Edgar Filing: FLUOR CORP

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, 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 (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 25, 2013, 163,352,559 shares of the registrant’s common stock, $0.01 par value, were outstanding.

Table of Contents

FLUOR CORPORATION

FORM 10-Q

September 30, 2013

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, 2013 and 2012 (Unaudited)	2

		Condensed Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)	3

		Condensed Consolidated Balance Sheet as of September 30, 2013 and December 31, 2012 (Unaudited)	4

		Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 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	22

	Item 3:	Quantitative and Qualitative Disclosures about Market Risk	32

	Item 4:	Controls and Procedures	32

	Changes in Consolidated Backlog (Unaudited)		33

Part II:	Other Information

	Item 1:	Legal Proceedings	34

	Item 1A:	Risk Factors	34

	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	34

	Item 6:	Exhibits	35

Signatures			38

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)	2013			2012			2013			2012

TOTAL REVENUE	$	6,684,216		$	7,136,056		$	21,060,168		$	20,554,413

TOTAL COST OF REVENUE	6,329,685			6,829,781			20,030,907			19,653,774

OTHER (INCOME) AND EXPENSES
Corporate general and administrative expense	46,070			40,884			110,590			109,932
Interest expense	6,435			6,890			19,838			20,381
Interest income	(2,716		)	(6,001		)	(10,948		)	(23,157		)
Total cost and expenses	6,379,474			6,871,554			20,150,387			19,760,930

EARNINGS BEFORE TAXES	304,742			264,502			909,781			793,483
INCOME TAX EXPENSE	87,391			92,164			271,834			251,449

NET EARNINGS	217,351			172,338			637,947			542,034

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS	44,305			27,755			137,031			81,379

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION	$	173,046		$	144,583		$	500,916		$	460,655

BASIC EARNINGS PER SHARE	$	1.06		$	0.87		$	3.08		$	2.74

DILUTED EARNINGS PER SHARE	$	1.05		$	0.86		$	3.05		$	2.72

SHARES USED TO CALCULATE EARNINGS PER SHARE
BASIC	162,940			166,660			162,715			167,925
DILUTED	164,845			167,968			164,324			169,271

DIVIDENDS DECLARED PER SHARE	$	0.16		$	0.16		$	0.48		$	0.48

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

UNAUDITED

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands)	2013			2012		2013			2012

NET EARNINGS	$	217,351		$	172,338	$	637,947		$	542,034

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment	26,192			24,168		(30,555		)	27,416
Ownership share of equity method investees’ other comprehensive income (loss)	2,262			133		8,353			(1,356		)
Defined benefit pension and postretirement plan adjustments	(4,045		)	1,027		4,780			6,367
Unrealized gain (loss) on derivative contracts	1,015			412		(827		)	2,001
Unrealized gain (loss) on debt securities	365			393		(732		)	285
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	25,789			26,133		(18,981		)	34,713

COMPREHENSIVE INCOME	243,140			198,471		618,966			576,747

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	43,902			27,505		136,681			80,792

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION	$	199,238		$	170,966	$	482,285		$	495,955

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

UNAUDITED

	September 30,			December 31,
(in thousands, except share amounts)	2013			2012

ASSETS

CURRENT ASSETS
Cash and cash equivalents ($597,484 and $411,550 related to variable interest entities (“VIEs”))	$	2,537,570		$	2,154,541
Marketable securities, current ($12,068 and $30,369 related to VIEs)	157,910			137,127
Accounts and notes receivable, net ($208,819 and $193,354 related to VIEs)	1,156,387			1,242,691
Contract work in progress ($280,350 and $221,897 related to VIEs)	2,102,713			1,942,679
Deferred taxes	267,082			249,839
Other current assets	219,692			367,260
Total current assets	6,441,354			6,094,137

Marketable securities, noncurrent	281,999			318,355
Property, plant and equipment ((net of accumulated depreciation of $1,113,421 and $1,032,509) ($96,699 and $105,692 related to VIEs))	937,066			951,255
Investments and goodwill	342,144			244,226
Deferred taxes	116,164			79,357
Deferred compensation trusts	364,622			332,904
Other	243,819			255,809
TOTAL ASSETS	$	8,727,168		$	8,276,043

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Trade accounts payable ($342,972 and $295,972 related to VIEs)	$	1,974,777		$	1,954,108
Convertible senior notes, notes payable and other borrowings	25,433			20,792
Advance billings on contracts ($318,442 and $300,491 related to VIEs)	796,601			870,147
Accrued salaries, wages and benefits ($75,870 and $59,183 related to VIEs)	713,971			755,075
Other accrued liabilities ($26,189 and $6,478 related to VIEs)	301,399			286,992
Total current liabilities	3,812,181			3,887,114

LONG-TERM DEBT DUE AFTER ONE YEAR	496,494			520,205
NONCURRENT LIABILITIES	474,306			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 — 163,261,653 and 162,359,906 shares in 2013 and 2012, respectively	1,633			1,624
Additional paid-in capital	48,550			—
Accumulated other comprehensive loss	(276,481		)	(257,850		)
Retained earnings	4,019,910			3,597,521
Total shareholders’ equity	3,793,612			3,341,295

Noncontrolling interests	150,575			85,799

Total equity	3,944,187			3,427,094

TOTAL LIABILITIES AND EQUITY	$	8,727,168		$	8,276,043

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

UNAUDITED

	Nine Months Ended
	September 30,
(in thousands)	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES

Net earnings	$	637,947		$	542,034
Adjustments to reconcile net earnings to cash provided (utilized) by operating activities:
Depreciation of fixed assets	162,264			155,497
Amortization of intangibles	576			1,539
Gain on sale of an equity method investment	(2,370		)	—
Restricted stock and stock option amortization	31,861			28,240
Deferred compensation trust	(31,718		)	(25,019		)
Deferred compensation obligation	34,588			28,813
Deferred taxes	(40,980		)	(28,856		)
Excess tax benefit from stock-based plans	(4,501		)	(4,318		)
Retirement plan accrual, net of contributions	2,436			7,761
Changes in operating assets and liabilities	(77,983		)	(186,378		)
Undistributed earnings of equity method investments	(425		)	(14,755		)
Other items	955			5,744

Cash provided by operating activities	712,650			510,302

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of marketable securities	(348,949		)	(813,440		)
Proceeds from the sales and maturities of marketable securities	361,084			724,635
Capital expenditures	(181,059		)	(188,876		)
Proceeds from disposal of property, plant and equipment	33,630			65,623
Investments in partnerships and joint ventures	(37,540		)	(12,028		)
Consolidation of a variable interest entity	24,675			—
Proceeds from sale of an equity method investment	3,005			—
Acquisitions	(7,674		)	(19,337		)
Other items	8,988			(7,697		)

Cash utilized by investing activities	(143,840		)	(251,120		)

CASH FLOWS FROM FINANCING ACTIVITIES

Repurchase of common stock	—			(164,187		)
Dividends paid	(52,457		)	(75,646		)
Repayment of 5.625% Municipal Bonds	(17,795		)	—
Repayment of convertible debt and notes payable	(8,640		)	(903		)
Distributions paid to noncontrolling interests	(79,549		)	(61,917		)
Capital contributions by noncontrolling interests	1,549			3,553
Taxes paid on vested restricted stock	(11,404		)	(11,696		)
Stock options exercised	21,613			10,155
Excess tax benefit from stock-based plans	4,501			4,318
Other items	6,467			6,845

Cash utilized by financing activities	(135,715		)	(289,478		)

Effect of exchange rate changes on cash	(50,066		)	19,911

Increase (Decrease) in cash and cash equivalents	383,029			(10,385		)

Cash and cash equivalents at beginning of period	2,154,541			2,161,411

Cash and cash equivalents at end of period	$	2,537,570		$	2,151,026

See Notes to Condensed Consolidated Financial Statements.

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 nine months ended September 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 September 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 nine months ended September 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.” This ASU clarifies the financial statement presentation of unrecognized tax benefits in certain circumstances. 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 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 interim and annual reporting periods beginning after December 15, 2013. 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 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.”

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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 September 30, 2013 and 2012 are as follows:

	Three Months Ended									Three Months Ended
	September 30, 2013									September 30, 2012
				Tax
	Before-Tax			Benefit			Net-of-Tax			Before-Tax			Tax			Net-of-Tax
(in thousands)	Amount			(Expense)			Amount			Amount			Expense			Amount
Other comprehensive income (loss):
Foreign currency translation adjustment	$	42,074		$	(15,882	)	$	26,192		$	38,768		$	(14,600	)	$	24,168
Ownership share of equity method investees’ other comprehensive income	3,118			(856		)	2,262			165			(32		)	133
Defined benefit pension and postretirement plan adjustments	(6,472		)	2,427			(4,045		)	1,643			(616		)	1,027
Unrealized gain on derivative contracts	1,700			(685		)	1,015			693			(281		)	412
Unrealized gain on debt securities	585			(220		)	365			630			(237		)	393
Total other comprehensive income	41,005			(15,216		)	25,789			41,899			(15,766		)	26,133
Less: Other comprehensive loss attributable to noncontrolling interests	(403		)	—			(403		)	(250		)	—			(250		)
Other comprehensive income attributable to Fluor Corporation	$	41,408		$	(15,216	)	$	26,192		$	42,149		$	(15,766	)	$	26,383

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

	Nine Months Ended									Nine Months Ended
	September 30, 2013									September 30, 2012
				Tax
	Before-Tax			Benefit			Net-of-Tax			Before-Tax			Tax			Net-of-Tax
(in thousands)	Amount			(Expense)			Amount			Amount			Expense			Amount
Other comprehensive income (loss):
Foreign currency translation adjustment	$	(48,753	)	$	18,198		$	(30,555	)	$	43,922		$	(16,506	)	$	27,416
Ownership share of equity method investees’ other comprehensive income (loss)	11,471			(3,118		)	8,353			(1,138		)	(218		)	(1,356		)
Defined benefit pension and postretirement plan adjustments	7,648			(2,868		)	4,780			10,187			(3,820		)	6,367
Unrealized gain (loss) on derivative contracts	(1,247		)	420			(827		)	3,465			(1,464		)	2,001
Unrealized gain (loss) on debt securities	(1,170		)	438			(732		)	456			(171		)	285
Total other comprehensive income (loss)	(32,051		)	13,070			(18,981		)	56,892			(22,179		)	34,713
Less: Other comprehensive loss attributable to noncontrolling interests	(350		)	—			(350		)	(587		)	—			(587		)
Other comprehensive income (loss) attributable to Fluor Corporation	$	(31,701	)	$	13,070		$	(18,631	)	$	57,479		$	(22,179	)	$	35,300

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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 September 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 June 30, 2013	$	(10,902	)	$	(36,928	)	$	(243,899	)	$	(10,801	)	$	(143	)	$	(302,673	)
Other comprehensive income (loss) before reclassifications	26,471			2,262			(6,057		)	(443		)	367			22,600
Amounts reclassified from AOCI	—			—			2,012			1,582			(2		)	3,592
Net other comprehensive income (loss)	26,471			2,262			(4,045		)	1,139			365			26,192
Balance as of September 30, 2013	$	15,569		$	(34,666	)	$	(247,944	)	$	(9,662	)	$	222		$	(276,481	)

Attributable to Noncontrolling Interests:
Balance as of June 30, 2013	$	8,777		$	—		$	—		$	—		$	—		$	8,777
Other comprehensive loss before reclassifications	(279		)	—			—			(124		)	—			(403		)
Amounts reclassified from AOCI	—			—			—			—			—			—
Net other comprehensive loss	(279		)	—			—			(124		)	—			(403		)
Balance as of September 30, 2013	$	8,498		$	—		$	—		$	(124	)	$	—		$	8,374

The changes in AOCI balances by component (after-tax) for the nine months ended as of September 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	(30,330		)	8,353			(1,261		)	(2,883		)	(645		)	(26,766		)
Amounts reclassified from AOCI	—			—			6,041			2,181			(87		)	8,135
Net other comprehensive income (loss)	(30,330		)	8,353			4,780			(702		)	(732		)	(18,631		)
Balance as of September 30, 2013	$	15,569		$	(34,666	)	$	(247,944	)	$	(9,662	)	$	222		$	(276,481	)

Attributable to Noncontrolling Interests:
Balance as of December 31, 2012	$	8,723		$	—		$	—		$	1		$	—		$	8,724
Other comprehensive loss before reclassifications	(225		)	—			—			(124		)	—			(349		)
Amounts reclassified from AOCI	—			—			—			(1		)	—			(1		)
Net other comprehensive loss	(225		)	—			—			(125		)	—			(350		)
Balance as of September 30, 2013	$	8,498		$	—		$	—		$	(124	)	$	—		$	8,374

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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

	Location in Condensed	Three Months Ended			Nine Months Ended
(in thousands)	Consolidated Statement of Earnings	September 30, 2013			September 30, 2013
Component of AOCI:
Defined benefit pension plan adjustments	Various accounts(1)	$	(3,220	)	$	(9,666	)
Income tax benefit	Income tax expense	1,208			3,625
Net of tax		$	(2,012	)	$	(6,041	)

Unrealized loss on derivative contracts:
Commodity contracts and foreign currency contracts	Total cost of revenue	$	(2,112	)	$	(2,237	)
Interest rate contracts	Interest expense	(419		)	(1,258		)
Income tax benefit	Income tax expense	949			1,315
Net of tax		(1,582		)	(2,180		)
Less: Noncontrolling interests	Net earnings attributable to noncontrolling interests	—			(1		)
Net of tax and noncontrolling interests		$	(1,582	)	$	(2,181	)

Unrealized gain on available-for-sale securities	Corporate general and administrative expense	$	3		$	139
Income tax expense	Income tax expense	(1		)	(52		)
Net of tax		$	2		$	87

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

(4) The effective tax rate, based on the company’s operating results for the three and nine months ended September 30, 2013 was 28.7 percent and 29.9 percent, respectively, compared to 34.8 percent and 31.7 percent for the corresponding periods of 2012. The effective tax rate for the three months ended September 30, 2013 was favorably impacted primarily by research tax credits, lower deferred U.S. taxes on foreign earnings and an increase in earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company. 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 effective tax rate for the nine months ended September 30, 2013 was favorably impacted by research tax credits and an increase in earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company. The effective tax rate for the nine months ended September 30, 2012 was favorably impacted by the recognition of a deferred U.S. tax benefit of $16 million primarily attributable to foreign earnings in South Africa.

The company conducts business globally and, as a result, the company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, the Netherlands, South Africa, the United Kingdom and the United States. Although the company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be materially different, both favorably and unfavorably. With few 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 for both the nine months ended September 30, 2013 and 2012. Income tax payments, net of receipts, were $153.3 million and $243.2 million during the nine-month periods ended September 30, 2013 and 2012, respectively.

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, 2013 and 2012 are presented below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2013		2012		2013		2012

Net earnings attributable to Fluor Corporation	$	173,046	$	144,583	$	500,916	$	460,655

Basic EPS:
Weighted average common shares outstanding	162,940		166,660		162,715		167,925

Basic earnings per share	$	1.06	$	0.87	$	3.08	$	2.74

Diluted EPS:
Weighted average common shares outstanding	162,940		166,660		162,715		167,925

Diluted effect:
Employee stock options and restricted stock units and shares	1,490		964		1,218		1,004
Conversion equivalent of dilutive convertible debt	415		344		391		342
Weighted average diluted shares outstanding	164,845		167,968		164,324		169,271

Diluted earnings per share	$	1.05	$	0.86	$	3.05	$	2.72

Anti-dilutive securities not included above	1,845		1,653		1,914		1,529

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.

(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

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, 2013 and December 31, 2012:

	September 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	$	19,114	$	19,114	(2)	$	—		$	—	$	14,457	$	14,457	(2)	$	—		$	—
Marketable securities, current	135,098		—			135,098		(3)	—		102,439		—			102,439		(3)
Deferred compensation trusts	81,350		81,350		(4)	—			—		80,842		80,842		(4)	—			—
Marketable securities, noncurrent	281,999		—			281,999		(5)	—		318,355		—			318,355		(5)	—
Derivative assets(6)
Commodity contracts	219		—			219			—		95		—			95			—
Foreign currency contracts	805		—			805			—		640		—			640			—

Liabilities(1):
Derivative liabilities(6)
Commodity contracts	$	290	$	—		$	290		$	—	$	28	$	—		$	28		$	—
Foreign currency contracts	3,344		—			3,344			—		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 with maturities of less than one year 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 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, 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 $223 million, commercial paper of $10 million and other debt securities of $6 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 nine months ended September 30, 2013, proceeds from the sales and maturities of available-for-sale securities were $29 million and $235 million, respectively, compared to $85 million and $434 million, respectively, for the corresponding periods of 2012.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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

		September 30, 2013				December 31, 2012
	Fair Value	Carrying		Fair		Carrying		Fair
(in thousands)	Hierarchy	Value		Value		Value		Value
Assets:
Cash(1)	Level 1	$	1,604,552	$	1,604,552	$	1,343,866	$	1,343,866
Cash equivalents(2)	Level 2	913,904		913,904		796,218		796,218
Marketable securities, current(3)	Level 2	22,812		22,812		34,688		34,688
Notes receivable, including noncurrent portion(4)	Level 3	25,836		25,836		34,471		34,471
Liabilities:
3.375% Senior Notes(5)	Level 2	$	496,494	$	493,992	$	496,164	$	527,219
1.5% Convertible Senior Notes(5)	Level 2	18,398		47,510		18,472		39,392
5.625% Municipal Bonds(5)	Level 2	—		—		17,795		17,878
Other borrowings(6)	Level 2	7,035		7,035		—		—
Notes payable, including noncurrent portion(7)	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 nine months of 2013, the company redeemed its 5.625% Municipal Bonds at a price of 100% of their principal amount.

(6) Other borrowings represent amounts outstanding under a short-term credit facility. The carrying amount of borrowings under this credit facility approximates fair value because of the short-term maturity.

(7) 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 nine 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.

(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

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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.

As of September 30, 2013, the company had total gross notional amounts of $127 million of foreign currency contracts and $12 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 May 2017. The impact to earnings due to hedge ineffectiveness was immaterial for the three and nine months ended September 30, 2013 and 2012.

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

	Asset Derivatives					Liability Derivatives
	Balance Sheet	September 30,		December 31,		Balance Sheet	September 30,		December 31,
(in thousands)	Location	2013		2012		Location	2013		2012
Commodity contracts	Other current assets	$	219	$	95	Other accrued liabilities	$	106	$	15
Foreign currency contracts	Other current assets	805		640		Other accrued liabilities	3,344		2,130
Commodity contracts	Other assets	—		—		Noncurrent liabilities	184		13
Foreign currency contracts	Other assets	—		—		Noncurrent liabilities	—		21
Total		$	1,024	$	735		$	3,634	$	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 nine months ended September 30, 2013 and 2012 is as follows:

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Fair Value Hedges (in thousands)	Location of Gain (Loss)	2013			2012			2013		2012
Foreign currency contracts	Corporate general and administrative expense	$	(81	)	$	(12,075	)	$	4,064	$	(19,773	)

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.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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					Nine Months Ended
	September 30,					September 30,
Cash Flow Hedges (in thousands)	2013			2012		2013			2012
Commodity contracts	$	47		$	619	$	79		$	1,011
Foreign currency contracts	(490		)	884		(2,962		)	2,910
Total	$	(443	)	$	1,503	$	(2,883	)	$	3,921

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

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Cash Flow Hedges (in thousands)	Location of Gain (Loss)	2013			2012			2013			2012
Commodity contracts	Total cost of revenue	$	(1	)	$	710		$	59		$	1,654
Foreign currency contracts	Total cost of revenue	(1,319		)	557			(1,454		)	558
Interest rate contracts	Interest expense	(262		)	(262		)	(786		)	(786		)
Total		$	(1,582	)	$	1,005		$	(2,181	)	$	1,426

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.

In the third quarter of 2013, the company adopted 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. The adoption of ASU 2013-10 did not have a material impact on the company’s financial position, results of operations or cash flows.

(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)	2013			2012			2013			2012			2013			2012			2013			2012
Service cost	$	1,613		$	1,489		$	4,840		$	4,468		$	3,809		$	1,921		$	11,505		$	5,815
Interest cost	7,275			8,323			21,825			24,970			7,989			8,070			23,925			24,518
Expected return on assets	(7,744		)	(8,830		)	(23,232		)	(26,492		)	(11,527		)	(10,369		)	(34,507		)	(31,446		)
Amortization of prior service cost	26			(28		)	77			(85		)	—			—			—			—
Recognized net actuarial loss	1,510			3,409			4,530			10,226			1,683			786			5,058			2,352
Net periodic pension expense	$	2,680		$	4,363		$	8,040		$	13,087		$	1,954		$	408		$	5,981		$	1,239

The company currently expects to fund approximately $20 million to $40 million into its defined benefit pension plans during 2013, which is expected to be in excess of the minimum funding required. During the nine months ended September 30, 2013, contributions of approximately $11 million were made by the company.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

During the third quarter of 2013, the company’s Board of Directors approved an amendment to the U.S. pension plan to freeze the accrual of future service-related benefits for craft participants on December 31, 2013. The amendment did not have a material impact on the plan’s pension obligation or accumulated other comprehensive income.

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, 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 third quarter of 2013 and the 2004 Notes were therefore classified as short-term debt as of December 31, 2012 and September 30, 2013. During the nine months ended September 30, 2013, holders converted less than $0.1 million of the 2004 Notes in exchange for the principal balance owed in cash plus 1,562 shares of the company’s common stock. 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.

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

	September 30,		December 31,
(in thousands)	2013		2012

Carrying value of the equity component	$	19,519	$	19,519
Principal amount and carrying value of the liability component	18,398		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 the three and nine month periods included original coupon interest of $0.1 million and $0.2 million, respectively, during both 2013 and 2012. The if-converted value of $48 million was in excess of the principal value as of September 30, 2013.

In the first quarter 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.

During the third quarter of 2013, the company borrowed $7 million under a short-term credit facility to purchase land and construction equipment associated with the equipment operations in the Global Services segment.

As of September 30, 2013, the company was in compliance with all of the financial covenants related to its debt agreements.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

(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 nine months of 2013 and 2012, restricted stock units and restricted shares totaling 477,731 and 450,668, respectively, were granted to executives and directors at weighted-average per share prices of $61.45 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 nine months 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 nine months 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.

(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 interests, 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, 2013, net earnings attributable to noncontrolling interests were $44.3 million and $137.0 million, respectively. For the three and nine months ended September 30, 2012, net earnings attributable to noncontrolling interests were $27.8 million and $81.4 million, respectively. Income taxes associated with earnings attributable to noncontrolling interests were immaterial in all periods presented. Distributions paid to noncontrolling interests were $79.5 million and $61.9 million for the nine months ended September 30, 2013 and 2012, respectively. Capital contributions by noncontrolling interests were $1.5 million and $3.6 million for the nine months ended September 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 as of 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 September 30, 2013.

As of September 30, 2013, several matters were in the litigation and dispute resolution process. The following discussion provides a background and current status of these matters:

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.

Table of Contents

FLUOR CORPORATION

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. The company is unable to estimate a range of possible losses in these lawsuits. In addition, the company has filed claims for indemnification under the sale agreement for other matters raised in these lawsuits. While management believes the company will be ultimately successful in these various matters, if the company was unsuccessful in its appeal of the ruling referenced above or in any of the other lawsuits, or in the prosecution of and collection on its indemnity claims, the company could recognize a material charge to its 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 filed an appeal, but the Court of Appeals for the Federal Circuit summarily affirmed the BCA’s decision in September 2013. The company has chosen not to further appeal this matter.

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 has chosen not to appeal 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.

Table of Contents

FLUOR CORPORATION

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 amount of future payments that the company could be required to make under outstanding performance guarantees, which represents the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts, was estimated to be $8.6 billion as of September 30, 2013. 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. The company assessed its performance guarantee obligation as of September 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 may 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.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

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 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 $150 million and $22 million as of September 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 September 30, 2013 for the unconsolidated VIEs were $38 million.

In some cases, the company is required to consolidate certain VIEs. As of September 30, 2013, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.3 billion and $765 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 for the 2012 periods. The company’s results of operations included revenue related to the Fluor SKM joint venture of $322 million and $1.6 billion for the three and nine months ended September 30, 2013, respectively, and $1.0 billion and $2.5 billion for the three and nine months ended September 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.

Table of Contents

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED

Operating information by segment is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
External Revenue (in millions)	2013		2012		2013		2012
Oil & Gas	$	2,892.7	$	2,551.6	$	8,518.5	$	6,887.4
Industrial & Infrastructure	2,665.0		3,465.0		8,879.5		10,102.0
Government	675.2		790.1		2,101.0		2,511.5
Global Services	149.7		159.5		454.0		503.0
Power	301.6		169.9		1,107.2		550.5
Total external revenue	$