FLR

FLUOR CORPORATION - 10-Q Summary (Period Ended September 30, 2002)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Fluor Corporation, a global engineering and construction firm, for the period ended September 30, 2002. The company operates through five segments: Energy and Chemicals, Industrial and Infrastructure, Power, Global Services, and Government Services. As of October 31, 2002, there were 80,343,968 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 11% for the quarter and 18% for the nine-month period compared to 2001, driven by higher work in the Energy and Chemicals and Power segments.
• Profitability: Net earnings turned positive ($31.2M) compared to a net loss of $54.5 million in the prior year quarter. This improvement is largely due to a significant reduction in losses from discontinued operations and lower dispute resolution provisions compared to 2001.
• Discontinued Operations: The company recognized a loss on disposal of $15.6 million for the quarter (vs. $98.0 million in 2001) related to the divestiture of construction equipment and temporary staffing businesses.
• Backlog: Consolidated backlog decreased slightly to $10.9 billion from $11.0 billion a year ago. New awards decreased 15% in the quarter and 11% for the nine-month period.
• Segment Performance:
  • Energy & Chemicals: Revenue up 38%; Operating profit up 75%.
  • Power: Revenue down 16%; Operating profit up 24% due to early project completions.
  • Industrial & Infrastructure: Revenue up 14%; Operating profit down 30% due to dispute provisions (Verde Gold project).

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2002 earnings from continuing operations of approximately $168 million ($2.10 per share). For 2003, the range is revised to $2.10 to $2.35 per share (previously $2.20 to $2.35) due to the suspension of the Tengizchevroil (TCO) expansion projects in Kazakhstan, which could reduce 2002 new awards by approximately $1 billion.
• Liquidity: The company maintains a strong cash position ($833.3 million) with minimal debt. Liquidity is supported by customer advances and access to $350 million in commercial paper and $120 million in uncommitted lines of credit.
• Dispute Resolution:
  • AT&T Wireless: Settled for $20 million (no earnings impact).
  • Murrin Murrin: Arbitration award of $84 million to client; company expects full insurance recovery.
  • Solutia: Settled for $20 million; expected to recognize $7 million in earnings in Q4 2002.
• Pension Liability: Due to market declines, pension assets are below accumulated benefit obligations. If minimum pension liability is recognized, it could result in a net-of-tax charge to equity of approximately $132 million. Pension expense in 2003 could increase by $10 million to $15 million.
• Accounting Changes: Potential consolidation of variable interest entities (synthetic leases) could increase long-term debt by approximately $125 million if new FASB rules are adopted.

Investor Verification Checklist

• Verify the status and funding agreement for the suspended Tengizchevroil (TCO) projects in Kazakhstan, as this directly impacts the 2003 earnings guidance.
• Confirm the timeline and certainty of insurance recoveries for the Murrin Murrin arbitration award ($84 million) and the Solutia settlement.
• Monitor the resolution of the pension funding shortfall and the potential $132 million charge to equity.
• Assess the impact of potential new consolidation rules for synthetic leases on the balance sheet debt levels.
• Review the progress of the remaining discontinued operations (AMECO dealership and TRS UK) to ensure disposal losses are fully recognized.