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, 2016

 

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
incorporation or organization)

 

(I.R.S. Employer
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 29, 2016, 139,248,369 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

June 30, 2016

 

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, 2016 and 2015 (Unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of June 30, 2016 and December 31, 2015 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

Item 2:

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

28

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

 

 

Item 4:

Controls and Procedures

38

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

39

 

 

 

Part II:

Other Information

 

 

 

 

 

Item 1:

Legal Proceedings

40

 

 

 

 

 

Item 1A:

Risk Factors

40

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

 

Item 6:

Exhibits

41

 

 

 

Signatures

 

44

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

4,856,117

 

$

4,810,106

 

$

9,280,006

 

$

9,358,755

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

4,607,868

 

4,516,125

 

8,775,935

 

8,767,314

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

52,640

 

47,785

 

107,753

 

88,895

 

Interest expense

 

18,719

 

11,401

 

33,364

 

23,569

 

Interest income

 

(4,512

)

(4,054

)

(7,668

)

(8,750

)

Total cost and expenses

 

4,674,715

 

4,571,257

 

8,909,384

 

8,871,028

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

181,402

 

238,849

 

370,622

 

487,727

 

INCOME TAX EXPENSE

 

61,348

 

78,105

 

131,557

 

161,379

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

120,054

 

160,744

 

239,065

 

326,348

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,241

 

12,237

 

32,929

 

33,762

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

101,813

 

$

148,507

 

$

206,136

 

$

292,586

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.73

 

$

1.02

 

$

1.48

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.72

 

$

1.00

 

$

1.46

 

$

1.96

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

139,226

 

146,261

 

139,088

 

146,996

 

DILUTED

 

140,801

 

147,921

 

140,833

 

148,918

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.21

 

$

0.21

 

$

0.42

 

$

0.42

 

 

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)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

120,054

 

$

160,744

 

$

239,065

 

$

326,348

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(38,516

)

12,885

 

(16,180

)

(35,839

)

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

 

8,384

 

1,653

 

366

 

(2,828

)

Defined benefit pension and postretirement plan adjustments

 

1,208

 

2,677

 

(2,117

)

5,365

 

Unrealized gain (loss) on derivative contracts

 

(2,681

)

496

 

921

 

1,390

 

Unrealized gain (loss) on available-for-sale securities

 

265

 

(235

)

1,112

 

374

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

(31,340

)

17,476

 

(15,898

)

(31,538

)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

88,714

 

178,220

 

223,167

 

294,810

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,940

 

11,626

 

33,684

 

33,742

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

69,774

 

$

166,594

 

$

189,483

 

$

261,068

 

 

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 and per share amounts)

 

2016

 

2015

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($379,146 and $289,991 related to variable interest entities (“VIEs”))

 

$

1,627,054

 

$

1,949,886

 

Marketable securities, current ($67,156 and $70,176 related to VIEs)

 

125,086

 

197,092

 

Accounts and notes receivable, net ($262,090 and $186,833 related to VIEs)

 

1,676,241

 

1,203,024

 

Contract work in progress ($198,397 and $178,826 related to VIEs)

 

1,796,469

 

1,376,471

 

Other current assets ($30,373 and $27,362 related to VIEs)

 

426,390

 

378,927

 

Total current assets

 

5,651,240

 

5,105,400

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

163,715

 

220,634

 

Property, plant and equipment (“PP&E”) ((net of accumulated depreciation of $1,084,124 and $1,046,077) (net PP&E of $68,651 and $70,247 related to VIEs))

 

1,055,902

 

892,340

 

Goodwill

 

567,264

 

111,646

 

Investments

 

748,455

 

337,930

 

Deferred taxes

 

339,206

 

394,832

 

Deferred compensation trusts

 

332,432

 

360,725

 

Other assets ($24,616 and $24,141 related to VIEs)

 

383,253

 

201,899

 

TOTAL ASSETS

 

$

9,241,467

 

$

7,625,406

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($275,511 and $178,139 related to VIEs)

 

$

1,714,192

 

$

1,266,509

 

Revolving credit facility and other borrowings

 

166,081

 

 

Advance billings on contracts ($234,097 and $188,484 related to VIEs)

 

737,663

 

754,037

 

Accrued salaries, wages and benefits ($31,672 and $47,526 related to VIEs)

 

731,393

 

669,592

 

Other accrued liabilities ($40,060 and $25,384 related to VIEs)

 

430,701

 

245,214

 

Total current liabilities

 

3,780,030

 

2,935,352

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

1,547,459

 

986,564

 

NONCURRENT LIABILITIES

 

630,344

 

589,991

 

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 — 139,243,680 and 139,018,309 shares in 2016 and 2015, respectively

 

1,392

 

1,390

 

Additional paid-in capital

 

21,441

 

 

Accumulated other comprehensive loss

 

(449,428

)

(432,775

)

Retained earnings

 

3,566,143

 

3,428,732

 

Total shareholders’ equity

 

3,139,548

 

2,997,347

 

 

 

 

 

 

 

Noncontrolling interests

 

144,086

 

116,152

 

 

 

 

 

 

 

Total equity

 

3,283,634

 

3,113,499

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

9,241,467

 

$

7,625,406

 

 

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)

 

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

239,065

 

$

326,348

 

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

 

 

 

 

 

Depreciation of fixed assets

 

101,390

 

94,695

 

Amortization of intangibles

 

7,191

 

445

 

(Earnings) loss from equity method investments, net of distributions

 

13,951

 

(7,377

)

Gain on sale of property, plant and equipment

 

(10,182

)

(18,034

)

Amortization of stock-based awards

 

23,912

 

27,774

 

Deferred compensation trust

 

28,322

 

35,754

 

Deferred compensation obligation

 

10,416

 

3,169

 

Deferred taxes

 

23,972

 

146,941

 

Net retirement plan accrual (contributions)

 

(8,690

)

6,968

 

Changes in operating assets and liabilities

 

(341,659

)

(111,957

)

Cash outflows from discontinued operations

 

 

(306,490

)

Other items

 

2,856

 

5,953

 

Cash provided by operating activities

 

90,544

 

204,189

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of marketable securities

 

(216,884

)

(182,561

)

Proceeds from the sales and maturities of marketable securities

 

346,486

 

220,728

 

Capital expenditures

 

(107,345

)

(133,487

)

Proceeds from disposal of property, plant and equipment

 

39,047

 

54,890

 

Investments in partnerships and joint ventures

 

(400,651

)

(47,458

)

Acquisitions, net of cash acquired

 

(240,740

)

 

Other items

 

7,042

 

911

 

Cash utilized by investing activities

 

(573,045

)

(86,977

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Repurchase of common stock

 

(9,718

)

(214,253

)

Dividends paid

 

(59,333

)

(63,531

)

Proceeds from issuance of 1.75% Senior Notes

 

552,958

 

 

Debt issuance costs

 

(3,513

)

 

Repayment of Stork Notes, convertible debt and other borrowings

 

(332,509

)

(28,425

)

Borrowings under revolving lines of credit

 

883,750

 

 

Repayment of borrowings under revolving lines of credit

 

(851,594

)

 

Distributions paid to noncontrolling interests

 

(24,327

)

(41,766

)

Capital contributions by noncontrolling interests

 

8,016

 

2,294

 

Taxes paid on vested restricted stock

 

(6,987

)

(8,392

)

Stock options exercised

 

3,144

 

1,162

 

Other items

 

8,554

 

(3,495

)

Cash provided (utilized) by financing activities

 

168,441

 

(356,406

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(8,772

)

(30,171

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(322,832

)

(269,365

)

Cash and cash equivalents at beginning of period

 

1,949,886

 

1,993,125

 

Cash and cash equivalents at end of period

 

$

1,627,054

 

$

1,723,760

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(1)                  Principles of Consolidation

 

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, 2015 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, 2016 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, 2016 and December 31, 2015 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 2015 have been reclassified to conform to the 2016 presentation due to the implementation of new accounting pronouncements discussed below. Segment operating information for 2015 has been recast to reflect changes in the composition of the company’s reportable segments as discussed in Note 16. Management has evaluated all material events occurring subsequent to the date of the financial statements up to the filing date of this Form 10-Q.

 

The Condensed Consolidated Financial Statements as of and for the three and six months ended June 30, 2016 include the financial statements of Stork Holding B.V. (“Stork”) since March 1, 2016, the date of acquisition. See Note 17 for a further discussion of the acquisition.

 

(2)                  Recent Accounting Pronouncements

 

New accounting pronouncements implemented by the company during the first six months of 2016 or requiring implementation in future periods are discussed below or in the related notes, where appropriate.

 

In the first quarter of 2016, the company adopted Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes” on a retrospective basis. This ASU requires entities to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent. As a result of the adoption of ASU 2015-17, deferred tax assets of $173 million were reclassified from current assets to noncurrent assets on the Condensed Consolidated Balance Sheet as of December 31, 2015. The adoption of ASU 2015-17 did not have any impact on the company’s results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires an acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of ASU 2015-16 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update),” which clarifies the presentation and measurement of debt issuance costs incurred in connection with line of credit arrangements. The adoption of ASU 2015-15 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” on a prospective basis. This ASU clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. The adoption of ASU 2015-05 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on a retrospective basis. This ASU changes the presentation of debt issuance costs on the balance sheet by requiring entities to present such costs as a direct deduction from the related debt liability rather than as an asset. As a result of the adoption of ASU

 

6



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

2015-03, debt issuance costs of $6 million were reclassified from noncurrent assets to a direct deduction of long-term debt on the Condensed Consolidated Balance Sheet as of December 31, 2015. The adoption of ASU 2015-03 did not have any impact on the company’s results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-02, “Amendments to the Consolidation Analysis.” This ASU amends the consolidation guidance for VIEs and general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The adoption of ASU 2015-02 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” Under this ASU, an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. The adoption of ASU 2015-01 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2016, the company adopted ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period.” This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. The adoption of ASU 2014-12 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU replace the incurred loss impairment methodology in current practice with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Management does not expect the adoption of ASU 2016-13 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU is intended to simplify various aspects of the accounting for share-based payment awards, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Management is currently evaluating the impact of adopting ASU 2016-09 on the company’s financial position, results of operations and cash flows.

 

In March 2016, the FASB issued ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting” which eliminates the requirement to retrospectively apply equity method accounting when an investor obtains significant influence over a previously held investment. ASU 2016-07 is effective for interim and annual reporting periods beginning after December 15, 2016, and should be applied prospectively. Management does not expect the adoption of ASU 2016-07 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” This ASU clarifies that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. ASU 2016-05 is effective for interim and annual reporting periods beginning after December 15, 2016. ASU 2016-05 can be applied on either a prospective or modified retrospective basis. Management does not expect the adoption of ASU 2016-05 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification,” which amends the existing guidance on accounting for leases. This ASU requires the recognition of lease assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted and modified retrospective application is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Management is currently evaluating the impact of adopting ASU 2016-02 on the company’s financial position, results of operations or cash flows.

 

7



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to recognize any changes in fair value in net income unless the investments qualify for a practicability exception. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect the adoption of ASU 2016-01 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and subsequent interim reporting periods. Management does not expect the adoption of ASU 2014-15 to have a material impact on the company’s financial position, results of operations or cash flows.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 outlines a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards, and also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Major provisions include determining which goods and services are distinct and require separate accounting (performance obligations), how variable consideration (which may include change orders and claims) is recognized, whether revenue should be recognized at a point in time or over time and ensuring the time value of money is considered in the transaction price.

 

As a result of the deferral of the effective date in ASU 2015-14, “Revenue from Contracts with Customers — Deferral of the Effective Date,” the company will now be required to adopt ASU 2014-09 for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of interim and annual reporting periods beginning after December 15, 2016. ASU 2014-09 can be applied either retrospectively to each prior period presented or as a cumulative-effect adjustment as of the date of adoption.

 

In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” which clarifies the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies how an entity determines whether to report revenue gross or net based on whether it controls a specific good or service before it is transferred to a customer. ASU 2016-08 also reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent.

 

In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which amends certain aspects of ASU 2014-09. ASU 2016-10 amends how an entity should identify performance obligations for immaterial promised goods or services, shipping and handling activities and promises that may represent performance obligations. ASU 2016-10 also provides implementation guidance for determining the nature of licensing and royalties arrangements.

 

In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which also clarifies certain aspects of ASU 2014-09 including the assessment of collectability, presentation of sales taxes, treatment of noncash consideration, and accounting for completed contracts and contract modifications at transition. ASU 2016-12, 2016-10 and 2016-08 are effective upon adoption of ASU 2014-09.

 

Management is currently evaluating the impact of adopting ASU 2014-09, 2016-08, 2016-10 and 2016-12 on the company’s financial position, results of operations, cash flows and related disclosures. Adoption of these ASUs is expected to affect the manner in which the company determines the unit of account for its projects (i.e., performance obligations). Under existing

 

8



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

guidance, the company typically segments revenue and margin recognition between the engineering and construction phases of its contracts. Upon adoption, the company expects that the entire engineering and construction contract will typically be a single unit of account (a single performance obligation), which will result in a more consistent recognition of revenue and margin over the term of the contract. Management is considering whether to adopt ASU 2014-09 at the required adoption date for the company (January 2018) or earlier (January 2017). The company expects to adopt this new standard using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption.

 

(3)                  Other Comprehensive Income (Loss)

 

The tax effects of the components of other comprehensive income (loss) (“OCI”) for the three months ended June 30, 2016 and 2015 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

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

 

$

(61,923

)

$

23,407

 

$

(38,516

)

$

21,082

 

$

(8,197

)

$

12,885

 

Ownership share of equity method investees’ other comprehensive income

 

13,112

 

(4,728

)

8,384

 

1,838

 

(185

)

1,653

 

Defined benefit pension and postretirement plan adjustments

 

1,933

 

(725

)

1,208

 

4,283

 

(1,606

)

2,677

 

Unrealized gain (loss) on derivative contracts

 

(4,337

)

1,656

 

(2,681

)

648

 

(152

)

496

 

Unrealized gain (loss) on available-for-sale securities

 

424

 

(159

)

265

 

(375

)

140

 

(235

)

Total other comprehensive income (loss)

 

(50,791

)

19,451

 

(31,340

)

27,476

 

(10,000

)

17,476

 

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

 

699

 

 

699

 

(611

)

 

(611

)

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

(51,490

)

$

19,451

 

$

(32,039

)

$

28,087

 

$

(10,000

)

$

18,087

 

 

9



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The tax effects of the components of OCI for the six months ended June 30, 2016 and 2015 are as follows:

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

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

 

$

(26,168

)

$

9,988

 

$

(16,180

)

$

(57,189

)

$

21,350

 

$

(35,839

)

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

 

1,020

 

(654

)

366

 

(4,164

)

1,336

 

(2,828

)

Defined benefit pension and postretirement plan adjustments

 

(617

)

(1,500

)

(2,117

)

8,584

 

(3,219

)

5,365

 

Unrealized gain on derivative contracts

 

1,448

 

(527

)

921

 

2,062

 

(672

)

1,390

 

Unrealized gain on available-for-sale securities

 

1,779

 

(667

)

1,112

 

599

 

(225

)

374

 

Total other comprehensive loss

 

(22,538

)

6,640

 

(15,898

)

(50,108

)

18,570

 

(31,538

)

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

 

755

 

 

755

 

(20

)

 

(20

)

Other comprehensive loss attributable to Fluor Corporation

 

$

(23,293

)

$

6,640

 

$

(16,653

)

$

(50,088

)

$

18,570

 

$

(31,518

)

 

The changes in accumulated other comprehensive income (“AOCI”) balances by component (after-tax) for the three months ended June 30, 2016 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 March 31, 2016

 

$

(200,207

)

$

(45,967

)

$

(165,855

)

$

(5,735

)

$

375

 

$

(417,389

)

Other comprehensive income (loss) before reclassifications

 

(39,010

)

8,384

 

 

(3,980

)

325

 

(34,281

)

Amounts reclassified from AOCI

 

 

 

1,208

 

1,094

 

(60

)

2,242

 

Net other comprehensive income (loss)

 

(39,010

)

8,384

 

1,208

 

(2,886

)

265

 

(32,039

)

Balance as of June 30, 2016

 

$

(239,217

)

$

(37,583

)

$

(164,647

)

$

(8,621

)

$

640

 

$

(449,428

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016

 

$

(140

)

$

 

$

 

$

(428

)

$

 

$

(568

)

Other comprehensive income before reclassifications

 

494

 

 

 

126

 

 

620

 

Amounts reclassified from AOCI

 

 

 

 

79

 

 

79

 

Net other comprehensive income

 

494

 

 

 

205

 

 

699

 

Balance as of June 30, 2016

 

$

354

 

$

 

$

 

$

(223

)

$

 

$

131

 

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the six months ended June 30, 2016 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, 2015

 

$

(222,569

)

$

(37,949

)

$

(162,530

)

$

(9,255

)

$

(472

)

$

(432,775

)

Other comprehensive income (loss) before reclassifications

 

(16,648

)

366

 

(4,617

)

(2,184

)

1,135

 

(21,948

)

Amounts reclassified from AOCI

 

 

 

2,500

 

2,818

 

(23

)

5,295

 

Net other comprehensive income (loss)

 

(16,648

)

366

 

(2,117

)

634

 

1,112

 

(16,653

)

Balance as of June 30, 2016

 

$

(239,217

)

$

(37,583

)

$

(164,647

)

$

(8,621

)

$

640

 

$

(449,428

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(114

)

$

 

$

 

$

(510

)

$

 

$

(624

)

Other comprehensive income before reclassifications

 

468

 

 

 

110

 

 

578

 

Amounts reclassified from AOCI

 

 

 

 

177

 

 

177

 

Net other comprehensive income

 

468

 

 

 

287

 

 

755

 

Balance as of June 30, 2016

 

$

354

 

$

 

$

 

$

(223

)

$

 

$

131

 

 

The changes in AOCI balances by component (after-tax) for the three months ended June 30, 2015 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 March 31, 2015

 

$

(168,660

)

$

(34,917

)

$

(322,457

)

$

(8,131

)

$

348

 

$

(533,817

)

Other comprehensive income (loss) before reclassifications

 

13,660

 

1,653

 

 

(120

)

(234

)

14,959

 

Amounts reclassified from AOCI

 

 

 

2,677

 

452

 

(1

)

3,128

 

Net other comprehensive income (loss)

 

13,660

 

1,653

 

2,677

 

332

 

(235

)

18,087

 

Balance as of June 30, 2015

 

$

(155,000

)

$

(33,264

)

$

(319,780

)

$

(7,799

)

$

113

 

$

(515,730

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2015

 

$

1,848

 

$

 

$

 

$

(614

)

$

 

$

1,234

 

Other comprehensive income (loss) before reclassifications

 

(775

)

 

 

105

 

 

(670

)

Amounts reclassified from AOCI

 

 

 

 

59

 

 

59

 

Net other comprehensive income (loss)

 

(775

)

 

 

164

 

 

(611

)

Balance as of June 30, 2015

 

$

1,073

 

$

 

$

 

$

(450

)

$

 

$

623

 

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the six months ended June 30, 2015 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, 2014

 

$

(119,416

)

$

(30,436

)

$

(325,145

)

$

(8,954

)

$

(261

)

$

(484,212

)

Other comprehensive income (loss) before reclassifications

 

(35,584

)

(2,828

)

 

476

 

444

 

(37,492

)

Amounts reclassified from AOCI

 

 

 

5,365

 

679

 

(70

)

5,974

 

Net other comprehensive income (loss)

 

(35,584

)

(2,828

)

5,365

 

1,155

 

374

 

(31,518

)

Balance as of June 30, 2015

 

$

(155,000

)

$

(33,264

)

$

(319,780

)

$

(7,799

)

$

113

 

$

(515,730

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

$

1,328

 

$

 

$

 

$

(685

)

$

 

$

643

 

Other comprehensive income (loss) before reclassifications

 

(255

)

 

 

102

 

 

(153

)

Amounts reclassified from AOCI

 

 

 

 

133

 

 

133

 

Net other comprehensive income (loss)

 

(255

)

 

 

235

 

 

(20

)

Balance as of June 30, 2015

 

$

1,073

 

$

 

$

 

$

(450

)

$

 

$

623

 

 

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

 

Three Months Ended

 

Six Months Ended

 

 

 

Condensed Consolidated

 

June 30,

 

June 30,

 

(in thousands)

 

Statement of Earnings

 

2016

 

2015

 

2016

 

2015

 

Component of AOCI:

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(1,933

)

$

(4,283

)

$

(4,000

)

$

(8,584

)

Income tax benefit

 

Income tax expense

 

725

 

1,606

 

1,500

 

3,219

 

Net of tax

 

 

 

$

(1,208

)

$

(2,677

)

$

(2,500

)

$

(5,365

)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

Commodity and foreign currency contracts

 

Total cost of revenue

 

$

(1,412

)

$

(398

)

$

(3,884

)

$

(460

)

Interest rate contracts

 

Interest expense

 

(420

)

(420

)

(839

)

(839

)

Income tax benefit (net)

 

Income tax expense

 

659

 

307

 

1,728

 

487

 

Net of tax

 

 

 

(1,173

)

(511

)

(2,995

)

(812

)

Less: Noncontrolling interests

 

Net earnings attributable to noncontrolling interests

 

(79

)

(59

)

(177

)

(133

)

Net of tax and noncontrolling interests

 

 

 

$

(1,094

)

$

(452

)

$

(2,818

)

$

(679

)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

Corporate general and administrative expense

 

$

95

 

$

2

 

$

36

 

$

112

 

Income tax expense

 

Income tax expense

 

(35

)

(1

)

(13

)

(42

)

Net of tax

 

 

 

$

60

 

$

1

 

$

23

 

$

70

 

 


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

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(4)                  Income Taxes

 

The effective tax rates for the three and six months ended June 30, 2016 were 33.8 percent and 35.5 percent, respectively, compared to 32.7 percent and 33.1 percent for the corresponding periods of 2015. The higher effective rates for the three and six months ended June 30, 2016 were primarily due to unfavorable impacts of foreign losses without benefits and the prior periods being favorably impacted by a benefit for an IRS settlement. Both periods benefitted from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of 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 2012.

 

(5)                  Cash Paid for Interest and Taxes

 

Cash paid for interest was $38 million and $21 million for the six months ended June 30, 2016 and 2015, respectively. Income tax payments, net of refunds, were $77 million and $115 million during the six-month periods ended June 30, 2016 and 2015, respectively.

 

(6)                   Earnings Per Share

 

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, 2016 and 2015 are presented below:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

101,813

 

$

148,507

 

$

206,136

 

$

292,586

 

 

 

 

 

 

 

 

 

 

 

Basic EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

139,226

 

146,261

 

139,088

 

146,996

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.73

 

$

1.02

 

$

1.48

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

139,226

 

146,261

 

139,088

 

146,996

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

Employee stock options, restricted stock units and shares and Value Driver Incentive units

 

1,575

 

1,660

 

1,745

 

1,742

 

Conversion equivalent of dilutive convertible debt

 

 

 

 

180

 

Weighted average diluted shares outstanding

 

140,801

 

147,921

 

140,833

 

148,918

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.72

 

$

1.00

 

$

1.46

 

$

1.96

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

4,107

 

3,499

 

3,917

 

3,330

 

 

13



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

During the six months ended June 30, 2016, the company repurchased and cancelled 202,650 shares of its common stock under its stock repurchase program for $10 million. No shares were repurchased during the three months ended June 30, 2016. During the three and six months ended June 30, 2015, the company repurchased and cancelled 1,782,679 and 3,722,676 shares, respectively, of its common stock under its stock repurchase program for $103 million and $214 million, respectively.

 

(7)                  Fair Value Measurements

 

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 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.

 

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, 2016 and December 31, 2015:

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Fair Value Hierarchy

 

Fair Value Hierarchy

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents(1)

 

$

6,526

 

$

6,526

 

$

 

$

 

$

19,161

 

$

19,161

 

$

 

$

 

Marketable securities, current(2)

 

49,442

 

 

49,442

 

 

87,763

 

 

87,763

 

 

Deferred compensation trusts(3)

 

30,130

 

30,130

 

 

 

60,003

 

60,003

 

 

 

Marketable securities, noncurrent(4)

 

163,715

 

 

163,715

 

 

220,634

 

 

220,634

 

 

Derivative assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

138

 

 

138

 

 

341

 

 

341

 

 

Foreign currency contracts

 

29,149

 

 

29,149

 

 

8,439

 

 

8,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

1,549

 

$

 

$

1,549

 

$

 

$

2,510

 

$

 

$

2,510

 

$

 

Foreign currency contracts

 

33,034

 

 

33,034

 

 

14,138

 

 

14,138

 

 

 


(1) 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.

 

(2) Consists of investments in U.S. agency securities, U.S. Treasury securities and corporate 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.

 

(3) 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 based on the last trade or official close of an active market or exchange.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(4)     Consists of investments in U.S. agency securities, U.S. Treasury securities and corporate 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.

 

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

 

All of the company’s financial instruments carried at fair value are included in the table above. All of the above financial instruments are available-for-sale securities except for those held in the deferred compensation trusts (which are trading securities) and derivative assets and liabilities. The company has determined that there was no other-than-temporary impairment of available-for-sale securities with unrealized losses, and the company expects to recover the entire cost basis of the securities. The available-for-sale securities are made up of the following security types as of June 30, 2016: money market funds of $7 million, U.S. agency securities of $13 million, U.S. Treasury securities of $90 million and corporate debt securities of $110 million. As of December 31, 2015, available-for-sale securities consisted of money market funds of $19 million, U.S. agency securities of $18 million, U.S. Treasury securities of $102 million and corporate debt securities of $189 million. The amortized cost of these available-for-sale securities is not materially different from the fair value. During the three and six months ended June 30, 2016, proceeds from sales and maturities of available-for-sale securities were $92 million and $214 million, respectively, compared to $20 million and $203 million for the corresponding periods of 2015.

 

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

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in thousands)

 

Hierarchy

 

Value

 

Value

 

Value

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

992,591

 

$

992,591

 

$

1,073,756

 

$

1,073,756

 

Cash equivalents(2)

 

Level 2

 

627,937

 

627,937

 

856,969

 

856,969

 

Marketable securities, current(3)

 

Level 2

 

75,644

 

75,644

 

109,329

 

109,329

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

25,010

 

25,010

 

19,182

 

19,182

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

1.750% Senior Notes(5)

 

Level 2

 

$

549,340

 

$

579,954

 

$

 

$

 

3.375% Senior Notes(5)

 

Level 2

 

495,588

 

530,435

 

495,165

 

509,025

 

3.5% Senior Notes(5)

 

Level 2

 

491,879

 

536,135

 

491,399

 

504,265

 

Revolving Credit Facility(6)

 

Level 2

 

121,803

 

121,803

 

 

 

Other borrowings, including noncurrent portion(7)

 

Level 2

 

54,930

 

54,930

 

 

 

 


(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.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(5) The fair value of the 1.750% Senior Notes, 3.375% Senior Notes and 3.5% Senior Notes were estimated based on quoted market prices for similar issues.

 

(6) Amounts represent borrowings under the company’s €125 million Revolving Credit Facility which expires in April 2017, as discussed in Note 10. The carrying amount of the borrowings under this revolving credit facility approximates fair value because of the short-term maturity.

 

(7) Other borrowings as of June 30, 2016 primarily represent bank loans and other financing arrangements assumed in conjunction with the acquisition of Stork. See Note 17 for a further discussion of the acquisition. The majority of these borrowings mature within one year. The carrying amounts of the borrowings under these arrangements approximate fair value because of the short-term maturity.

 

(8)                  Derivatives and Hedging

 

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 monetary assets and liabilities denominated in nonfunctional 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 implements a hedging strategy utilizing derivative instruments as hedging instruments to mitigate the risk. These hedging instruments 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 instrument’s gain or loss due to changes in fair value is recorded as a component of AOCI and is reclassified into earnings when the hedged item settles. Any ineffective portion of a hedging instrument’s change in fair value is immediately recognized in earnings. The company does not enter into derivative instruments 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 June 30, 2016, the company had total gross notional amounts of $790 million of foreign currency contracts and $6 million of commodity contracts outstanding relating to hedging of engineering and construction contract obligations and monetary assets and liabilities denominated in nonfunctional currencies. The foreign currency contracts are of varying duration, none of which extend beyond December 2019. The commodity contracts are of varying duration, none of which extend beyond December 2017. The impact to earnings due to hedge ineffectiveness was immaterial for the three and six months ended June 30, 2016 and 2015.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of June 30, 2016 and December 31, 2015 were as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

June 30,

 

December 31,

 

Balance Sheet

 

June 30,

 

December 31,

 

(in thousands)

 

Location

 

2016

 

2015

 

Location

 

2016

 

2015

 

Commodity contracts

 

Other current assets

 

$

138

 

$

326

 

Other accrued liabilities

 

$

1,460

 

$

2,195

 

Foreign currency contracts

 

Other current assets

 

14,707

 

6,865

 

Other accrued liabilities

 

16,587

 

12,381

 

Commodity contracts

 

Other assets

 

 

15

 

Noncurrent liabilities

 

89

 

315

 

Foreign currency contracts

 

Other assets

 

14,442

 

1,574

 

Noncurrent liabilities

 

16,447

 

1,757

 

Total

 

 

 

$

29,287

 

$

8,780

 

 

 

$

34,583

 

$

16,648

 

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The pre-tax net gains (losses) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three and six months ended June 30, 2016 and 2015 were as follows:

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Corporate general and administrative expense

 

$

(1,521

)

$

5,237

 

$

(1,326

)

$

4,083

 

 

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 amount of gain (loss) recognized in earnings on the hedged items in the same locations on the Condensed Consolidated Statement of Earnings.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Cash Flow Hedges (in thousands)

 

2016

 

2015

 

2016

 

2015

 

Commodity contracts

 

$

298

 

$

11

 

$

300

 

$

(102

)

Foreign currency contracts

 

(4,278

)

(131

)

(2,484

)

578

 

Total

 

$

(3,980

)

$

(120

)

$

(2,184

)

$

476

 

 

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

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Cash Flow Hedges (in thousands)

 

Location of Gain (Loss)

 

2016

 

2015

 

2016

 

2015

 

Commodity contracts

 

Total cost of revenue

 

$

(57

)

$

(120

)

$

(177

)

$

(211

)

Foreign currency contracts

 

Total cost of revenue

 

(775

)

(70

)

(2,117

)

56

 

Interest rate contracts

 

Interest expense

 

(262

)

(262

)

(524

)

(524

)

Total

 

 

 

$

(1,094

)

$

(452

)

$

(2,818

)

$

(679

)

 

As of June 30, 2016, the company also had total gross notional amounts of $8 million of foreign currency contracts and $2 million of commodity contracts outstanding that were not designated as hedging instruments. These contracts primarily related to engineering and construction and operations and maintenance contract obligations denominated in nonfunctional currencies. Recognized gains of $3 million and $0.3 million associated with these contracts were included in Cost of Revenues for the three and six months ended June 30, 2016, respectively.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(9)