FLR

FLUOR CORPORATION - 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, and the six-month period ended on the same date. Fluor Corporation is a global engineering, procurement, and construction firm organized into five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power. The company recently completed the relocation of its corporate headquarters from Southern California to Irving, Texas.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 18% for the quarter and 22% for the six-month period compared to 2005. This was primarily driven by work supporting the Federal Emergency Management Agency (FEMA) for hurricane relief efforts and growth in the Oil & Gas and Industrial segments.
• Profitability Surge: Net earnings turned from a loss of $16.4 million in Q2 2005 to a profit of $66.6 million in Q2 2006. The 2005 loss was significantly impacted by a $65 million charge related to an unfavorable jury award in the Cayman Islands and provisions on embassy projects.
• Cash Flow: Operating cash flow turned negative ($243.9 million utilized) for the six months ended June 30, 2006, compared to positive cash flow in 2005. This was due to substantial working capital requirements to support FEMA activities and project execution expansion.
• Corporate Expenses: Corporate administrative expenses increased significantly due to $11.3 million in costs associated with the headquarters relocation and the adoption of new share-based compensation accounting standards (SFAS 123-R).

Outlook, Risks, and Unusual Items

• Guidance & Outlook: Management expects FEMA-related activity to decline for the balance of 2006. Additionally, the completion of the Fernald project and the re-bidding of the Hanford project are expected to result in significantly reduced revenues and operating profit in the Government segment starting in the second half of 2006.
• Unusual Items:
  • Headquarters Relocation: $8.8 million in Q2 and $11.3 million in the first half of 2006 were charged to corporate expenses for relocation costs. Approximately $7 million in additional costs are expected for the remainder of 2006.
  • Accounting Changes: Adoption of SFAS 123-R resulted in increased compensation expense recognition for stock options and restricted stock.
• Risks & Contingencies:
  • Dispute Resolution: Several projects are in dispute resolution, including the London Connect Project, Embassy Projects (claims totaling ~$80 million submitted), and the Infrastructure Joint Venture Project in California (claims totaling ~$120 million submitted).
  • Convertible Notes: $330 million of Convertible Senior Notes are classified as short-term debt because the stock price trigger for cash conversion was met. The company does not know the amount that will be presented for conversion.

Investor Verification Checklist

• FEMA Revenue Sustainability: Verify the timeline for the decline in FEMA-related revenues and the impact on the Government segment's backlog and profitability in H2 2006.
• Convertible Notes Conversion: Monitor the stock price to determine if the $330 million in Convertible Senior Notes will be converted to equity or repaid in cash, impacting liquidity.
• Dispute Resolution Outcomes: Track the status of the London Connect, Embassy, and California Infrastructure Joint Venture disputes, as final resolutions could materially impact earnings.
• Working Capital Trends: Assess the normalization of operating cash flows as FEMA project execution winds down and working capital requirements stabilize.
• Headquarters Cost Completion: Confirm the final total cost of the headquarters relocation against the estimated remaining $7 million expense.