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 September 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
(State or other jurisdiction of
 incorporation or organization)

 

33-0927079
(I.R.S. Employer
Identification No.)

 

 

 

6700 Las Colinas Boulevard
Irving, Texas
(Address of principal executive offices)

 

75039
(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 October 26, 2012, 166,509,480 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

September 30, 2012

 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

Part I:

Financial Information

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 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

20

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

 

 

Item 4:

Controls and Procedures

29

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

30

 

 

 

 

Part II:

Other Information

 

 

 

 

 

 

Item 1:

Legal Proceedings

31

 

 

 

 

 

Item 1A:

Risk Factors

31

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

 

 

Item 6:

Exhibits

32

 

 

 

 

Signatures

 

35

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

7,136,056

 

$

6,037,613

 

$

20,554,413

 

$

17,129,265

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

6,829,781

 

5,775,527

 

19,653,774

 

16,290,102

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

40,884

 

37,258

 

109,932

 

102,189

 

Interest expense

 

6,890

 

2,027

 

20,381

 

8,134

 

Interest income

 

(6,001

)

(8,136

)

(23,157

)

(24,367

)

Total cost and expenses

 

6,871,554

 

5,806,676

 

19,760,930

 

16,376,058

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

264,502

 

230,937

 

793,483

 

753,207

 

INCOME TAX EXPENSE

 

92,164

 

69,348

 

251,449

 

238,946

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

172,338

 

161,589

 

542,034

 

514,261

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

27,755

 

26,227

 

81,379

 

73,689

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

144,583

 

$

135,362

 

$

460,655

 

$

440,572

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.87

 

$

0.79

 

$

2.74

 

$

2.54

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.86

 

$

0.78

 

$

2.72

 

$

2.51

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

166,660

 

171,576

 

167,925

 

173,607

 

DILUTED

 

167,968

 

173,178

 

169,271

 

175,819

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.16

 

$

0.125

 

$

0.48

 

$

0.375

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

172,338

 

$

161,589

 

$

542,034

 

$

514,261

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

24,168

 

(78,883

)

27,416

 

(36,167

)

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

 

133

 

(5,774

)

(1,356

)

(5,071

)

Pension plan adjustment

 

1,027

 

26,022

 

6,367

 

37,661

 

Unrealized gain (loss) on derivative contracts

 

412

 

(14,427

)

2,001

 

(12,450

)

Unrealized gain (loss) on debt securities

 

393

 

(627

)

285

 

(416

)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

26,133

 

(73,689

)

34,713

 

(16,443

)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

198,471

 

87,900

 

576,747

 

497,818

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

27,505

 

24,438

 

80,792

 

79,900

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

170,966

 

$

63,462

 

$

495,955

 

$

417,918

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

 

 

September 30,

 

December 31,

 

(in thousands, except share amounts)

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($460,192 and $472,597 related to variable interest entities (“VIEs”))

 

$

2,151,026

 

$

2,161,411

 

Marketable securities, current ($55,484 and $0 related to VIEs)

 

378,331

 

96,438

 

Accounts and notes receivable, net ($180,729 and $167,238 related to VIEs)

 

1,215,693

 

1,235,935

 

Contract work in progress ($216,735 and $264,014 related to VIEs)

 

2,285,211

 

1,946,747

 

Deferred taxes

 

282,077

 

207,674

 

Other current assets

 

205,769

 

232,418

 

Total current assets

 

6,518,107

 

5,880,623

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

310,468

 

503,550

 

Property, plant and equipment (net of accumulated depreciation of $1,021,599 and $947,223)

 

962,222

 

921,585

 

Investments and goodwill

 

278,243

 

225,246

 

Deferred taxes

 

97,066

 

167,387

 

Deferred compensation trusts

 

328,037

 

303,016

 

Other

 

275,297

 

268,869

 

TOTAL ASSETS

 

$

8,769,440

 

$

8,270,276

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($325,095 and $239,522 related to VIEs)

 

$

2,023,426

 

$

1,734,686

 

Convertible senior notes and other notes payable

 

23,702

 

19,458

 

Advance billings on contracts ($282,913 and $469,644 related to VIEs)

 

876,001

 

1,107,559

 

Accrued salaries, wages and benefits ($73,918 and $39,581 related to VIEs)

 

665,948

 

668,107

 

Other accrued liabilities ($7,243 and $23,427 related to VIEs)

 

357,980

 

310,301

 

Total current liabilities

 

3,947,057

 

3,840,111

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

524,947

 

513,500

 

NONCURRENT LIABILITIES

 

526,093

 

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 — 166,508,134 and 168,979,199 shares in 2012 and 2011, respectively

 

1,665

 

1,690

 

Additional paid-in capital

 

 

2,574

 

Accumulated other comprehensive loss

 

(163,992

)

(199,292

)

Retained earnings

 

3,842,313

 

3,590,553

 

Total shareholders’ equity

 

3,679,986

 

3,395,525

 

 

 

 

 

 

 

Noncontrolling interests

 

91,357

 

64,381

 

 

 

 

 

 

 

Total equity

 

3,771,343

 

3,459,906

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

8,769,440

 

$

8,270,276

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

542,034

 

$

514,261

 

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

 

 

 

 

 

Depreciation of fixed assets

 

155,497

 

148,042

 

Amortization of intangibles

 

1,539

 

2,170

 

Restricted stock and stock option amortization

 

28,240

 

28,551

 

Deferred compensation trust

 

(25,019

)

22,313

 

Deferred compensation obligation

 

28,813

 

(24,948

)

Deferred taxes

 

(28,856

)

(9,560

)

Excess tax benefit from stock-based plans

 

(4,318

)

(12,319

)

Retirement plan accrual, net of contributions

 

7,761

 

(12,130

)

Changes in operating assets and liabilities

 

(186,378

)

26,569

 

Undistributed earnings of equity method investments

 

(14,755

)

18,773

 

Other items

 

5,744

 

9,457

 

Cash provided by operating activities

 

510,302

 

711,179

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

(813,440

)

(558,009

)

Proceeds from the sales and maturities of marketable securities

 

724,635

 

653,235

 

Capital expenditures

 

(188,876

)

(237,404

)

Proceeds from disposal of property, plant and equipment

 

65,623

 

43,619

 

Investments in partnerships and joint ventures

 

(12,028

)

(7,562

)

Proceeds from the sale of assets

 

 

11,016

 

Acquisitions

 

(19,337

)

(15,300

)

Other items

 

(7,697

)

5,743

 

Cash utilized by investing activities

 

(251,120

)

(104,662

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

(164,187

)

(599,891

)

Dividends paid

 

(75,646

)

(66,351

)

Proceeds from issuance of Senior Notes

 

 

495,595

 

Debt issuance costs

 

 

(4,059

)

Settlement of U.S. Treasury rate lock agreements

 

 

(16,778

)

Repayment of convertible debt

 

(903

)

(73,039

)

Distributions paid to noncontrolling interests

 

(61,917

)

(72,270

)

Capital contribution by joint venture partners

 

3,553

 

22,589

 

Taxes paid on vested restricted stock

 

(11,696

)

(18,690

)

Stock options exercised

 

10,155

 

25,343

 

Excess tax benefit from stock-based plans

 

4,318

 

12,319

 

Other items

 

6,845

 

(4,236

)

Cash utilized by financing activities

 

(289,478

)

(299,468

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

19,911

 

(55,757

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(10,385

)

251,292

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,161,411

 

2,134,997

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

2,151,026

 

$

2,386,289

 

 

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 nine months ended September 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 September 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 nine months ended September 30, 2012 or requiring implementation in future periods are discussed below or in the notes, where applicable.

 

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, “Technical Corrections and Improvements.” The amendments in ASU 2012-04 make technical corrections, clarifications and limited-scope improvements to various topics throughout the Accounting Standards Codification. ASU 2012-04 is effective upon issuance, except for amendments that are subject to transition guidance, which will be effective for interim and annual reporting periods beginning after December 15, 2012. Management does not expect the adoption of ASU 2012-04 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections,” which amends various SEC sections in the Accounting Standards Codification as a result of (1) the issuance of SEC Staff Accounting Bulletin No. 114, (2) the issuance of SEC Release No. 33-9250 and (3) corrections related to ASU 2010-22, “Technical Corrections to SEC Paragraphs.” ASU 2012-03 was effective upon issuance. The adoption of ASU 2012-03 did not have an impact on the company’s financial position, results of operations or cash flows.

 

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 allows entities testing an indefinite-lived intangible asset for impairment the option of performing a qualitative assessment before calculating the fair value of the asset. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. ASU 2012-02 is effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012. Management does not expect the adoption of ASU 2012-02 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In December 2011, the FASB issued 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 on or 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

 

6



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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.

 

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

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

(in thousands)

 

Before-Tax
Amount

 

Tax
Expense

 

Net-of-Tax
Amount

 

Before-Tax
Amount

 

Tax
(Expense)
Benefit

 

Net-of-Tax
Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

38,768

 

$

(14,600

)

$

24,168

 

$

(125,682

)

$

46,799

 

$

(78,883

)

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

 

165

 

(32

)

133

 

(9,199

)

3,425

 

(5,774

)

Pension plan adjustment

 

1,643

 

(616

)

1,027

 

41,636

 

(15,614

)

26,022

 

Unrealized gain (loss) on derivative contracts

 

693

 

(281

)

412

 

(22,011

)

7,584

 

(14,427

)

Unrealized gain (loss) on debt securities

 

630

 

(237

)

393

 

(1,003

)

376

 

(627

)

Total other comprehensive income (loss)

 

41,899

 

(15,766

)

26,133

 

(116,259

)

42,570

 

(73,689

)

Less: Other comprehensive (loss) attributable to noncontrolling interests

 

(250

)

 

(250

)

(1,789

)

 

(1,789

)

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

42,149

 

$

(15,766

)

$

26,383

 

$

(114,470

)

$

42,570

 

$

(71,900

)

 

7



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 nine months ended September 30, 2012 and 2011 are as follows:

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

(in thousands)

 

Before-Tax 
Amount

 

Tax 
Expense

 

Net-of-Tax 
Amount

 

Before-Tax 
Amount

 

Tax 
(Expense) 
Benefit

 

Net-of-Tax 
Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

43,922

 

$

(16,506

)

$

27,416

 

$

(61,968

)

$

25,801

 

$

(36,167

)

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

 

(1,138

)

(218

)

(1,356

)

(7,281

)

2,210

 

(5,071

)

Pension plan adjustment

 

10,187

 

(3,820

)

6,367

 

60,258

 

(22,597

)

37,661

 

Unrealized gain (loss) on derivative contracts

 

3,465

 

(1,464

)

2,001

 

(19,344

)

6,894

 

(12,450

)

Unrealized gain (loss) on debt securities

 

456

 

(171

)

285

 

(665

)

249

 

(416

)

Total other comprehensive income (loss)

 

56,892

 

(22,179

)

34,713

 

(29,000

)

12,557

 

(16,443

)

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

 

(587

)

 

(587

)

6,211

 

 

6,211

 

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

57,479

 

$

(22,179

)

$

35,300

 

$

(35,211

)

$

12,557

 

$

(22,654

)

 

(4)                   The effective tax rate, based on the company’s operating results for the three and nine months ended September 30, 2012, was 34.8 percent and 31.7 percent, respectively, compared to 30.0 percent and 31.7 percent for the corresponding periods of 2011. The effective tax rate for the three months ended September 30, 2012 was unfavorably impacted by the payment of additional foreign taxes from the settlement of an audit and a reassessment of certain tax exposures. The same period in 2011 was favorably impacted by a worthless stock deduction. The effective tax rate was similar for the nine months ended September 30, 2012 compared to the corresponding period of 2011. The effective tax rate for the nine months ended September 30, 2012 was favorably impacted by 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 same period in 2011 was favorably impacted by the worthless stock deduction mentioned above.

 

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 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 $20.9 million and $5.0 million for the nine months ended September 30, 2012 and 2011, respectively. Income tax payments, net of receipts, were $243.2 million and $133.9 million during the nine-month periods ended September 30, 2012 and 2011, respectively.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(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 nine months ended September 30, 2012 and 2011 are presented below:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

144,583

 

$

135,362

 

$

460,655

 

$

440,572

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

166,660

 

171,576

 

167,925

 

173,607

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.87

 

$

0.79

 

$

2.74

 

$

2.54

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

166,660

 

171,576

 

167,925

 

173,607

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock units and shares

 

964

 

1,252

 

1,004

 

1,425

 

Conversion equivalent of dilutive convertible debt

 

344

 

350

 

342

 

787

 

Weighted average diluted shares outstanding

 

167,968

 

173,178

 

169,271

 

175,819

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.86

 

$

0.78

 

$

2.72

 

$

2.51

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

1,653

 

1,000

 

1,529

 

770

 

 

During the three and nine months ended September 30, 2012, the company repurchased and cancelled 600,900 and 3,223,949 shares of its common stock, respectively, under its stock repurchase program for $31 million and $164 million, respectively. During the three and nine months ended September 30, 2011, the company repurchased and cancelled 4,186,200 and 9,300,000 shares of its common stock, respectively, under its stock repurchase program for $241 million and $600 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

 

9



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 September 30, 2012 and December 31, 2011:

 

 

 

September 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

 

$

1,562

 

$

1,562

(2)

$

 

$

 

$

24,364

 

$

24,364

(2)

$

 

$

 

Marketable securities, current

 

122,781

 

 

122,781

(3)

 

72,845

 

 

72,845

(3)

 

 

Deferred compensation trusts

 

80,626

 

80,626

(4)

 

 

76,844

 

76,844

(4)

 

 

Marketable securities, noncurrent

 

310,468

 

 

310,468

(5)

 

503,550

 

 

503,550

(5)

 

Derivative assets(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swap forward contracts

 

415

 

 

415

 

 

2,535

 

 

2,535

 

 

Foreign currency contracts

 

1,887

 

 

1,887

 

 

3,105

 

 

3,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity swap forward contracts

 

$

27

 

$

 

$

27

 

$

 

$

53

 

$

 

$

53

 

$

 

Foreign currency contracts

 

20,962

 

 

20,962

 

 

4,612

 

 

4,612

 

 

 


(1) The company measures and reports assets and liabilities at fair value utilizing pricing information received from third parties. 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, U.S. Treasury 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 five 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 contracts and foreign currency forward contracts on the Condensed Consolidated Balance Sheet. Commodity swap contracts and foreign currency forward 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 September 30, 2012: money market funds of $2 million, U.S. agency securities of $166 million, U.S. Treasury securities of $70 million, corporate debt securities of $188 million and other securities of $9 million. As of December 31, 2011, available-for-sale securities consisted of money market funds of $24 million, U.S. agency securities of $238 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 nine months ended September 30, 2012, proceeds from the sales

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

and maturities of available-for-sale securities were $85 million and $434 million, respectively, compared to $154 million and $428 million for the corresponding periods of 2011.

 

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:

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Fair Value

 

Carrying

 

 

 

Carrying

 

 

 

(in thousands)

 

Hierarchy

 

Value

 

Fair Value

 

Value

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,424,806

 

$

1,424,806

 

$

1,225,480

 

$

1,225,480

 

Cash equivalents(2)

 

Level 2

 

724,658

 

724,658

 

911,567

 

911,567

 

Marketable securities, current(3)

 

Level 2

 

255,550

 

255,550

 

23,593

 

23,593

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

32,710

 

32,710

 

41,957

 

41,957

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

3.375% Senior Notes(5)

 

Level 2

 

$

496,054

 

$

529,101

 

$

495,723

 

$

500,254

 

1.5% Convertible Senior Notes(5)

 

Level 2

 

18,555

 

35,672

 

19,458

 

35,647

 

5.625% Municipal Bonds(5)

 

Level 2

 

17,790

 

17,924

 

17,777

 

17,901

 

Notes payable, including noncurrent portion(6)

 

Level 3

 

16,250

 

16,250

 

 

 

 


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

 

(2) Cash equivalents consist of held-to-maturity time deposits with maturities of three months or less at the date of purchase. 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 original maturities greater than three months that will mature within 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 fair 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.

 

(6)    Notes payable consist primarily of equipment loans with banks at various interest rates with maturities ranging from less than one year to four years. The carrying value of notes payable approximates fair value. Factors considered by the company in determining the fair value include the company’s current credit rating, current interest rates, the term of the note and any collateral pledged as security.

 

(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, deposits denominated in non-functional currencies, 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

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 September 30, 2012, the company had total gross notional amounts of $701 million of foreign exchange forward contracts and $2 million of commodity swap 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 March 2014. The commodity swap 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 nine months ended September 30, 2012 and 2011, respectively.

 

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

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

September 30,

 

December 31,

 

Balance Sheet

 

September 30,

 

December 31,

 

(in thousands)

 

Location

 

2012

 

2011

 

Location

 

2012

 

2011

 

Commodity swaps

 

Other current assets

 

$

415

 

$

2,451

 

Other accrued liabilities

 

$

10

 

$

 

Foreign currency forwards

 

Other current assets

 

1,859

 

3,105

 

Other accrued liabilities

 

20,962

 

4,612

 

Commodity swaps

 

Other assets

 

 

84

 

Noncurrent liabilities

 

17

 

53

 

Foreign currency forwards

 

Other assets

 

28

 

 

Noncurrent liabilities

 

 

 

Total

 

 

 

$

2,302

 

$

5,640

 

 

 

$

20,989

 

$

4,665

 

 

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

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2012

 

2011

 

2012

 

2011

 

Foreign currency forwards

 

Corporate general and administrative expense

 

$

(12,075

)

$

10,836

 

$

(19,773

)

$

15,147

 

 

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

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Cash Flow Hedges (in thousands)

 

2012

 

2011

 

2012

 

2011

 

Commodity swaps

 

$

619

 

$

(417

)

$

1,011

 

$

1,766

 

Foreign currency forwards

 

884

 

(1,173

)

2,910

 

(691

)

U.S. Treasury rate lock agreements

 

 

(10,486

)

 

(10,486

)

Total

 

$

1,503

 

$

(12,076

)

$

3,921

 

$

(9,411

)

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

Cash Flow Hedges (in thousands)

 

Location of Gain (Loss)

 

2012

 

2011

 

2012

 

2011

 

Commodity swaps

 

Total cost of revenue

 

$

710

 

$

1,570

 

$

1,654

 

$

3,122

 

Foreign currency forwards

 

Total cost of revenue

 

557

 

(81

)

558

 

(663

)

U.S. Treasury rate lock agreements

 

Interest expense

 

(262

)

(43

)

(786

)

(43

)

Total

 

 

 

$

1,005

 

$

1,446

 

$

1,426

 

$

2,416

 

 

(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

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

1,489

 

$

8,960

 

$

4,468

 

$

26,880

 

$

1,921

 

$

1,542

 

$

5,815

 

$

5,992

 

Interest cost

 

8,323

 

9,191

 

24,970

 

27,575

 

8,070

 

8,537

 

24,518

 

25,676

 

Expected return on assets

 

(8,830

)

(10,155

)

(26,492

)

(30,467

)

(10,369

)

(10,760

)

(31,446

)

(32,106

)

Amortization of prior service cost

 

(28

)

(47

)

(85

)

(140

)

 

 

 

 

Recognized net actuarial loss

 

3,409

 

3,497

 

10,226

 

10,491

 

786

 

1,367

 

2,352

 

4,464

 

Gain on curtailment

 

 

(618

)

 

(618

)

 

 

 

 

Net periodic pension expense

 

$

4,363

 

$

10,828

 

$

13,087

 

$

33,721

 

$

408

 

$

686

 

$

1,239

 

$

4,026

 

 

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 nine months ended September 30, 2012, contributions of approximately $7 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, and began 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.

 

13



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 third quarter of 2012 and the 2004 Notes were therefore classified as short-term debt. During the nine months ended September 30, 2012, holders converted $0.9 million of the 2004 Notes in exchange for the principal balance owed in cash plus 17,352 shares of the company’s common stock. During the nine months ended September 30, 2011, holders converted $73 million of the 2004 Notes in exchange for the principal balance owed in cash plus 1,601,081 shares of the company’s common stock.

 

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

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Carrying value of the equity component

 

$

19,518

 

$

19,514

 

Principal amount and carrying value of the liability component

 

18,555

 

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 the three and nine months ended September 30, 2012 included original coupon interest of $0.1 million and $0.2 million, respectively. Interest expense for the three and nine months ended September 30, 2011 included original coupon interest of $0.1 million and $0.4 million, respectively. The if-converted value of $38 million was in excess of the principal value as of September 30, 2012.

 

In the third quarter of 2012, the company assumed notes payable totaling $16 million, of which $5 million was classified as current, in connection with the acquisition of a small equipment company. The notes payable consist primarily of equipment loans with banks at various interest rates with maturities ranging from less than one year to four years.

 

As of September 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. In the first nine months of 2012 and 2011, restricted stock units and restricted shares totaling 450,668 and 291,912, respectively, were granted to executives and directors 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 certain 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 nine months 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 earnings 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 nine months ended September 30, 2012, earnings attributable to noncontrolling interests were $28.0 million and $82.3 million, respectively, and the related tax effect was $0.2 million and $0.9 million, respectively. For the three and nine months ended September 30, 2011, earnings attributable to noncontrolling interests were $26.2 million and $74.5 million, respectively, and the related tax effect was less than $0.1 million and $0.8 million, respectively. Distributions paid to noncontrolling interests were $61.9 million and $72.3 million for the nine

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

months ended September 30, 2012 and 2011, respectively. Capital contributions by noncontrolling interests were $3.6 million and $22.6 million for the nine months ended September 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 $298 million for both September 30, 2012 and December 31, 2011, 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 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 September 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 September 30, 2012, the company had recorded $278 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. As of September 30, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company is seeking 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 on the company’s claims have been completed, and the parties are awaiting the decision of the arbitrators. The client has filed a counterclaim against the company seeking to recover costs associated with alleged defects. The counterclaim is currently scheduled for hearing in 2013. To the extent the company is not successful in recovering its damages or the client’s counterclaim is successful, 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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

$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 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 has filed an appeal with 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 and final written submissions are expected to be completed in the fourth 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.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(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 September 30, 2012 were estimated to be $4.3 billion. The company assessed its performance guarantee obligation as of September 30, 2012 and 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. The majority of these partnerships or joint ventures are 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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 $71 million and $50 million as of September 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 September 30, 2012 for the unconsolidated VIEs were $55 million.

 

In some cases, the company is required to consolidate certain VIEs. As of September 30, 2012, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.1 billion and $691 million, respectively. As of December 31, 2011, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $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 $1.0 billion and $2.5 billion for the three and nine months ended September 30, 2012, respectively, and $407 million and $1.3 billion for the three and nine months ended September 30, 2011, respectively.

 

(16)          Operating information by segment is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

External Revenue (in millions)

 

2012

 

2011

 

2012

 

2011

 

Oil & Gas

 

$

2,551.6

 

$

2,217.9

 

$

6,887.4

 

$

5,852.1

 

Industrial & Infrastructure

 

3,201.6

 

2,404.0

 

9,352.2

 

6,992.8

 

Government

 

790.1

 

882.4

 

2,511.5

 

2,548.9

 

Global Services

 

422.9

 

389.9

 

1,252.8

 

1,174.5

 

Power

 

169.9

 

143.4

 

550.5

 

561.0

 

Total external revenue

 

$

7,136.1

 

$

6,037.6

 

$

20,554.4

 

$

17,129.3

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Segment Profit (Loss) (in millions)

 

2012

 

2011

 

2012

 

2011

 

Oil & Gas

 

$

87.2

 

$

73.7

 

$

244.7

 

$

204.2

 

Industrial & Infrastructure

 

132.3

 

67.5

 

356.2

 

268.5

 

Government

 

22.9

 

43.0

 

98.1

 

108.8

 

Global Services

 

41.9

 

39.1

 

133.8

 

111.4

 

Power

 

(6.0

)

12.6

 

(14.5

)

71.8

 

Total segment profit

 

$

278.3

 

$

235.9

 

$

818.3

 

$

764.7

 

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Reconciliation of Total Segment Profit to Earnings 
Before Taxes (in millions)

 

2012

 

2011

 

2012

 

2011

 

Total segment profit

 

$

278.3

 

$

235.9

 

$

818.3

 

$

764.7

 

Corporate general and administrative expense

 

(40.9

)

(37.3

)

(109.9

)

(102.2

)

Interest income, net

 

(0.9

)

6.1

 

2.8

 

16.2

 

Earnings attributable to noncontrolling interests

 

28.0

 

26.2

 

82.3

 

74.5

 

Earnings before taxes

 

$

264.5

 

$

230.9

 

$

793.5

 

$

753.2

 

 

Total assets by segment are as follows:

 

 

 

September 30,

 

December 31,

 

Total assets (in millions)

 

2012

 

2011

 

Oil & Gas

 

$

1,552.7

 

$

1,245.0

 

Industrial & Infrastructure

 

1,084.2

 

943.6

 

Government

 

814.4

 

799.6

 

Global Services

 

939.7

 

936.6

 

Power

 

117.7

 

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. The change in total assets for the Power segment was due to a decrease in project working capital.

 

(17)          Subsequent Event

 

In October 2012, the company sold its unconsolidated interest in a telecommunications company located in the United Kingdom and, as a result, will recognize a pre-tax gain of approximately $40 million in the fourth quarter of 2012.

 

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

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

·                  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;

·                  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;

·                  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 September 30, 2012 increased 18 percent to $7.1 billion, from $6.0 billion for the three months ended September 30, 2011. Consolidated revenue for the nine months ended September 30, 2012 increased 20 percent to $20.6 billion, from $17.1 billion for the corresponding period in 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 growth in the Oil & Gas segment.

 

Net earnings attributable to Fluor Corporation were $145 million, or $0.86 per diluted share, and $461 million, or $2.72 per diluted share, for the three and nine months ended September 30, 2012, compared to net earnings attributable to Fluor Corporation of $135 million, or $0.78 per diluted share, and $441 million, or $2.51 per diluted share, for the corresponding periods of 2011. In the 2012 periods, there was improved performance in the Industrial & Infrastructure, Oil & Gas and Global Services segments, offset somewhat by lower earnings in the Power and Government segments.

 

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 competitive environment 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 mining and metals business line of the Industrial & Infrastructure segment has grown rapidly over the last four years, but is now showing signs of slowing down. During the third quarter of 2012, the segment experienced lower new award volume for mining projects, cancellations of two mining projects totaling $2.0 billion, and the deferral of major capital investment decisions by some mining customers due to project cost escalation, softening commodity demand and project-specific circumstances. The timing of when capital investment by these mining customers could resume is uncertain. However, it is possible that the weakened mining market conditions could be prolonged.

 

The effective tax rate, based on the company’s operating results for the three and nine months ended September 30, 2012, was 34.8 percent and 31.7 percent, respectively, compared to 30.0 percent and 31.7 percent for the corresponding periods of 2011. The effective tax rate for the three months ended September 30, 2012 was unfavorably impacted by the payment of additional foreign taxes from the settlement of an audit and a reassessment of certain tax exposures. The same period in 2011 was favorably impacted by a worthless stock deduction. The effective tax rate was similar for the nine months ended September 30, 2012 compared to the corresponding period of 2011. The effective tax rate for the nine months ended September 30, 2012 was favorably impacted by the recognition of a deferred tax benefit of $16 million primarily attributable to foreign taxes previously

 

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paid on certain unremitted foreign earnings in South Africa; the same period in 2011 was favorably impacted by the worthless stock deduction mentioned above.

 

Consolidated new awards were $6.3 billion and $22.0 billion for the three and nine months ended September 30, 2012 compared to new awards of $6.7 billion and $22.6 billion for the three and nine months ended September 30, 2011. The Government, Oil & Gas and Industrial & Infrastructure segments were the major contributors to the new award activity in the current year periods. Approximately 73 percent of consolidated new awards for the nine months ended September 30, 2012 were for projects located outside of the United States compared to 87 percent for the first nine months of 2011.

 

Consolidated backlog as of September 30, 2012 decreased two percent to $40.8 billion from $41.8 billion as of September 30, 2011. As of September 30, 2012, approximately 75 percent of consolidated backlog related to projects located outside the United States compared to 80 percent as of September 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,551.6

 

$

2,217.9

 

$

6,887.4

 

$

5,852.1

 

Segment profit

 

87.2

 

73.7

 

244.7

 

204.2

 

 

Revenue for the three and nine months ended September 30, 2012 increased 15 percent and 18 percent, respectively, compared to the corresponding periods in 2011. Segment profit for the three and nine months ended September 30, 2012 increased 18 percent and 20 percent, respectively, compared to the three and nine months ended September 30, 2011. The increases in revenue and segment profit were the result of higher project execution activities for several projects in the segment, including a coal bed methane gas project in Australia, a grassroots petrochemical complex in the Middle East and a major mine replacement project in Canada. Segment profit margin for the three and nine months ended September 30, 2012 was 3.4 percent and 3.6 percent, respectively, compared to 3.3 percent and 3.5 percent, respectively, for the same periods in the prior year.

 

New awards for the three months ended September 30, 2012 were $2.0 billion, compared to $1.6 billion for the corresponding period of 2011. Current quarter awards included a petrochemical facility project in the United States. Backlog as of September 30, 2012 increased 31 percent to $19.1 billion compared to $14.6 billion as of September 30, 2011, primarily driven by 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 $1.6 billion at September 30, 2012 from $1.2 billion as of December 31, 2011 due to an increase in working capital related to the growth in project execution activities.

 

Industrial & Infrastructure

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,201.6

 

$

2,404.0

 

$

9,352.2

 

$

6,992.8

 

Segment profit

 

132.3

 

67.5

 

356.2

 

268.5

 

 

Revenue for the three and nine months ended September 30, 2012 increased 33 percent and 34 percent, respectively, compared to the corresponding periods of 2011, due to substantial growth in the mining and metals business line. Segment profit also increased significantly for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 primarily as the result of increased project contributions associated with the revenue increase for the current year, as well as the impact of charges taken in the prior year periods for the Greater Gabbard Offshore Wind Farm (“Greater

 

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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. Segment profit for the three and nine months ended September 30, 2011 was negatively affected by $38 million and $52 million, respectively, for these project charges, due to additional costs associated with project execution activities.

 

Segment profit margin for the three and nine months ended September 30, 2012 was 4.1 percent and 3.8 percent, respectively, compared to 2.8 percent and 3.8 percent, respectively, for the same periods in the prior year. Both of the 2011 comparison periods were negatively impacted by the Greater Gabbard Project charges, noted above. Additionally, in both of the current year periods, the segment had a higher mix of construction revenue than in the 2011 periods. Construction activities typically generate lower margins than engineering services due to the higher content of customer-furnished materials.

 

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 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 September 30, 2012, the company had recorded $278 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. As of September 30, 2012, the client had withheld the contractual maximum for liquidated damages related to the dispute of approximately $150 million. The company is seeking 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 on the company’s claims have been completed, and the parties are awaiting the decision of the arbitrators. The client has filed a counterclaim against the company seeking to recover costs associated with alleged defects. The counterclaim is currently scheduled for hearing in 2013. To the extent the company is not successful in recovering its damages or the client’s counterclaim is successful, there could be a substantial charge to earnings.

 

New awards for the three months ended September 30, 2012 were $1.7 billion compared to $2.8 billion for the 2011 comparison period. New awards for the current quarter were spread across all business lines and included a managed toll lane project in Virginia and a blood fractionation project in Georgia. New awards for the 2011 quarter included the infrastructure and processing facilities for a major copper project in Peru. Backlog declined to $16.2 billion as of September 30, 2012 compared to $22.3 billion as of September 30, 2011 as a result of lower new award volume in the mining and metals business line, cancellations of two mining projects totaling $2.0 billion, and the deferral of major capital investment decisions by some mining customers due to project cost escalation, softening commodity demand and project-specific circumstances. The timing of when capital investment by these mining customers could resume is uncertain. However, it is possible that the weakened mining market conditions could be prolonged.

 

Total assets in the segment increased to $1.1 billion as of September 30, 2012 from $944 million as of December 31, 2011 due to an increase in working capital to support the 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
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

790.1

 

$

882.4

 

$

2,511.5

 

$

2,548.9

 

Segment profit

 

22.9

 

43.0

 

98.1

 

108.8

 

 

Revenue for the three months ended September 30, 2012 decreased 10 percent compared to the same period in the prior year, principally due to a reduction in the volume of work on the Logistics Civil Augmentation Program (“LOGCAP IV”) for the United States Army in Afghanistan. In addition, a decline in revenue for the close-out of the American Recovery and Reinvestment Act funded work at the Savannah River Site Management and Operating Project (the “Savannah River Project”) in South Carolina was offset by growth in project execution activities associated with the gaseous diffusion plant contract for the Department of Energy in Portsmouth, Ohio (the “Portsmouth Project”) that was awarded in the first quarter of 2011. Revenue for the nine months ended September 30, 2012 declined slightly compared to the prior year period.

 

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Segment profit for the three months ended September 30, 2012 decreased 47 percent compared to the corresponding 2011 period, due to lower award fee on LOGCAP IV. Segment profit for the nine months ended September 30, 2012 declined 10 percent compared to the first nine months of the prior year as the result of charges totaling $13 million related to an adverse judgment in the first quarter of 2012 associated with the company’s claim on an embassy project, which is discussed further in Note 13 to the Condensed Consolidated Financial Statements.

 

Segment profit margin for the three and nine months ended September 30, 2012 was 2.9 percent and 3.9 percent, respectively, compared to 4.9 percent and 4.3 percent for the three and nine months ended September 30, 2011. The lower segment profit margins in the 2012 periods were primarily due to the factors discussed above that impacted revenue and segment profit.

 

New awards for the three months ended September 30, 2012 were $2.0 billion compared to $1.7 billion for the corresponding 2011 period. This increase was primarily due to higher funding for LOGCAP IV task orders. New awards in both periods included the annual funding of the Department of Energy contracts for the Savannah River Project and the Portsmouth Project. Backlog as of September 30, 2012 was $1.6 billion compared to $1.8 billion as of September 30, 2011.

 

Total assets in the Government segment were $814 million as of September 30, 2012 and $800 million as of December 31, 2011.

 

Global Services

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

422.9

 

$

389.9

 

$

1,252.8

 

$

1,174.5

 

Segment profit

 

41.9

 

39.1

 

133.8

 

111.4

 

 

Revenue increased eight percent for the three months ended September 30, 2012 compared to the same period in 2011, primarily due to an increase in the operations and maintenance business line’s international project execution activities. Revenue increased seven percent for the nine months ended September 30, 2012 compared to the corresponding period in the prior year, principally due to the equipment business line’s increased volume of activity in Peru, Mexico and Canada. The temporary staffing and operations and maintenance business lines also contributed to the year-to-date revenue increase.

 

Segment profit for the three and nine months ended September 30, 2012 increased seven percent and 20 percent, respectively, compared to the same periods in 2011, primarily due to contributions from the operations and maintenance and temporary staffing business lines. The operations and maintenance business line experienced higher contributions from various domestic and international projects. The temporary staffing business line contributed to the increase in segment profit due to improvement from North American and European operations. Segment profit margin was 9.9 percent in the current quarter compared to 10.0 percent for the same quarter in 2011. Segment profit margin for the nine months ended September 30, 2012 was 10.7 percent compared to 9.5 percent for the same period in 2011 due to improvement in margins from the operations and maintenance business line.

 

New awards for the three months ended September 30, 2012 were $165 million compared to $302 million for the corresponding period in 2011. Backlog as of September 30, 2012 was $1.8 billion compared to $2.0 billion as of September 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 $940 million as of September 30, 2012 and $937 million as of December 31, 2011.

 

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Power

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011