,918

 

(1,215

)

703

 

Pension plan adjustment

 

8,544

 

(3,204

)

5,340

 

18,622

 

(6,983

)

11,639

 

Unrealized gain on derivative contracts

 

2,772

 

(1,183

)

1,589

 

2,667

 

(690

)

1,977

 

Unrealized gain (loss) on debt securities

 

(174

)

66

 

(108

)

338

 

(127

)

211

 

Total other comprehensive income

 

14,993

 

(6,413

)

8,580

 

87,259

 

(30,013

)

57,246

 

Less: Other comprehensive income (loss) attributable to noncontrolling interests

 

(337

)

 

(337

)

8,000

 

 

8,000

 

Other comprehensive income attributable to Fluor Corporation

 

$

15,330

 

$

(6,413

)

$

8,917

 

$

79,259

 

$

(30,013

)

$

49,246

 

 

(4)                   The effective tax rate, based on the company’s operating results for the three and six months ended June 30, 2012, was 33.2 percent and 30.1 percent, respectively, compared to 31.9 percent and 32.5 percent for the corresponding periods of 2011. The higher effective tax rate for the three months ended June 30, 2012 compared to the same period in the prior year was primarily due to an increase in state tax expense. The lower effective tax rate for the six months ended June 30, 2012 compared to the first six months of 2011 was due to the recognition of a deferred tax benefit of $16 million primarily attributable to foreign taxes previously paid on certain unremitted foreign earnings in South Africa.

 

The company conducts business globally and, as a result, the company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, the Netherlands, South Africa, the United Kingdom and the United States. Although the company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be materially different, both favorably and unfavorably. With few

 

7



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

exceptions, the company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003.

 

(5)                   Cash paid for interest was $11.2 million and $4.2 million for the six months ended June 30, 2012 and 2011, respectively. Income tax payments, net of receipts, were $169.8 million and $75.9 million during the six-month periods ended June 30, 2012 and 2011, respectively.

 

(6)                    Diluted earnings per share (“EPS”) reflects the assumed exercise or conversion of all dilutive securities using the treasury stock method.

 

The calculations of the basic and diluted EPS for the three and six months ended June 30, 2012 and 2011 are presented below:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

161,190

 

$

165,499

 

$

316,072

 

$

305,210

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

168,264

 

173,425

 

168,558

 

174,622

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.96

 

$

0.95

 

$

1.88

 

$

1.75

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

168,264

 

173,425

 

168,558

 

174,622

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock units and shares

 

869

 

1,301

 

1,024

 

1,512

 

Conversion equivalent of dilutive convertible debt

 

307

 

531

 

342

 

1,006

 

Weighted average diluted shares outstanding

 

169,440

 

175,257

 

169,924

 

177,140

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.95

 

$

0.94

 

$

1.86

 

$

1.72

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

1,717

 

1,021

 

1,467

 

655

 

 

During the three and six months ended June 30, 2012, the company repurchased and cancelled 2,173,049 and 2,623,049 shares of its common stock, respectively, under its stock repurchase program for $106 million and $133 million, respectively. During the three and six months ended June 30, 2011, the company repurchased and cancelled 1,613,800 and 5,113,800 shares of its common stock, respectively, under its stock repurchase program for $113 million and $359 million, respectively.

 

(7)                   In the first quarter of 2012, the company adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amended and expanded the disclosure requirements of ASC 820, “Fair Value Measurements and Disclosures.”

 

The fair value hierarchy established by ASC 820 prioritizes the use of inputs used in valuation techniques into the following three levels:

 

·

Level 1

quoted prices in active markets for identical assets and liabilities

·

Level 2

inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly

·

Level 3

unobservable inputs

 

8



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The following table presents, for each of the fair value hierarchy levels required under ASC 820-10, the company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Fair Value Hierarchy

 

Fair Value Hierarchy

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,828

 

$

11,828

(2)

$

 

$

 

$

24,364

 

$

24,364

(2)

$

 

$

 

Marketable securities, current

 

102,622

 

 

102,622

(3)

 

72,845

 

 

72,845

(3)

 

Deferred compensation trusts

 

76,951

 

76,951

(4)

 

 

76,844

 

76,844

(4)

 

 

Marketable securities, noncurrent

 

318,740

 

 

318,740

(5)

 

503,550

 

 

503,550

(5)

 

Derivative assets(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swap forward contracts

 

889

 

 

889

 

 

2,535

 

 

2,535

 

 

Foreign currency contracts

 

15,751

 

 

15,751

 

 

3,105

 

 

3,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swap forward contracts

 

$

112

 

$

 

$

112

 

$

 

$

53

 

$

 

$

53

 

$

 

Foreign currency contracts

 

1,491

 

 

1,491

 

 

4,612

 

 

4,612

 

 

 


(1)      The company measures and reports assets and liabilities at fair value utilizing pricing information received from third-party pricing services. The company performs procedures to verify the reasonableness of pricing information received for significant assets and liabilities classified as Level 2.

 

(2)      Consists of registered money market funds valued at fair value. These investments represent the net asset value of the shares of such funds as of the close of business at the end of the period.

 

(3)      Consists of investments in U.S. agency securities, corporate debt securities and other debt securities which are valued at the last reported sale price on the last business day at the end of the period. Securities not traded on the last business day are valued at the last reported bid price.

 

(4)      Consists of registered money market funds and an equity index fund valued at fair value. These investments, which are trading securities, represent the net asset value of the shares of such funds as of the close of business at the end of the period.

 

(5)      Consists of investments in U.S. agency securities, U.S. Treasury securities, corporate debt securities and other debt securities with maturities ranging from one to three years which are valued at the last reported sale price on the last business day at the end of the period. Securities not traded on the last business day are valued at the last reported bid price.

 

(6)      See Note 8 for the classification of commodity swap forward contracts and foreign currency contracts on the Condensed Consolidated Balance Sheet. Commodity swap forward contracts and foreign currency contracts are estimated using standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows.

 

All of the company’s financial instruments carried at fair value are included in the table above. All of the above financial instruments are available-for-sale securities except for those held in the deferred compensation trusts (which are trading securities) and derivative assets and liabilities. The company has determined that there was no other-than-temporary impairment of available-for-sale securities with unrealized losses, and the company expects to recover the entire cost basis of the securities. The available-for-sale securities are made up of the following security types as of June 30, 2012: money market funds of $12 million, U.S. agency securities of $168 million, U.S. Treasury securities of $53 million, corporate debt securities of $197 million and other securities of $3 million. As of December 31, 2011, available-for-sale securities consisted of money market funds of $24 million, U.S. agency securities of $237 million, U.S. Treasury securities of $99 million, corporate debt securities of $235 million and other securities of $5 million. The amortized cost of these available-for-sale securities is not materially different than the fair value. During the three and six months ended June 30, 2012, proceeds from the sales and maturities of available-for-sale securities were $171 million and $349 million, respectively, compared to $164 million and $273 million for the corresponding periods of 2011.

 

9



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The carrying values and estimated fair values of the company’s financial instruments that are not required to be measured at fair value in the Condensed Consolidated Balance Sheet are as follows:

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

(in thousands)

 

Fair Value
Hierarchy

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,132,624

 

$

1,132,624

 

$

1,225,480

 

$

1,225,480

 

Cash equivalents(2)

 

Level 2

 

659,117

 

659,117

 

911,567

 

911,567

 

Marketable securities, current(3)

 

Level 2

 

324,428

 

324,428

 

23,593

 

23,593

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

39,062

 

39,062

 

41,957

 

41,957

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

3.375% Senior Notes(5)

 

Level 2

 

$

495,944

 

$

521,108

 

$

495,723

 

$

500,254

 

1.5% Convertible Senior Notes(5)

 

Level 2

 

19,155

 

32,228

 

19,458

 

35,647

 

5.625% Municipal Bonds(5)

 

Level 2

 

17,786

 

17,916

 

17,777

 

17,901

 

 


(1)      Cash consists of bank deposits. Carrying amounts approximate fair value.

 

(2)      Cash equivalents consist of held-to-maturity time deposits with maturities less than three months. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments.

 

(3)      Marketable securities, current consist of held-to-maturity time deposits with maturities greater than three months but less than one year. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments.

 

(4)      Notes receivable are carried at net realizable value which approximates fair value. Factors considered by the company in determining the net realizable value include current interest rates, the term of the note, the credit worthiness of the borrower and any collateral pledged as security. Notes receivable are periodically assessed for impairment.

 

(5)      The fair value of the 3.375% Senior Notes, 1.5% Convertible Senior Notes and 5.625% Municipal Bonds are estimated based on quoted market prices for similar issues.

 

(8)               The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with intercompany transactions, and risk associated with interest rate volatility may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally mitigates the risk by utilizing derivative instruments as hedging instruments that are designated as either fair value or cash flow hedges in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities.” The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The company also formally assesses, both at inception and at least quarterly thereafter, whether the hedging instruments are highly effective in offsetting changes in the fair value of the hedged items. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the effective portion of the change in the fair value of the hedging instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the effective portion of the hedging instruments’ gains or losses due to changes in fair value are recorded as a component of accumulated other comprehensive income (loss) (“OCI”) and are reclassified into earnings when the hedged items settle. Any ineffective portion of a hedging instrument’s change in fair value is immediately recognized in earnings. The company does not enter into hedging instruments or engage in hedging activities for speculative purposes.

 

As of June 30, 2012, the company had total gross notional amounts of $715 million of foreign exchange forward contracts and $7 million of commodity swap forward contracts outstanding relating to engineering and construction contract obligations and intercompany transactions. The foreign exchange forward contracts are of varying duration, none of which extend beyond

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

December 2012. The commodity swap forward contracts are of varying duration, none of which extend beyond August 2014. The impact to earnings due to hedge ineffectiveness was immaterial for the three and six months ended June 30, 2012 and 2011, respectively.

 

The fair values of the hedging instruments under ASC 815 as of June 30, 2012 and December 31, 2011 are as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

June 30,

 

December 31

 

Balance Sheet

 

June 30,

 

December 31,

 

(in thousands)

 

Location

 

2012

 

2011

 

Location

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swaps

 

Other current assets

 

$

889

 

$

2,451

 

Other accrued liabilities

 

$

34

 

$

 

Foreign currency forwards

 

Other current assets

 

15,751

 

3,105

 

Other accrued liabilities

 

1,491

 

4,612

 

Commodity swaps

 

Other assets

 

 

84

 

Noncurrent liabilities

 

78

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

16,640

 

$

5,640

 

 

 

$

1,603

 

$

4,665

 

 

The pre-tax amount of gain (loss) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three and six months ended June 30, 2012 and 2011 is as follows:

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forwards

 

Corporate general and administrative expense

 

$

5,875

 

$

3,937

 

$

(7,698

)

$

4,311

 

 

The pre-tax amount of gain (loss) recognized in earnings on the hedging instruments for the fair value hedges noted in the table above offsets the amount of gain (loss) recognized in earnings on the hedged items in the same locations on the Condensed Consolidated Statement of Earnings.

 

The after-tax amount of gain (loss) recognized in OCI associated with the hedging instruments designated as cash flow hedges is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Cash Flow Hedges (in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Commodity swaps

 

$

(220

)

$

(1,740

)

$

392

 

$

2,183

 

Foreign currency forwards

 

(62

)

277

 

2,026

 

482

 

Total

 

$

(282

)

$

(1,463

)

$

2,418

 

$

2,665

 

 

The after-tax amount of gain (loss) reclassified from accumulated OCI into earnings associated with the hedging instruments designated as cash flow hedges is as follows:

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Cash Flow Hedges (in thousands)

 

Location of Gain (Loss)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swaps

 

Total cost of revenue

 

$

708

 

$

1,202

 

$

944

 

$

1,552

 

Foreign currency forwards

 

Total cost of revenue

 

271

 

(348

)

1

 

(582

)

Treasury rate lock agreements

 

Interest expense

 

(262

)

 

(524

)

 

Total

 

 

 

$

717

 

$

854

 

$

421

 

$

970

 

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(9)            Net periodic pension expense for the U.S. and non-U.S. defined benefit pension plans includes the following components:

 

 

 

U.S. Pension Plan

 

Non-U.S. Pension Plans

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,490

 

$

8,960

 

$

2,979

 

$

17,920

 

$

1,931

 

$

1,584

 

$

3,894

 

$

4,450

 

Interest cost

 

8,324

 

9,191

 

16,647

 

18,384

 

8,184

 

8,572

 

16,448

 

17,139

 

Expected return on assets

 

(8,831

)

(10,156

)

(17,662

)

(20,312

)

(10,497

)

(10,792

)

(21,077

)

(21,346

)

Amortization of prior service cost

 

(29

)

(46

)

(57

)

(93

)

 

 

 

 

Recognized net actuarial loss

 

3,408

 

3,497

 

6,817

 

6,994

 

782

 

1,379

 

1,566

 

3,097

 

Net periodic pension expense

 

$

4,362

 

$

11,446

 

$

8,724

 

$

22,893

 

$

400

 

$

743

 

$

831

 

$

3,340

 

 

The company currently expects to fund approximately $30 million to $60 million into its defined benefit pension plans during 2012, which is expected to be in excess of the minimum funding required. During the six months ended June 30, 2012, contributions of approximately $5 million were made by the company.

 

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.

 

In the first quarter of 2012, the company adopted FASB ASU 2011-09, “Disclosures about an Employer’s Participation in a Multiemployer Plan,” which amends ASC 715-80 by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective of ASU 2011-09 is to enhance the transparency of disclosures about the significant multiemployer plans in which an employer participates, the level of the employer’s participation in those plans, the financial health of the plans, and the nature of the employer’s commitments to the plans. The company was not required to make additional disclosures as a result of the adoption of ASU 2011-09.

 

(10)             In September 2011, the company issued $500 million of 3.375% Senior Notes (the “2011 Notes”) due September 15, 2021 and received proceeds of $492 million, net of underwriting discounts and debt issuance costs. Interest on the 2011 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on March 15, 2012. The company may, at any time, redeem the 2011 Notes at a redemption price equal to 100 percent of the principal amount, plus a “make whole” premium described in the indenture. Additionally, if a change of control triggering event occurs, as defined by the terms of the indenture, the company will be required to offer to purchase the 2011 Notes at a purchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The company is generally not limited under the indenture governing the 2011 Notes in its ability to incur additional indebtedness provided the company is in compliance with certain restrictive covenants, including restrictions on liens and restrictions on sale and leaseback transactions.

 

In February 2004, the company issued $330 million of 1.5% Convertible Senior Notes (the “2004 Notes”) due February 15, 2024 and received proceeds of $323 million, net of underwriting discounts. In December 2004, the company irrevocably elected to pay the principal amount of the 2004 Notes in cash. The 2004 Notes are convertible if a specified trading price of the company’s common stock (the “trigger price”) is achieved and maintained for a specified period. The trigger price condition was satisfied during the fourth quarter of 2011 and second quarter of 2012 and the 2004 Notes were therefore classified as short-term debt. During the six months ended June 30, 2012, holders converted $0.3 million of the 2004 Notes in exchange for the principal balance owed in cash plus 6,078 shares of the company’s common stock. During the six months ended June 30, 2011, holders converted $71 million of the 2004 Notes in exchange for the principal balance owed in cash plus 1,565,434 shares of the company’s common stock.

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The following table presents information related to the liability and equity components of the 2004 Notes:

 

(in thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Carrying value of the equity component

 

$

19,514

 

$

19,514

 

Principal amount and carrying value of the liability component

 

19,155

 

19,458

 

 

The 2004 Notes are convertible into shares of the company’s common stock (par value $0.01 per share) at a conversion rate of 36.2815 shares per each $1,000 principal amount of the 2004 Notes. Interest expense for both the three and six months ended June 30, 2012 included original coupon interest of $0.1 million. Interest expense for the three and six months ended June 30, 2011 included original coupon interest of less than $0.1 million and $0.3 million, respectively. The if-converted value of $34 million was in excess of the principal value as of June 30, 2012.

 

As of June 30, 2012, the company was in compliance with all of the financial covenants related to its debt agreements.

 

(11)             The company’s executive and director stock-based compensation plans are described, and informational disclosures provided, in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2011. Restricted stock units and restricted shares totaling 450,668 and 291,912 were granted to executives and directors in the first half of 2012 and 2011, respectively, at weighted-average per share prices of $61.70 and $70.59, respectively. For the company’s executives, the restricted units and shares granted in 2012 and 2011 vest ratably over three years. For the company’s directors, other than the initial grant that the directors received upon joining the Board of Directors which vests ratably over a five year period, the restricted units and shares granted in 2012 and 2011 vest or vested on the first anniversary of the grant. During the first half of 2012 and 2011, options for the purchase of 688,380 shares at a weighted-average exercise price of $62.18 per share and 548,391 shares at a weighted-average exercise price of $70.76 per share, respectively, were awarded to executives. The options granted in 2012 and 2011 vest ratably over three years. The options expire ten years after the grant date.

 

(12)             The company applies the provisions of ASC 810-10-45, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.

 

As required by ASC 810-10-45, the company has separately disclosed on the face of the Condensed Consolidated Statement of Earnings for all periods presented the amount of net earnings attributable to the company and the amount of net earnings attributable to noncontrolling interests. For the three and six months ended June 30, 2012, earnings attributable to noncontrolling interests were $31.8 million and $54.4 million, respectively, and the related tax effect was $0.5 million and $0.8 million, respectively. For the three and six months ended June 30, 2011, earnings attributable to noncontrolling interests were $26.5 million and $48.2 million, respectively, and the related tax effect was $0.5 million and $0.7 million, respectively. Distributions paid to noncontrolling interests were $40.2 million and $40.5 million for the six months ended June 30, 2012 and 2011, respectively. Capital contributions by noncontrolling interests were $3.4 million and $22.6 million for the six months ended June 30, 2012 and 2011, respectively.

 

(13)             The company and certain of its subsidiaries are involved in various litigation matters. Additionally, the company and certain of its subsidiaries are contingently liable for commitments and performance guarantees arising in the ordinary course of business. The company and certain of its clients have made claims arising from the performance under its contracts. The company recognizes revenue, but not profit, for certain significant claims when it is determined that recovery of incurred costs is probable and the amounts can be reliably estimated. Under ASC 605-35-25, these requirements are satisfied when the contract or other evidence provides a legal basis for the claim, additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, claim-related costs are identifiable and considered reasonable in view of the work performed, and evidence supporting the claim is objective and verifiable. Recognized claims against clients amounted to $303 million and $298 million as of June 30, 2012 and December 31, 2011, respectively, and are primarily included in contract work in progress in the accompanying Condensed Consolidated Balance Sheet. The company periodically evaluates its position and the amounts recognized in revenue with respect to all its claims. Amounts ultimately realized from claims could differ materially from the balances included in the financial statements. The company does not

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

expect that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position or results of operations.

 

As of June 30, 2012, several matters were in the litigation and dispute resolution process. The following discussion provides a background and current status of these matters:

 

Greater Gabbard Offshore Wind Farm Project

 

The company is involved in a dispute in connection with the Greater Gabbard Project, a $1.8 billion lump-sum project to provide engineering, procurement and construction services for the client’s offshore wind farm project in the United Kingdom. The dispute relates to the company’s claim for additional compensation for schedule and cost impacts arising from delays in the fabrication of monopiles and transition pieces, along with certain disruption and productivity issues associated with construction activities and weather-related delays. The company believes these schedule and cost impacts are attributable to the client and other third parties.

 

As of June 30, 2012, the company had recorded $283 million of claim revenue related to this issue for costs incurred to date. The company believes the ultimate recovery of incurred costs related to the claim is probable under ASC 605-35-25. The company will continue to periodically evaluate its position and the amount recognized in revenue with respect to this claim. The project is substantially complete. However, the resolution of the claim is expected to extend beyond the completion date of the project. As of June 30, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company will seek to recover in arbitration all damages resulting from the client’s breaches of the contract for the project, including the claim amount and a significant portion of the liquidated damages. Hearings in the arbitration have commenced. The client also recently filed a counterclaim against the company seeking to recover costs associated with alleged defects. To the extent the client’s counterclaim is successful or the company is not successful in recovering its damages, there could be a substantial charge to earnings.

 

St. Joe Minerals Matters

 

Since 1995, the company has been named as a defendant in a number of lawsuits alleging injuries resulting from the lead business of St. Joe Minerals Corporation (“St. Joe”) and The Doe Run Company (“Doe Run”) in Herculaneum, Missouri. The company was named as a defendant in these lawsuits as a result of its ownership or other interests in St. Joe and Doe Run in the period between 1981 and 1994. In 1994, the company sold its interests in St. Joe and Doe Run, along with all liabilities associated with the lead business, pursuant to a sale agreement in which the buyer agreed to indemnify the company for those liabilities. Until December 2010, substantially all the lawsuits were settled and paid by the buyer; and in all cases the company was fully released.

 

In December 2010, the buyer settled with certain plaintiffs without obtaining a release for the benefit of the company, leaving the company to defend its case with these plaintiffs in the City of St. Louis Circuit Court. In late July 2011, the jury reached an unexpected verdict in this case, ruling in favor of 16 of the plaintiffs and against the company and certain former subsidiaries for $38.5 million in compensatory and economic damages and $320 million in punitive damages. In August 2011, the court entered judgments based on the verdict.

 

In December 2011, the company appealed the judgments of the court. The company strongly believes that the judgments are not supported by the facts or the law and that it is probable that such judgments will be overturned. Therefore, based upon the present status of this matter, the company does not believe it is probable that a loss will be incurred. Accordingly, the company has not recorded a charge as a result of the judgments. The company has also taken steps to enforce its rights to the indemnification described above.

 

The company, the buyer and other entities are defendants in 22 additional lawsuits relating to the lead business of St. Joe and Doe Run. The company believes it has strong defenses to these lawsuits and is vigorously defending its position. In addition, the company has filed claims for indemnification under the sale agreement for other matters raised in these lawsuits. While we believe we will be ultimately successful in these various matters, if we were unsuccessful in our appeal of the ruling referenced

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

above or in any of the other lawsuits, or in the prosecution of and collection on our indemnity claims, we could recognize a substantial charge to our earnings.

 

Embassy Projects

 

The company constructed 11 embassy projects for the U.S. Department of State under fixed-price contracts. Some of these projects were adversely impacted by higher costs due to schedule extensions, scope changes causing material deviations from the Standard Embassy Design, increased costs to meet client requirements for additional security-cleared labor, site conditions at certain locations, subcontractor and teaming partner difficulties and the availability and productivity of construction labor. All embassy projects were completed prior to 2011.

 

The company had previously recognized claim revenue of $33 million for outstanding claims on two embassy projects. During the first quarter of 2012, the company received an adverse judgment from the Board of Contract Appeals associated with a claim on one embassy project and, as a result, recorded a charge of $13 million. The company believes that the decision was incorrect and will appeal to the Federal Circuit. Total claims-related costs incurred to date for the last remaining claim, along with requests for equitable adjustment, exceed the amount recorded in claim revenue. All claims have been certified in accordance with federal contracting requirements. A hearing on the final embassy claim was held during the second quarter of 2012.

 

Conex International v. Fluor Enterprises, Inc.

 

In November 2006, a Jefferson County, Texas, jury reached an unexpected verdict in the case of Conex International (“Conex”) v. Fluor Enterprises Inc. (“FEI”), ruling in favor of Conex and awarding $99 million in damages related to a 2001 construction project.

 

In 2001, Atofina (now part of Total Petrochemicals Inc.) hired Conex International to be the mechanical contractor on a project at Atofina’s refinery in Port Arthur, Texas. FEI was also hired to provide certain engineering advice to Atofina on the project. There was no contract between Conex and FEI. Later in 2001 after the project was complete, Conex and Atofina negotiated a final settlement for extra work on the project. Conex sued FEI in September 2003, alleging damages for interference and misrepresentation and demanding that FEI should pay Conex the balance of the extra work charges that Atofina did not pay in the settlement. Conex also asserted that FEI interfered with Conex’s contract and business relationship with Atofina. The jury verdict awarded damages for the extra work and the alleged interference.

 

The company appealed the decision and the judgment against the company was reversed in its entirety in December 2008. Both parties appealed the decision to the Texas Supreme Court, and the Court denied both petitions. The company requested rehearing on two issues to the Texas Supreme Court, and that request was denied. The Texas Supreme Court remanded the matter back to the trial court for a new trial. The matter was stayed, pending resolution of certain technical issues associated with the 2011 bankruptcy filing by the plaintiff’s parent. These issues have been resolved. The matter will be remanded to the court in Jefferson County, Texas. Based upon the present status of this matter, the company does not believe that there is a reasonable possibility that a loss will be incurred.

 

(14)             In the ordinary course of business, the company enters into various agreements providing performance assurances and guarantees to clients on behalf of certain unconsolidated and consolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The performance guarantees have various expiration dates ranging from mechanical completion of the facilities being constructed to a period extending beyond contract completion in certain circumstances. The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. Amounts that may be required to be paid in excess of estimated cost to complete contracts in progress are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump-sum or fixed-price contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, the company may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors for claims. Performance guarantees outstanding as of June 30, 2012 were estimated to be $6.5 billion. The company assessed its performance guarantee obligation as of June 30, 2012 and

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

December 31, 2011 in accordance with ASC 460, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and the carrying value of the liability was not material.

 

Financial guarantees, made in the ordinary course of business 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. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation.

 

(15)             In the normal course of business, the company forms partnerships or joint ventures primarily for the execution of single contracts or projects. These partnerships or joint ventures are typically characterized by a 50 percent or less, noncontrolling ownership or participation interest, with decision making and distribution of expected gains and losses typically being proportionate to the ownership or participation interest. Many of the partnership and joint venture agreements provide for capital calls to fund operations, as necessary. Such funding is infrequent and is not anticipated to be material. The company accounts for its partnerships and joint ventures in accordance with ASC 810.

 

In accordance with ASC 810, the company assesses its partnerships and joint ventures at inception to determine if any meet the qualifications of a VIE. The company considers a partnership or joint venture a VIE if either (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, the company reassesses its initial determination of whether the partnership or joint venture is a VIE. The majority of the company’s partnerships and joint ventures qualify as VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional subordinated financial support.

 

The company also performs a qualitative assessment of each VIE to determine if the company is its primary beneficiary, as required by ASC 810. The company concludes that it is the primary beneficiary and consolidates the VIE if the company has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if the company is the primary beneficiary. The company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. As required by ASC 810, management’s assessment of whether the company is the primary beneficiary of a VIE is continuously performed.

 

In most cases, when the company is not the primary beneficiary and not required to consolidate the VIE, the proportionate consolidation method of accounting is used for joint ventures and partnerships in the construction industry, whereby the company recognizes its proportionate share of revenue, cost and segment profit in its Condensed Consolidated Statement of Earnings and uses the one-line equity method of accounting in the Condensed Consolidated Balance Sheet as allowed under ASC 810-10-45-14. The equity and cost methods of accounting for the investments are also used, depending on the company’s respective ownership interest, amount of influence over the VIE and the nature of services provided by the VIE. The aggregate investment carrying value of the unconsolidated VIEs was $48 million and $50 million as of June 30, 2012 and December 31, 2011, respectively, and was classified under “Investments and goodwill” in the Condensed Consolidated Balance Sheet. Some of the company’s VIEs have debt; however, such debt is typically non-recourse in nature. The company’s maximum exposure to loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments. Future funding commitments as of June 30, 2012 for the unconsolidated VIEs were $34 million.

 

In some cases, the company is required to consolidate certain VIEs. As of June 30, 2012, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.0 billion and $699 million, respectively. As of December 31, 2011, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

$1.1 billion and $774 million, respectively. The assets of a VIE are restricted for use only for the particular VIE and are not available for general operations of the company.

 

None of the VIEs are individually material to the company’s results of operations, financial position or cash flows except for the Fluor SKM joint venture, a consolidated joint venture formed for the execution of an iron ore joint venture project in Australia, which is material to the company’s revenue. The company’s results of operations included revenue related to the Fluor SKM joint venture of $867 million and $1.5 billion for the three and six months ended June 30, 2012, respectively, and $495 million and $919 million for the three and six months ended June 30, 2011, respectively.

 

(16)          Operating information by segment is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

External Revenue (in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Oil & Gas

 

$

2,295.0

 

$

1,978.1

 

$

4,335.8

 

$

3,634.2

 

Industrial & Infrastructure

 

3,352.7

 

2,595.8

 

6,150.6

 

4,588.9

 

Government

 

871.4

 

848.0

 

1,721.5

 

1,666.5

 

Global Services

 

403.5

 

406.1

 

829.9

 

784.6

 

Power

 

205.7

 

205.9

 

380.6

 

417.5

 

Total external revenue

 

$

7,128.3

 

$

6,033.9

 

$

13,418.4

 

$

11,091.7

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Segment Profit (Loss) (in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Oil & Gas

 

$

84.1

 

$

68.7

 

$

157.5

 

$

130.5

 

Industrial & Infrastructure

 

120.6

 

108.9

 

223.9

 

201.0

 

Government

 

39.9

 

31.7

 

75.2

 

65.8

 

Global Services

 

48.7

 

41.3

 

91.9

 

72.3

 

Power

 

(6.6

)

29.7

 

(8.5

)

59.2

 

Total segment profit

 

$

286.7

 

$

280.3

 

$

540.0

 

$

528.8

 

 

A reconciliation of the segment information to consolidated amounts is as follows:

 

Reconciliation of Total Segment Profit to Earnings

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Before Taxes (in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Total segment profit

 

$

286.7

 

$

280.3

 

$

540.0

 

$

528.8

 

Corporate general and administrative expense

 

(31.2

)

(31.1

)

(69.0

)

(64.9

)

Interest income, net

 

0.9

 

5.5

 

3.6

 

10.2

 

Earnings attributable to noncontrolling interests

 

31.8

 

26.5

 

54.4

 

48.2

 

Earnings before taxes

 

$

288.2

 

$

281.2

 

$

529.0

 

$

522.3

 

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

Total assets by segment are as follows:

 

Total assets (in millions)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Oil & Gas

 

$

1,436.9

 

$

1,245.0

 

Industrial & Infrastructure

 

1,107.6

 

943.6

 

Government

 

849.7

 

799.6

 

Global Services

 

875.8

 

936.6

 

Power

 

133.5

 

191.1

 

 

The increase in total assets for the Oil & Gas and Industrial & Infrastructure segments was due to an increase in project working capital for project execution activities.

 

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FLUOR CORPORATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes and the company’s December 31, 2011 Annual Report on Form 10-K. For purposes of reviewing this document, “segment profit” is calculated as revenue less cost of revenue and earnings attributable to noncontrolling interests excluding: corporate general and administrative expense; interest expense; interest income; domestic and foreign income taxes; and other non-operating income and expense items.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements made herein, including statements regarding the company’s projected revenue and earnings levels, cash flow and liquidity, new awards and backlog levels and the implementation of strategic initiatives and organizational changes are forward-looking in nature. We wish to caution readers that forward-looking statements, including disclosures which use words such as the company “believes,” “anticipates,” “expects,” “estimates” and similar statements are subject to various risks and uncertainties which could cause actual results of operations to differ materially from expectations. Factors potentially contributing to such differences include, among others:

 

·                  Difficulties or delays incurred in the execution of contracts, or failure to accurately estimate the resources and time necessary for our contracts, resulting in cost overruns or liabilities, including those caused by the performance of our clients, subcontractors, suppliers and joint venture or teaming partners;

·                  Intense competition in the global engineering, procurement and construction industry, which can place downward pressure on our contract prices and profit margins;

·                  The company’s failure to receive anticipated new contract awards and the related impact on revenue, earnings, staffing levels and cost;

·                  Current economic conditions affecting our clients, partners, subcontractors and suppliers, which may result in decreased capital investment or expenditures, or a failure to make anticipated increased capital investment or expenditures, by the company’s clients or other financial difficulties by our partners, subcontractors or suppliers;

·                  Client delays or defaults in making payments;

·                  The cyclical nature of many of the markets the company serves, including our commodity-based business lines, and our vulnerability to downturns;

·                  A failure to obtain favorable results in existing or future litigation or dispute resolution proceedings;

·                  Changes in global business, economic (including currency risk), political and social conditions;

·                  Civil unrest, security issues, labor conditions and other unforeseeable events in the countries in which we do business, resulting in unanticipated losses;

·                  Failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects;

·                  Failure of our suppliers, subcontractors or joint venture partners to provide supplies or services at the agreed-upon levels or times;

·                  Repercussions of events beyond our control, such as severe weather conditions, that may significantly affect operations, result in higher cost or subject the company to liability claims by our clients;

·                  Client cancellations of, or scope adjustments to, existing contracts, including our government contracts that may be terminated at any time and the related impacts on staffing levels and cost;

·                  Liabilities arising from faulty engineering services;

·                  The potential impact of certain tax matters including, but not limited to, those from foreign operations and the ongoing audits by tax authorities;

·                  The impact of anti-bribery and international trade laws and regulations;

·                  The risks associated with acquisitions, dispositions or other investments;

·                  Possible systems and information technology interruptions or the failure to adequately protect intellectual property rights;

·                  The availability of credit and restrictions imposed by credit facilities, both for the company and our clients, suppliers, subcontractors or other partners;

·                  Failure to maintain safe work sites;

·                  The impact of past and future environmental, health and safety regulations;

·                  Possible limitations of bonding or letter of credit capacity;

·                  The company’s ability to secure appropriate insurance;

·                  Limitations on cash transfers from subsidiaries that may restrict the company’s ability to satisfy financial obligations or to pay interest or principal when due on outstanding debt; and

·                  Restrictions on possible transactions imposed by our charter documents and Delaware law.

 

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Any forward-looking statements that we may make are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those anticipated by us. Any forward-looking statements are subject to the risks, uncertainties and other factors that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements.

 

Due to known and unknown risks, the company’s actual results may differ materially from its expectations or projections. While most risks affect only future cost or revenue anticipated by the company, some risks may relate to accruals that have already been reflected in earnings. The company’s failure to receive payments of accrued amounts or incurrence of liabilities in excess of amounts previously recognized could result in a charge against future earnings. As a result, the reader is cautioned to recognize and consider the inherently uncertain nature of forward-looking statements and not to place undue reliance on them.

 

Additional information concerning these and other factors can be found in the company’s press releases and periodic filings with the Securities and Exchange Commission, including the discussion under the heading “Item 1A. — Risk Factors” in the company’s Form 10-K filed February 22, 2012. These filings are available publicly on the SEC’s website at http://www.sec.gov, on the company’s website at http://investor.fluor.com or upon request from the company’s Investor Relations Department at (469) 398-7220. The company cannot control such risk factors and other uncertainties, and in many cases, cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties should be considered when evaluating the company and deciding whether to invest in its securities. Except as otherwise required by law, the company undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

 

RESULTS OF OPERATIONS

 

Summary

 

Consolidated revenue for the three months ended June 30, 2012 increased 18 percent to $7.1 billion from $6.0 billion for the three months ended June 30, 2011. Consolidated revenue for the six months ended June 30, 2012 increased 21 percent to $13.4 billion from $11.1 billion for the first half of the prior year. The revenue increases in the current year periods were principally due to substantial growth in the mining and metals business line of the Industrial & Infrastructure segment, as well as revenue growth in the Oil & Gas segment.

 

Net earnings attributable to Fluor Corporation were $161 million, or $0.95 per diluted share, and $316 million, or $1.86 per diluted share, for the three and six months ended June 30, 2012, compared to net earnings attributable to Fluor Corporation of $165 million, or $0.94 per diluted share, and $305 million, or $1.72 per diluted share, for the corresponding periods of 2011. In the 2012 periods, there was improved performance in the Industrial & Infrastructure, Oil & Gas, Global Services and Government segments, offset by lower earnings in the Power segment.

 

The uncertain economic conditions in Europe and other markets have resulted in a highly competitive business environment that has continued to put increased pressure on margins. This trend is expected to continue and, in certain cases, may result in more lump-sum project execution for the company. In some instances, margins are being negatively impacted by the change in the mix of work performed (e.g., a higher mix of construction-related work and a higher content of customer-furnished materials, which typically generate lower margins than engineering work or projects without customer-furnished materials).

 

The effective tax rate, based on the company’s actual operating results for the three and six months ended June 30, 2012 was 33.2 percent and 30.1 percent, respectively, compared to 31.9 percent and 32.5 percent for the corresponding periods of 2011. The higher effective tax rate for the three months ended June 30, 2012 compared to the same period in the prior year was primarily due to an increase in state tax expense. The lower effective tax rate for the six months ended June 30, 2012 compared to the first six months of 2011 was due to the recognition of a deferred tax benefit of $16 million primarily attributable to foreign taxes previously paid on certain unremitted foreign earnings in South Africa.

 

Consolidated new awards were $7.3 billion and $15.7 billion for the three and six months ended June 30, 2012 compared to new awards of $9.7 billion and $15.9 billion for the three and six months ended June 30, 2011. The Oil & Gas segment and the mining and metals business line in the Industrial & Infrastructure segment were the major contributors to the new award activity in the current year periods. Approximately 87 percent of consolidated new awards for the six months ended June 30, 2012 were for projects located outside of the United States compared to 92 percent for the first six months of 2011.

 

Consolidated backlog as of June 30, 2012 increased seven percent to $43.0 billion from $40.3 billion as of June 30, 2011. As of June 30, 2012, approximately 82 percent of consolidated backlog related to projects located outside the United States compared

 

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to 81 percent as of June 30, 2011. 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, revisions to project scope and cost, and deferrals, as appropriate.

 

Oil & Gas

 

Revenue and segment profit for the Oil & Gas segment are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,295.0

 

$

1,978.1

 

$

4,335.8

 

$

3,634.2

 

Segment profit

 

84.1

 

68.7

 

157.5

 

130.5

 

 

Revenue for the three and six months ended June 30, 2012 increased 16 percent and 19 percent, respectively, compared to the corresponding periods in 2011. Segment profit for the three and six months ended June 30, 2012 increased 22 percent and 21 percent, respectively, compared to the corresponding periods in 2011. The increase in revenue and segment profit was a result of higher project execution activities for various projects, including a coal bed methane gas project in Australia and a refinery expansion project in the United States.

 

Segment profit margin for the three and six months ended June 30, 2012 was 3.7 percent and 3.6 percent, respectively, compared to 3.5 percent and 3.6 percent, respectively, for the three and six months ended June 30, 2011.

 

New awards for the three and six months ended June 30, 2012 were $5.0 billion and $9.0 billion, respectively, compared to $3.2 billion and $4.2 billion for the corresponding periods of 2011. Current quarter awards included new construction management scope and additional release of work associated with a grassroots oil sands bitumen processing facility in Canada. Backlog as of June 30, 2012 increased 30 percent to $19.5 billion compared to $14.9 billion as of June 30, 2011, primarily driven by the strong new award activity in the first half of this year. Although market conditions remain very competitive, the increase in backlog reflects the improvement in the segment’s markets, particularly the increasing worldwide demand for new capacity in oil and gas production, refining and petrochemicals.

 

Total assets in the segment increased to $1.4 billion at June 30, 2012 from $1.2 billion as of December 31, 2011 due to an increase in project working capital for project execution activities.

 

Industrial & Infrastructure

 

Revenue and segment profit for the Industrial & Infrastructure segment are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,352.7

 

$

2,595.8

 

$

6,150.6

 

$

4,588.9

 

Segment profit

 

120.6

 

108.9

 

223.9

 

201.0

 

 

Revenue for the three and six months ended June 30, 2012 increased 29 percent and 34 percent, respectively, compared to the three and six months ended June 30, 2011 as a result of continued growth in the mining and metals business line.

 

Segment profit for the three and six months ended June 30, 2012 increased 11 percent compared to the corresponding periods in the prior year primarily due to growth in the mining and metals business line. The infrastructure business line also contributed to the increase in segment profit for both 2012 periods due to the achievement of milestones on a project in California. Segment profit margins of 3.6 percent for the three and six months ended June 30, 2012 decreased compared to segment profit margins of 4.2 percent and 4.4 percent for the three and six months ended June 30, 2011. This resulted from an increase in the proportion of mining and metals business line revenue, which generates lower margins than revenue from the other business lines due to a lower risk profile and a higher content of customer-furnished materials during construction.

 

The company is involved in a dispute in connection with the Greater Gabbard Project. The dispute relates to the company’s claim for additional compensation for schedule and cost impacts arising from delays in the fabrication of monopiles and

 

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transition pieces, along with certain disruption and productivity issues associated with construction activities and weather-related delays. The company believes the schedule and cost impacts are attributable to the client and other third parties. As of June 30, 2012, the company had recorded $283 million of claim revenue related to this issue for costs incurred to date. The company believes the ultimate recovery of incurred costs related to the claim is probable under ASC 605-35-25. The company will continue to periodically evaluate its position and the amount recognized in revenue with respect to this claim. The project is substantially complete. However, the resolution of the claim is expected to extend beyond the completion date of the project. As of June 30, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company will seek to recover in arbitration all damages resulting from the client’s breaches of the contract for the project, including the claim amount and a significant portion of the liquidated damages. Hearings in the arbitration have commenced. The client also recently filed a counterclaim against the company seeking to recover costs associated with alleged defects. To the extent the client’s counterclaim is successful or the company is not successful in recovering its damages, there could be a substantial charge to earnings.

 

New awards for the three months ended June 30, 2012 were $1.1 billion compared to $5.1 billion for the second quarter of 2011. The prior year period included new awards for the continued expansion of a major iron ore project in Australia, as well as a large copper project in Chile. Segment backlog decreased to $19.5 billion as of June 30, 2012 compared to $21.4 billion as of June 30, 2011.

 

Total assets in the Industrial & Infrastructure segment were $1.1 billion as of June 30, 2012 compared to $944 million as of December 31, 2011. This increase was primarily due to an increase in working capital to support project execution activities in the mining and metals business line.

 

Government

 

Revenue and segment profit for the Government segment are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

871.4

 

$

848.0

 

$

1,721.5

 

$

1,666.5

 

Segment profit

 

39.9

 

31.7

 

75.2

 

65.8

 

 

Revenue for both the three months and six months ended June 30, 2012 increased a modest three percent compared to the same periods in the prior year. Segment profit for the three and six months ended June 30, 2012 increased 26 percent and 14 percent, respectively, compared to the same periods in the prior year principally due to an increase in the volume of work and improved award fee performance on the Logistics Civil Augmentation Program (“LOGCAP IV”) for the United States Army in Afghanistan. The stronger performance for the six months ended June 30, 2012 was offset somewhat by charges totaling $13 million related to an adverse judgment associated with the company’s claim on an embassy project, which is discussed further in Note 13 above.

 

Segment profit margin for the three and six months ended June 30, 2012 was 4.6 percent and 4.4 percent, respectively, compared to 3.7 percent and 3.9 percent for the three and six months ended June 30, 2011. The improvement in segment profit margins for the 2012 periods was primarily due to the factors discussed above that impacted segment profit.

 

New awards for the three months ended June 30, 2012 were $769 million compared to $1.1 billion for the corresponding 2011 period. New awards for the prior year period included advanced funding for LOGCAP IV task orders. Segment backlog decreased to $505 million as of June 30, 2012 compared to $1.1 billion as of June 30, 2011, principally due to the work-off of the LOGCAP IV advanced funding.

 

Total assets in the Government segment were $850 million as of June 30, 2012 and $800 million as of December 31, 2011.

 

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Global Services

 

Revenue and segment profit for the Global Services segment are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

403.5

 

$

406.1

 

$

829.9

 

$

784.6

 

Segment profit

 

48.7

 

41.3

 

91.9

 

72.3

 

 

Revenue for the three months ended June 30, 2012 was comparable to the same period in 2011. Revenue increased six percent for the six months ended June 30, 2012 compared to the corresponding period in the prior year, principally due to the equipment business line’s higher volume of activity in Mexico and Peru.

 

Segment profit for the three months ended June 30, 2012 increased 18 percent compared to the three months ended June 30, 2011, primarily due to higher contributions from the operations and maintenance and equipment business lines which experienced improved performance from various domestic and international projects. Segment profit for the six months ended June 30, 2012 increased 27 percent compared to the first six months of 2011 as the result of improved performance in the operations and maintenance, equipment and temporary staffing business lines.  The segment profit improvement in the operations and maintenance business line was driven by projects in the United States. The improved performance in the equipment business line was principally due to operations in Afghanistan, Canada, the United States and Mexico, while the temporary staffing business line also experienced increased contributions both domestically and internationally during the first six months of 2012.

 

Segment profit margin for the three and six months ended June 30, 2012 was 12.1 percent and 11.1 percent, respectively, compared to 10.1 percent and 9.2 percent for the three and six months ended June 30, 2011 due to improvement in margins from the operations and maintenance business line.

 

New awards for the three months ended June 30, 2012 were $279 million compared to $164 million for the corresponding period in 2011. Backlog as of June 30, 2012 was $1.9 billion compared to $2.1 billion as of June 30, 2011. Operations and maintenance activities that have yet to be performed comprise Global Services backlog. Short-duration operations and maintenance activities may not contribute to ending backlog. In addition, the equipment, temporary staffing and supply chain solutions business lines do not report backlog or new awards.

 

Total assets in the Global Services segment were $876 million as of June 30, 2012 and $937 million as of December 31, 2011.

 

Power

 

Revenue and segment profit for the Power segment are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

205.7

 

$

205.9

 

$

380.6

 

$

417.5

 

Segment profit (loss)

 

(6.6

)

29.7

 

(8.5

)

59.2

 

 

Revenue for the three months ended June 30, 2012 was comparable to the three months ended June 30, 2011. Revenue for the six months ended June 30, 2012 declined nine percent compared to the six months ended June 30, 2011. This decline was primarily due to the expected reduction in project execution activities on several projects which have reached or are near final completion, including gas-fired power plants in Texas, Virginia and Georgia. This overall revenue decrease was offset somewhat by an increase in revenue attributable to projects awarded in 2011, including an air emissions control construction program for Luminant and a new gas-fired power plant in Texas.

 

Segment profit and segment profit margin for the three and six months ended June 30, 2012 declined significantly compared to the three and six months ended June 30, 2011, primarily due to reduced contributions from projects completed or nearing completion, including the gas-fired power plants in Texas and Virginia, and expenses associated with NuScale, a small modular nuclear reactor technology company, in which the company acquired a majority interest in late 2011. The NuScale expenses for

 

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the three and six months ended June 30, 2012 were $15 million and $25 million, respectively. The operations of NuScale are primarily for research and development activities. Although part of the Power segment, these activities could provide future benefits to both commercial and government clients.

 

The Power segment continues to be impacted by relatively weak demand for new power generation. Improving market opportunities include gas-fired baseload generation, renewable energy, regional transmission additions and air emissions compliance projects for existing coal-fired power plants. New awards for the three months ended June 30, 2012 were $118 million compared to $107 million in the second quarter of 2011. Backlog increased to $1.7 billion as of June 30, 2012 from $744 million as of June 30, 2011, primarily the result of new award activity in the latter part of 2011, including an air emissions control construction program for Luminant, a new gas-fired power plant project in Texas and a new solar power project in Arizona.

 

Total assets in the Power segment were $133 million as of June 30, 2012 and $191 million as of December 31, 2011.

 

Other

 

Corporate general and administrative expense for the three and six months ended June 30, 2012 was $31.2 million and $69.0 million compared to $31.1 million and $64.9 million for the three and six months ended June 30, 2011.

 

Net interest income was $0.9 million and $3.6 million during the three and six month periods ended June 30, 2012 compared to net interest income of $5.5 million and $10.2 million during the corresponding periods of 2011. The decrease in net interest income for the three and six months ended June 30, 2012 compared to the same periods in the prior year was primarily due to  interest expense on the $500 million of 3.375% Senior Notes that were issued in September 2011.

 

Income tax expense for the three and six months ended June 30, 2012 and 2011 is discussed above under “Results of Operations — Summary.”

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 2 of the Notes to Condensed Consolidated Financial Statements.

 

LITIGATION AND MATTERS IN DISPUTE RESOLUTION

 

See Note 13 of the Notes to Condensed Consolidated Financial Statements.

 

LIQUIDITY AND FINANCIAL CONDITION

 

Liquidity is provided by available cash and cash equivalents and marketable securities, cash generated from operations, credit facilities and access to financial markets. The company has committed and uncommitted lines of credit totaling $3.8 billion, which may be used for revolving loans, letters of credit and/or general purposes. The company believes that for at least the next 12 months, cash generated from operations, along with its unused credit capacity of $2.5 billion and substantial cash position, is sufficient to support operating requirements. However, the company regularly reviews its sources and uses of liquidity and may pursue opportunities to increase its liquidity positions. The company’s conservative financial strategy and consistent performance have earned it strong credit ratings, resulting in continued access to the financial markets. As of June 30, 2012, the company was in compliance with all its covenants related to its debt agreements. The company’s total debt to total capitalization (“debt-to-capital”) ratio as of June 30, 2012 was 13.0 percent compared to 13.6 percent as of December 31, 2011.

 

Cash Flows

 

Cash and cash equivalents were $1.8 billion as of June 30, 2012 compared to $2.2 billion as of December 31, 2011. Cash and cash equivalents combined with current and noncurrent marketable securities were $2.5 billion and $2.8 billion as of June 30, 2012 and December 31, 2011, respectively. Cash and cash equivalents are held in numerous accounts throughout the world to fund the company’s global project execution activities. As of June 30, 2012 and December 31, 2011, cash and cash equivalents held outside the United States amounted to $1.3 billion and $1.5 billion, respectively. The company did not consider any cash to be permanently reinvested overseas as of June 30, 2012 and December 31, 2011 and, as a result, has accrued the U.S. deferred tax liability on foreign earnings, as appropriate.

 

Operating Activities

 

Cash flows from operating activities result primarily from earnings sources and are impacted by changes in working capital. Working capital levels vary from period to period and are primarily affected by the company’s volume of work. These levels are

 

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