Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2013

 

or

 

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

 

For the transition period from          to          

 

Commission File Number:  1-16129

 

FLUOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0927079

(State or other jurisdiction of

 

(I.R.S. Employer

 incorporation or organization)

 

Identification No.)

 

 

 

6700 Las Colinas Boulevard

 

 

Irving, Texas

 

75039

(Address of principal executive offices)

 

(Zip Code)

 

469-398-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of July 26, 2013, 163,032,542 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

June 30, 2013

 

TABLE OF CONTENTS

 

 

 

 

PAGE

 

 

 

 

Part I:

Financial Information

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of June 30, 2013 and December 31, 2012 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

Item 2:

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

21

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

 

 

Item 4:

Controls and Procedures

31

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

32

 

 

 

Part II:

Other Information

 

 

 

 

 

Item 1:

Legal Proceedings

33

 

 

 

 

 

Item 1A:

Risk Factors

33

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

 

 

Item 6:

Exhibits

34

 

 

 

 

Signatures

38

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

7,190,328

 

$

7,128,249

 

$

14,375,952

 

$

13,418,357

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

6,857,472

 

6,809,783

 

13,701,222

 

12,823,993

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

31,918

 

31,206

 

64,520

 

69,048

 

Interest expense

 

6,448

 

6,610

 

13,403

 

13,491

 

Interest income

 

(4,216

)

(7,531

)

(8,232

)

(17,156

)

Total cost and expenses

 

6,891,622

 

6,840,068

 

13,770,913

 

12,889,376

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

298,706

 

288,181

 

605,039

 

528,981

 

INCOME TAX EXPENSE

 

91,366

 

95,660

 

184,443

 

159,285

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

207,340

 

192,521

 

420,596

 

369,696

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

45,928

 

31,331

 

92,726

 

53,624

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

161,412

 

$

161,190

 

$

327,870

 

$

316,072

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.99

 

$

0.96

 

$

2.02

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.98

 

$

0.95

 

$

2.00

 

$

1.86

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

162,797

 

168,264

 

162,603

 

168,558

 

DILUTED

 

164,135

 

169,440

 

164,064

 

169,924

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.16

 

$

0.16

 

$

0.32

 

$

0.32

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

207,340

 

$

192,521

 

$

420,596

 

$

369,696

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(41,303

)

(22,680

)

(56,747

)

3,248

 

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

 

5,877

 

(6,998

)

6,091

 

(1,489

)

Defined benefit pension and postretirement plan adjustments

 

1,584

 

4,527

 

8,825

 

5,340

 

Unrealized gain (loss) on derivative contracts

 

(1,994

)

(1,670

)

(1,842

)

1,589

 

Unrealized loss on debt securities

 

(956

)

(241

)

(1,097

)

(108

)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

(36,792

)

(27,062

)

(44,770

)

8,580

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

170,548

 

165,459

 

375,826

 

378,276

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

46,488

 

31,040

 

92,779

 

53,287

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

124,060

 

$

134,419

 

$

283,047

 

$

324,989

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

 

 

June 30,

 

December 31,

 

(in thousands, except share amounts)

 

2013

 

2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($486,805 and $411,550 related to variable interest entities (“VIEs”))

 

$

2,105,076

 

$

2,154,541

 

Marketable securities, current ($50,430 and $30,369 related to VIEs)

 

192,188

 

137,127

 

Accounts and notes receivable, net ($212,144 and $193,354 related to VIEs)

 

1,355,841

 

1,242,691

 

Contract work in progress ($223,939 and $221,897 related to VIEs)

 

1,974,529

 

1,942,679

 

Deferred taxes

 

251,374

 

249,839

 

Other current assets

 

307,531

 

367,260

 

Total current assets

 

6,186,539

 

6,094,137

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

298,863

 

318,355

 

Property, plant and equipment ((net of accumulated depreciation of $1,075,284 and $1,032,509) ($101,949 and $105,692 related to VIEs))

 

929,275

 

951,255

 

Investments and goodwill

 

288,244

 

244,226

 

Deferred taxes

 

77,174

 

79,357

 

Deferred compensation trusts

 

349,175

 

332,904

 

Other

 

238,327

 

255,809

 

TOTAL ASSETS

 

$

8,367,597

 

$

8,276,043

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($294,147 and $295,972 related to VIEs)

 

$

1,900,848

 

$

1,954,108

 

Convertible senior notes and other notes payable

 

18,469

 

20,792

 

Advance billings on contracts ($266,492 and $300,491 related to VIEs)

 

742,422

 

870,147

 

Accrued salaries, wages and benefits ($95,688 and $59,183 related to VIEs)

 

747,675

 

755,075

 

Other accrued liabilities ($25,707 and $6,478 related to VIEs)

 

283,129

 

286,992

 

Total current liabilities

 

3,692,543

 

3,887,114

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

496,384

 

520,205

 

NONCURRENT LIABILITIES

 

438,838

 

441,630

 

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 — 163,032,682 and 162,359,906 shares in 2013 and 2012, respectively

 

1,630

 

1,624

 

Additional paid-in capital

 

27,569

 

 

Accumulated other comprehensive loss

 

(302,673

)

(257,850

)

Retained earnings

 

3,873,124

 

3,597,521

 

Total shareholders’ equity

 

3,599,650

 

3,341,295

 

 

 

 

 

 

 

Noncontrolling interests

 

140,182

 

85,799

 

 

 

 

 

 

 

Total equity

 

3,739,832

 

3,427,094

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

8,367,597

 

$

8,276,043

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

420,596

 

$

369,696

 

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

 

 

 

 

 

Depreciation of fixed assets

 

108,781

 

103,025

 

Amortization of intangibles

 

445

 

804

 

Gain on sale of an equity method investment

 

(2,370

)

 

Restricted stock and stock option amortization

 

20,859

 

18,722

 

Deferred compensation trust

 

(16,271

)

(14,034

)

Deferred compensation obligation

 

16,367

 

15,315

 

Deferred taxes

 

28,934

 

30,881

 

Excess tax benefit from stock-based plans

 

(3,418

)

(3,924

)

Retirement plan accrual, net of contributions

 

(1,519

)

4,401

 

Changes in operating assets and liabilities

 

(331,662

)

(440,461

)

Undistributed earnings of equity method investments

 

(4,106

)

(9,593

)

Other items

 

5,693

 

6,831

 

Cash provided by operating activities

 

242,329

 

81,663

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

(324,436

)

(645,202

)

Proceeds from the sales and maturities of marketable securities

 

285,543

 

492,861

 

Capital expenditures

 

(121,792

)

(120,425

)

Proceeds from disposal of property, plant and equipment

 

25,679

 

50,612

 

Investments in partnerships and joint ventures

 

(32,828

)

(3,203

)

Consolidation of a variable interest entity

 

24,675

 

 

Proceeds from sale of an equity method investment

 

3,005

 

 

Acquisitions

 

(7,674

)

 

Other items

 

2,563

 

(4,493

)

Cash utilized by investing activities

 

(145,265

)

(229,850

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(132,889

)

Dividends paid

 

(26,206

)

(48,573

)

Repayment of 5.625% Municipal Bonds

 

(17,795

)

 

Repayment of convertible debt and notes payable

 

(8,569

)

(303

)

Distributions paid to noncontrolling interests

 

(45,809

)

(40,172

)

Capital contributions by noncontrolling interests

 

1,462

 

3,387

 

Taxes paid on vested restricted stock

 

(11,252

)

(11,603

)

Stock options exercised

 

11,902

 

5,691

 

Excess tax benefit from stock-based plans

 

3,418

 

3,924

 

Other items

 

(657

)

5,817

 

Cash utilized by financing activities

 

(93,506

)

(214,721

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(53,023

)

5,066

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(49,465

)

(357,842

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,154,541

 

2,161,411

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

2,105,076

 

$

1,803,569

 

 

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, 2012 Annual Report on Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended June 30, 2013 may not necessarily be indicative of results that can be expected for the full year.

 

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly its consolidated financial position as of June 30, 2013 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 2012 have been reclassified to conform to the 2013 presentation. Management has evaluated all material events occurring subsequent to the date of the financial statements up to the date this quarterly report is filed on Form 10-Q.

 

(2)                   New accounting pronouncements implemented by the company during the six months ended June 30, 2013 or requiring implementation in future periods are discussed below or elsewhere in the notes, where appropriate.

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 clarifies the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Management does not expect the adoption of ASU 2013-11 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU 2013-10 permits the use of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes and also removes the restriction on using different benchmark rates for similar hedges. ASU 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Management does not expect the adoption of ASU 2013-10 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In April 2013, the FASB issued ASU 2013-07, “Liquidation Basis of Accounting,” which clarifies when an entity should apply the liquidation basis of accounting. In addition, ASU 2013-07 provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. ASU 2013-07 is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013 and interim periods therein. Management does not expect the adoption of ASU 2013-07 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” The objective of ASU 2013-05 is to resolve a practice diversity in circumstances where reporting entities release cumulative translation adjustments into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU 2013-05 is effective for interim and annual reporting periods beginning after December 15, 2013 and will be applied on a prospective basis. Management does not expect the adoption of ASU 2013-05 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date,” which addresses the recognition, measurement and

 

6



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

disclosure of certain obligations including debt arrangements, other contractual obligations and settled litigation and judicial rulings. ASU 2013-04 is effective for interim and annual reporting periods beginning after December 15, 2013. Management does not expect the adoption of ASU 2013-04 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2013, the company adopted 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 (“ASC”). The adoption of ASU 2012-04 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2013, the company adopted 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. The adoption of ASU 2012-02 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

(3)                   The tax effects of the components of other comprehensive income (loss) (“OCI”) for the three months ended June 30, 2013 and 2012 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

Tax

 

Tax

 

 

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

(in thousands)

 

Amount

 

(Expense)

 

Amount

 

Amount

 

(Expense)

 

Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(66,421

)

$

25,118

 

$

(41,303

)

$

(36,516

)

$

13,836

 

$

(22,680

)

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

 

8,272

 

(2,395

)

5,877

 

(10,201

)

3,203

 

(6,998

)

Defined benefit pension and postretirement plan adjustments

 

2,535

 

(951

)

1,584

 

7,244

 

(2,717

)

4,527

 

Unrealized loss on derivative contracts

 

(3,191

)

1,197

 

(1,994

)

(2,274

)

604

 

(1,670

)

Unrealized loss on debt securities

 

(1,530

)

574

 

(956

)

(386

)

145

 

(241

)

Total other comprehensive loss

 

(60,335

)

23,543

 

(36,792

)

(42,133

)

15,071

 

(27,062

)

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

 

560

 

 

560

 

(291

)

 

(291

)

Other comprehensive loss attributable to Fluor Corporation

 

$

(60,895

)

$

23,543

 

$

(37,352

)

$

(41,842

)

$

15,071

 

$

(26,771

)

 

7



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The tax effects of the components of OCI for the six months ended June 30, 2013 and 2012 are as follows:

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

Tax

 

Tax

 

 

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

(in thousands)

 

Amount

 

(Expense)

 

Amount

 

Amount

 

(Expense)

 

Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

(90,827

)

$

34,080

 

$

(56,747

)

$

5,154

 

$

(1,906

)

$

3,248

 

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

 

8,353

 

(2,262

)

6,091

 

(1,303

)

(186

)

(1,489

)

Defined benefit pension and postretirement plan adjustments

 

14,120

 

(5,295

)

8,825

 

8,544

 

(3,204

)

5,340

 

Unrealized gain (loss) on derivative contracts

 

(2,947

)

1,105

 

(1,842

)

2,772

 

(1,183

)

1,589

 

Unrealized loss on debt securities

 

(1,755

)

658

 

(1,097

)

(174

)

66

 

(108

)

Total other comprehensive income (loss)

 

(73,056

)

28,286

 

(44,770

)

14,993

 

(6,413

)

8,580

 

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

 

53

 

 

53

 

(337

)

 

(337

)

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

(73,109

)

$

28,286

 

$

(44,823

)

$

15,330

 

$

(6,413

)

$

8,917

 

 

In the first quarter of 2013, the company adopted ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”),” which requires an entity to disclose additional information about reclassification adjustments, including (a) changes in AOCI balances by component and (b) significant items reclassified out of AOCI.

 

The changes in AOCI balances by component (after-tax) for the three months ended June 30, 2013 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share
of Equity Method
Investees’ Other
Comprehensive
Income (Loss)

 

Defined Benefit
Pension and
Postretirement
Plans

 

Unrealized
Loss on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-
Sale Securities

 

Accumulated
Other
Comprehensive
Income (Loss),
Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2013

 

$

30,961

 

$

(42,805

)

$

(245,483

)

$

(8,807

)

$

813

 

$

(265,321

)

Other comprehensive income (loss) before reclassifications

 

(41,863

)

5,877

 

(423

)

(2,525

)

(895

)

(39,829

)

Amounts reclassified from AOCI

 

 

 

2,007

 

531

 

(61

)

2,477

 

Net other comprehensive income (loss)

 

(41,863

)

5,877

 

1,584

 

(1,994

)

(956

)

(37,352

)

Balance as of June 30, 2013

 

$

(10,902

)

$

(36,928

)

$

(243,899

)

$

(10,801

)

$

(143

)

$

(302,673

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2013

 

$

8,217

 

$

 

$

 

$

 

$

 

$

8,217

 

Other comprehensive income before reclassifications

 

560

 

 

 

 

 

560

 

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive income

 

560

 

 

 

 

 

560

 

Balance as of June 30, 2013

 

$

8,777

 

$

 

$

 

$

 

$

 

$

8,777

 

 

8



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the six months ended as of June 30, 2013 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share
of Equity Method
Investees’ Other
Comprehensive
Income (Loss)

 

Defined Benefit
Pension and
Postretirement
Plans

 

Unrealized
Gain (Loss)
on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-
Sale Securities

 

Accumulated
Other
Comprehensive
Income (Loss),
Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

45,899

 

$

(43,019

)

$

(252,724

)

$

(8,960

)

$

954

 

$

(257,850

)

Other comprehensive income (loss) before reclassifications

 

(56,801

)

6,091

 

4,796

 

(2,440

)

(1,012

)

(49,366

)

Amounts reclassified from AOCI

 

 

 

4,029

 

599

 

(85

)

4,543

 

Net other comprehensive income (loss)

 

(56,801

)

6,091

 

8,825

 

(1,841

)

(1,097

)

(44,823

)

Balance as of June 30, 2013

 

$

(10,902

)

$

(36,928

)

$

(243,899

)

$

(10,801

)

$

(143

)

$

(302,673

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

8,723

 

$

 

$

 

$

1

 

$

 

$

8,724

 

Other comprehensive income before reclassifications

 

54

 

 

 

 

 

54

 

Amounts reclassified from AOCI

 

 

 

 

(1

)

 

(1

)

Net other comprehensive income (loss)

 

54

 

 

 

(1

)

 

53

 

Balance as of June 30, 2013

 

$

8,777

 

$

 

$

 

$

 

$

 

$

8,777

 

 

The significant items reclassified out of AOCI and the corresponding location and impact on the Condensed Consolidated Statement of Earnings are as follows:

 

 

 

Location in Condensed

 

Three Months Ended

 

Six Months Ended

 

(in thousands)

 

Consolidated Statement of Earnings

 

June 30, 2013

 

June 30, 2013

 

Component of AOCI:

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(3,210

)

$

(6,446

)

Income tax benefit

 

Income tax expense

 

1,203

 

2,417

 

Net of tax

 

 

 

$

(2,007

)

$

(4,029

)

 

 

 

 

 

 

 

 

Unrealized loss on derivative contracts:

 

 

 

 

 

 

 

Commodity contracts and foreign currency contracts

 

Total cost of revenue

 

$

(437

)

$

(125

)

Interest rate contracts

 

Interest expense

 

(420

)

(839

)

Income tax benefit

 

Income tax expense

 

326

 

366

 

Net of tax

 

 

 

(531

)

(598

)

Less: Noncontrolling interest

 

Net earnings attributable to noncontrolling interests

 

 

1

 

Net of tax and noncontrolling interest

 

 

 

$

(531

)

$

(599

)

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

Corporate general and administrative expense

 

$

98

 

$

136

 

Income tax expense

 

Income tax expense

 

(37

)

(51

)

Net of tax

 

 

 

$

61

 

$

85

 

 


(1)           Defined benefit pension plan adjustments were reclassified primarily to total cost of revenue and corporate general and administrative expense.

 

9



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(4)                   The effective tax rate, based on the company’s operating results for the three and six months ended June 30, 2013, was 30.6 percent and 30.5 percent, respectively, compared to 33.2 percent and 30.1 percent for the corresponding periods of 2012. The lower effective tax rate for the three month period ended June 30, 2013 was primarily attributable to increased earnings related to noncontrolling interests for joint ventures and partnerships for which taxes are not typically paid by the company.

 

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 $11.3 million and $11.2 million for the six months ended June 30, 2013 and 2012, respectively. Income tax payments, net of receipts, were $108.2 million and $169.8 million during the six-month periods ended June 30, 2013 and 2012, respectively.

 

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

 

The calculations of the basic and diluted EPS for the three and six months ended June 30, 2013 and 2012 are presented below:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

161,412

 

$

161,190

 

$

327,870

 

$

316,072

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

162,797

 

168,264

 

162,603

 

168,558

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.99

 

$

0.96

 

$

2.02

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

162,797

 

168,264

 

162,603

 

168,558

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock units and shares

 

972

 

869

 

1,082

 

1,024

 

Conversion equivalent of dilutive convertible debt

 

366

 

307

 

379

 

342

 

Weighted average diluted shares outstanding

 

164,135

 

169,440

 

164,064

 

169,924

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.98

 

$

0.95

 

$

2.00

 

$

1.86

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

2,516

 

1,717

 

1,949

 

1,467

 

 

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

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(7)                 The fair value hierarchy established by ASC 820, “Fair Value Measurement,” 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

 

The following table presents, for each of the fair value hierarchy levels required under ASC 820-10, the company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

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

 

$

18,999

 

$

18,999

(2)

$

 

$

 

$

14,457

 

$

14,457

(2)

$

 

$

 

Marketable securities, current

 

117,118

 

 

117,118

(3)

 

102,439

 

 

102,439

(3)

 

 

Deferred compensation trusts

 

81,277

 

81,277

(4)

 

 

80,842

 

80,842

(4)

 

 

Marketable securities, noncurrent

 

298,863

 

 

298,863

(5)

 

318,355

 

 

318,355

(5)

 

Derivative assets(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

 

 

 

 

95

 

 

95

 

 

Foreign currency contracts

 

317

 

 

317

 

 

640

 

 

640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

37

 

$

 

$

37

 

$

 

$

28

 

$

 

$

28

 

$

 

Foreign currency contracts

 

4,455

 

 

4,455

 

 

2,151

 

 

2,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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 primarily 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, commercial paper and other debt securities that are valued based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

(4) Consists primarily 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 year to three years that are valued based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

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

 

All of the company’s financial instruments carried at fair value are included in the table above. All of the above financial instruments are available-for-sale securities except for those held in the deferred compensation trusts (which are trading

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

securities) and derivative assets and liabilities. The company has determined that there was no other-than-temporary impairment of available-for-sale securities with unrealized losses, and the company expects to recover the entire cost basis of the securities. The available-for-sale securities are made up of the following security types as of June 30, 2013: money market funds of $19 million, U.S. agency securities of $157 million, U.S. Treasury securities of $21 million, corporate debt securities of $220 million, commercial paper of $11 million and other debt securities of $7 million. As of December 31, 2012, available-for-sale securities consisted of money market funds of $14 million, U.S. agency securities of $161 million, U.S. Treasury securities of $67 million, corporate debt securities of $184 million and other debt securities of $9 million. The amortized cost of these available-for-sale securities is not materially different than the fair value. During the three and six months ended June 30, 2013, proceeds from the sales and maturities of available-for-sale securities were $131 million and $206 million, respectively, compared to $171 million and $349 million for the corresponding periods of 2012.

 

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

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in thousands)

 

Hierarchy

 

Value

 

Value

 

Value

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,206,577

 

$

1,206,577

 

$

1,343,866

 

$

1,343,866

 

Cash equivalents(2)

 

Level 2

 

879,500

 

879,500

 

796,218

 

796,218

 

Marketable securities, current(3)

 

Level 2

 

75,070

 

75,070

 

34,688

 

34,688

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

42,839

 

42,839

 

34,471

 

34,471

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

3.375% Senior Notes(5)

 

Level 2

 

$

496,384

 

$

498,901

 

$

496,164

 

$

527,219

 

1.5% Convertible Senior Notes(5)

 

Level 2

 

18,469

 

39,616

 

18,472

 

39,392

 

5.625% Municipal Bonds(5)

 

Level 2

 

 

 

17,795

 

17,878

 

Notes payable, including noncurrent portion(6)

 

Level 3

 

 

 

8,566

 

8,566

 

 


(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. Amortized cost is not materially different from the fair value.

 

(4)     Notes receivable are carried at net realizable value which approximates fair value. Factors considered by the company in determining the fair value include the credit worthiness of the borrower, current interest rates, the term of the note, 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. During the first six months of 2013, the company redeemed its 5.625% Municipal Bonds at a price of 100% of their principal amount.

 

(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. During the first six months of 2013, the company paid off the remaining balances of various notes payable that were assumed in connection with the 2012 acquisition of an equipment company.

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(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, “Derivatives and Hedging.” The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The company also formally assesses, both at inception and at least quarterly thereafter, whether the hedging instruments are highly effective in offsetting changes in the fair value of the hedged items. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the effective portion of the change in the fair value of the hedging instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the effective portion of the hedging instruments’ gains or losses due to changes in fair value are recorded as a component of AOCI 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. The company maintains master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, the company reports the fair value of derivative instruments on a gross basis.

 

In the first quarter of 2013, the company adopted ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11.

 

As of June 30, 2013, the company had total gross notional amounts of $117 million of foreign currency contracts and less than $1 million of commodity contracts outstanding relating to engineering and construction contract obligations and intercompany transactions. The foreign currency contracts are of varying duration, none of which extend beyond April 2014. The commodity contracts are of varying duration, none of which extend beyond August 2014. The impact to earnings due to hedge ineffectiveness was immaterial for the three and six months ended June 30, 2013 and 2012.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of June 30, 2013 and December 31, 2012 are  as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

June 30,

 

December 31,

 

Balance Sheet

 

June 30,

 

December 31,

 

(in thousands)

 

Location

 

2013

 

2012

 

Location

 

2013

 

2012

 

Commodity contracts

 

Other current assets

 

$

 

$

95

 

Other accrued liabilities

 

$

35

 

$

15

 

Foreign currency contracts

 

Other current assets

 

317

 

640

 

Other accrued liabilities

 

4,455

 

2,130

 

Commodity contracts

 

Other assets

 

 

 

Noncurrent liabilities

 

2

 

13

 

Foreign currency contracts

 

Other assets

 

 

 

Noncurrent liabilities

 

 

21

 

Total

 

 

 

$

317

 

$

735

 

 

 

$

4,492

 

$

2,179

 

 

The pre-tax amount of gain (loss) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three and six months ended June 30, 2013 and 2012 is as follows:

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2013

 

2012

 

2013

 

2012

 

Foreign currency contracts

 

Corporate general and administrative expense

 

$

326

 

$

5,875

 

$

4,145

 

$

(7,698

)

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Cash Flow Hedges (in thousands)

 

2013

 

2012

 

2013

 

2012

 

Commodity contracts

 

$

1

 

$

(220

)

$

32

 

$

392

 

Foreign currency contracts

 

(2,526

)

(62

)

(2,472

)

2,026

 

Total

 

$

(2,525

)

$

(282

)

$

(2,440

)

$

2,418

 

 

The after-tax amount of gain (loss) reclassified from AOCI into earnings associated with the derivative instruments designated as cash flow hedges for the three months ended June 30, 2013 and 2012 is as follows:

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

Cash Flow Hedges (in thousands)

 

Location of Gain (Loss)

 

2013

 

2012

 

2013

 

2012

 

Commodity contracts

 

Total cost of revenue

 

$

13

 

$

708

 

$

60

 

$

944

 

Foreign currency contracts

 

Total cost of revenue

 

(282

)

271

 

(135

)

1

 

Interest rate contracts

 

Interest expense

 

(262

)

(262

)

(524

)

(524

)

Total

 

 

 

$

(531

)

$

717

 

$

(599

)

$

421

 

 

(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

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

1,614

 

$

1,490

 

$

3,227

 

$

2,979

 

$

3,814

 

$

1,931

 

$

7,696

 

$

3,894

 

Interest cost

 

7,275

 

8,324

 

14,550

 

16,647

 

7,919

 

8,184

 

15,936

 

16,448

 

Expected return on assets

 

(7,744

)

(8,831

)

(15,488

)

(17,662

)

(11,421

)

(10,497

)

(22,980

)

(21,077

)

Amortization of prior service cost

 

25

 

(29

)

51

 

(57

)

 

 

 

 

Recognized net actuarial loss

 

1,510

 

3,408

 

3,020

 

6,817

 

1,675

 

782

 

3,375

 

1,566

 

Net periodic pension expense

 

$

2,680

 

$

4,362

 

$

5,360

 

$

8,724

 

$

1,987

 

$

400

 

$

4,027

 

$

831

 

 

The company currently expects to fund approximately $30 million to $60 million into its defined benefit pension plans during 2013, which is expected to be in excess of the minimum funding required. During the six months ended June 30, 2013, contributions of approximately $9 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.

 

(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,

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

the company will be required to offer to purchase the 2011 Notes at a purchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The company is generally not limited under the indenture governing the 2011 Notes in its ability to incur additional indebtedness provided the company is in compliance with certain restrictive covenants, including restrictions on liens and restrictions on sale and leaseback transactions.

 

In February 2004, the company issued $330 million of 1.5% Convertible Senior Notes (the “2004 Notes”) due February 15, 2024 and received proceeds of $323 million, net of underwriting discounts. In December 2004, the company irrevocably elected to pay the principal amount of the 2004 Notes in cash. The 2004 Notes are convertible if a specified trading price of the company’s common stock (the “trigger price”) is achieved and maintained for a specified period. The trigger price condition was satisfied during the fourth quarter of 2012 and second quarter of 2013 and the 2004 Notes were therefore classified as short-term debt as of December 31, 2012 and June 30, 2013, respectively. During the six months ended June 30, 2013, holders converted less than $0.1 million of the 2004 Notes in exchange for the principal balance owed in cash plus 61 shares of the company’s common stock. During the six months ended June 30, 2012, holders converted $0.3 million of the 2004 Notes in exchange for the principal balance owed in cash plus 6,078 shares of the company’s common stock.

 

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

 

(in thousands)

 

June 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Carrying value of the equity component

 

$

19,519

 

$

19,519

 

Principal amount and carrying value of the liability component

 

18,469

 

18,472

 

 

The 2004 Notes are convertible into shares of the company’s common stock (par value $0.01 per share) at a conversion rate of 36.6729 shares per each $1,000 principal amount of the 2004 Notes. Interest expense for both the three and six months ended June 30, 2013 included original coupon interest of $0.1 million. Interest expense for both the three and six months ended June 30, 2012 included original coupon interest of $0.1 million. The if-converted value of $40 million was in excess of the principal value as of June 30, 2013.

 

During the first six months of 2013, the company redeemed its 5.625% Municipal Bonds at a price of 100% of their principal amount and paid off the remaining balances of various notes payable that were assumed in connection with the 2012 acquisition of an equipment company.

 

As of June 30, 2013, 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, 2012. In the first half of 2013 and 2012, restricted stock units and restricted shares totaling 468,695 and 450,668, respectively, were granted to executives and directors at weighted-average per share prices of $61.30 and $61.70, respectively. For the company’s executives, the restricted units and shares granted in 2013 and 2012 vest ratably over three years. For the company’s directors, the restricted units and shares granted in 2013 and 2012 vest or vested on the first anniversary of the grant. During the first half of 2013 and 2012, options for the purchase of 884,574 shares at a weighted-average exercise price of $61.45 per share and 688,380 shares at a weighted-average exercise price of $62.18 per share, respectively, were awarded to executives. The options granted in 2013 and 2012 vest ratably over three years. The options expire ten years after the grant date. In the first half of 2013 and 2012, performance-based Value Driver Incentive (“VDI”) units totaling 385,742 and 341,104, respectively, were granted to executives at weighted-average per share prices of $61.45 and $62.29, respectively. The number of units is adjusted at the end of each performance period based on the achievement of performance criteria. The VDI awards granted in 2013 vest after a period of approximately three years. The VDI awards granted in 2012 vest on the first and third anniversaries of the date of grant.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(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 six months ended June 30, 2013, earnings attributable to noncontrolling interests were $44.8 million and $93.1 million, respectively, and the related tax benefit was $1.1 million and tax expense was $0.4 million, respectively. For the three and six months ended June 30, 2012, earnings attributable to noncontrolling interests were $31.8 million and $54.4 million, respectively, and the related tax expense was $0.5 million and $0.8 million, respectively. Distributions paid to noncontrolling interests were $45.8 million and $40.2 million for the six months ended June 30, 2013 and 2012, respectively. Capital contributions by noncontrolling interests were $1.5 million and $3.4 million for the six months ended June 30, 2013 and 2012, 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 (including change orders in dispute and unapproved change orders in regard to both scope and price) 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 (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. The company periodically evaluates its position and the amounts recognized in revenue with respect to all its claims. Recognized claims against clients amounted to $20 million for December 31, 2012 and are included in contract work in progress for that period in the accompanying Condensed Consolidated Balance Sheet. There were no recognized claims against clients as of June 30, 2013.

 

As of June 30, 2013, 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 was 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 primary dispute was resolved in November 2012 resulting in a pre-tax charge against the company’s earnings in the fourth quarter of 2012.

 

The client had also filed a counterclaim against the company, seeking to recover up to $100 million for past and future costs associated with, among other things, monitoring certain monopiles and transition pieces for alleged defects. The counterclaim and all related disputes were resolved during the second quarter of 2013, with no material effect on earnings. This concluded the company’s involvement in the completion of the project.

 

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, which are discontinued operations. 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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

 

In December 2011, the company appealed the judgments of the court. Briefings and oral arguments before the Missouri Court of Appeals (Eastern District) have been completed, and the company is awaiting a decision. 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 21 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.

 

During the first quarter of 2012, the company received an adverse judgment from the Board of Contract Appeals (“BCA”) 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.

 

A hearing on the final embassy claim was held during the second quarter of 2012, and a decision was rendered during the second quarter of 2013. While the BCA found in favor of Fluor on certain of its claims, the BCA award was less than the company’s demand which resulted in a charge to earnings of approximately $17 million during the second quarter of 2013. The company is considering an appeal of the BCA’s decision in this matter.

 

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 has been remanded to the court in Jefferson County, Texas. Based upon the present status of this matter, the company does not believe that there is a reasonable possibility that a loss will be incurred.

 

(14)            In the ordinary course of business, the company enters into various agreements providing performance assurances and guarantees to clients on behalf of certain unconsolidated and consolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The performance guarantees have various expiration dates ranging from mechanical completion of the facilities being constructed to a period extending beyond contract completion in certain circumstances. The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. Amounts that may be required to be paid in excess of estimated cost to complete contracts in progress are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump-sum or fixed-price contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, the company may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors for claims. Performance guarantees outstanding as of June 30, 2013 were estimated to be $5.4 billion. The company assessed its performance guarantee obligation as of June 30, 2013 and December 31, 2012 in accordance with ASC 460, “Guarantees” 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 (a) the power to direct the economically significant activities of the entity and (b) 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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

rights and board representation of the respective parties in determining if the company is the primary beneficiary. The company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. As required by ASC 810, management’s assessment of whether the company is the primary beneficiary of a VIE is continuously performed.

 

In most cases, when the company is not the primary beneficiary and not required to consolidate the VIE, the proportionate consolidation method of accounting is used for joint ventures and partnerships in the construction industry, whereby the company recognizes its proportionate share of revenue, cost and profit in its Condensed Consolidated Statement of Earnings and uses the one-line equity method of accounting in the Condensed Consolidated Balance Sheet, which is a common application of ASC 810-10-45-14 in the construction industry. 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 net carrying value of the unconsolidated VIEs classified under “Investments and goodwill” and “Other accrued liabilities” in the Condensed Consolidated Balance Sheet was a net asset of $92 million and $22 million as of June 30, 2013 and December 31, 2012, respectively. Some of the company’s VIEs have debt; however, such debt is typically non-recourse in nature. The company’s maximum exposure to loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments. Future funding commitments as of June 30, 2013 for the unconsolidated VIEs were $38 million.

 

In some cases, the company is required to consolidate certain VIEs. As of June 30, 2013, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.1 billion and $684 million, respectively. As of December 31, 2012, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.0 billion and $664 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 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 $538 million and $1.3 billion for the three and six months ended June 30, 2013, respectively, and $867 million and $1.5 billion for the three and six months ended June 30, 2012, respectively.

 

(16)            Effective January 1, 2013, the company implemented certain organizational changes that impacted the composition of its reportable segments. The company’s operations and maintenance activities, previously included in the Global Services segment, have been integrated into the Industrial & Infrastructure segment as part of the new industrial services business line, which also includes project execution activities that were previously reported in the manufacturing and life sciences business line. Additionally, the Global Services segment now includes activities associated with the company’s efforts to grow its fabrication and construction capabilities and the operations of a new procurement entity, Acqyre, which was formed to provide strategic sourcing solutions to third parties. Segment operating information and total assets for 2012 have been recast to reflect these organizational changes.

 

Operating information by segment is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

External Revenue (in millions)

 

2013

 

2012

 

2013

 

2012

 

Oil & Gas

 

$

2,856.5

 

$

2,295.0

 

$

5,625.8

 

$

4,335.8

 

Industrial & Infrastructure

 

3,082.3

 

3,595.2

 

6,214.5

 

6,636.9

 

Government

 

674.5

 

871.4

 

1,425.8

 

1,721.5

 

Global Services

 

154.4

 

161.0

 

304.3

 

343.6

 

Power

 

422.6

 

205.7

 

805.6

 

380.6

 

Total external revenue

 

$

7,190.3

 

$

7,128.3

 

$

14,376.0

 

$

13,418.4

 

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

Intercompany revenue for the Global Services segment, excluded from the amounts above, was $125.9 million and $243.2 million for the three and six months ended June 30, 2013, respectively, and $110.1 million and $225.7 million for the three and six months ended June 30, 2012, respectively.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Segment Profit (Loss) (in millions)

 

2013

 

2012

 

2013

 

2012

 

Oil & Gas