10-Q 1 a15-7706_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

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 March 31, 2015

 

 

 

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 April 24, 2015, 146,572,661 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

March 31, 2015

 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

Part I:

Financial Information

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of March 31, 2015 and December 31, 2014 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

Item 2:

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

21

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

 

 

Item 4:

Controls and Procedures

30

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

31

 

 

 

Part II:

Other Information

 

 

 

 

 

Item 1:

Legal Proceedings

32

 

 

 

 

 

Item 1A:

Risk Factors

32

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

 

Item 5:

Other Information

32

 

 

 

 

 

Item 6:

Exhibits

33

 

 

 

 

Signatures

36

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

4,548,649

 

$

5,384,636

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

4,251,189

 

5,072,304

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

Corporate general and administrative expense

 

41,110

 

37,773

 

Interest expense

 

12,168

 

6,897

 

Interest income

 

(4,696

)

(3,806

)

Total cost and expenses

 

4,299,771

 

5,113,168

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

248,878

 

271,468

 

INCOME TAX EXPENSE

 

83,274

 

78,158

 

 

 

 

 

 

 

NET EARNINGS

 

165,604

 

193,310

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

21,525

 

44,236

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

144,079

 

$

149,074

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.98

 

$

0.93

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.96

 

$

0.92

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

BASIC

 

147,731

 

160,213

 

DILUTED

 

149,915

 

162,360

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.21

 

$

0.21

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

NET EARNINGS

 

$

165,604

 

$

193,310

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

Foreign currency translation adjustment

 

(48,724

)

(12,729

)

Ownership share of equity method investees’ other comprehensive loss

 

(4,481

)

(1,998

)

Defined benefit pension and postretirement plan adjustments

 

2,688

 

1,648

 

Unrealized gain (loss) on derivative contracts

 

894

 

(429

)

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

 

609

 

(18

)

TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX

 

(49,014

)

(13,526

)

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

116,590

 

179,784

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

22,116

 

39,897

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

94,474

 

$

139,887

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

 

 

March 31,

 

December 31,

 

(in thousands, except share and per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($342,823 and $352,996 related to variable interest entities (“VIEs”))

 

$

1,811,293

 

$

1,993,125

 

Marketable securities, current ($70,065 and $14,082 related to VIEs)

 

145,568

 

105,131

 

Accounts and notes receivable, net ($209,058 and $193,565 related to VIEs)

 

1,256,292

 

1,471,705

 

Contract work in progress ($200,180 and $166,334 related to VIEs)

 

1,486,943

 

1,587,275

 

Deferred taxes

 

320,147

 

340,223

 

Other current assets ($27,868 and $38,848 related to VIEs)

 

359,010

 

260,588

 

Total current assets

 

5,379,253

 

5,758,047

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

254,761

 

343,644

 

Property, plant and equipment (“PP&E”) ((net of accumulated depreciation of $1,071,024 and $1,081,198) (net PP&E of $81,181 and $77,579 related to VIEs))

 

965,935

 

980,263

 

Investments and goodwill

 

335,986

 

302,757

 

Deferred taxes

 

106,049

 

201,004

 

Deferred compensation trusts

 

371,418

 

405,022

 

Other assets ($24,796 and $24,003 related to VIEs)

 

205,794

 

203,692

 

TOTAL ASSETS

 

$

7,619,196

 

$

8,194,429

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($202,316 and $213,837 related to VIEs)

 

$

1,251,950

 

$

1,422,084

 

Convertible senior notes and other borrowings

 

27,738

 

28,742

 

Advance billings on contracts ($188,732 and $151,321 related to VIEs)

 

586,020

 

569,418

 

Accrued salaries, wages and benefits ($51,113 and $51,749 related to VIEs)

 

697,174

 

725,586

 

Other accrued liabilities ($26,130 and $21,709 related to VIEs)

 

256,814

 

585,023

 

Total current liabilities

 

2,819,696

 

3,330,853

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

992,231

 

991,685

 

NONCURRENT LIABILITIES

 

606,013

 

648,061

 

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 — 146,976,144 and 148,633,640 shares in 2015 and 2014, respectively

 

1,470

 

1,486

 

Additional paid-in capital

 

 

 

Accumulated other comprehensive loss

 

(533,817

)

(484,212

)

Retained earnings

 

3,601,071

 

3,593,597

 

Total shareholders’ equity

 

3,068,724

 

3,110,871

 

 

 

 

 

 

 

Noncontrolling interests

 

132,532

 

112,959

 

 

 

 

 

 

 

Total equity

 

3,201,256

 

3,223,830

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

7,619,196

 

$

8,194,429

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

165,604

 

$

193,310

 

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

 

 

 

 

 

Depreciation of fixed assets

 

47,803

 

48,492

 

Amortization of intangibles

 

223

 

223

 

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

 

(7,386

)

2,784

 

Gain on sale of property, plant and equipment

 

(8,841

)

(5,108

)

Restricted stock and stock option amortization

 

12,546

 

10,792

 

Deferred compensation trust

 

33,604

 

(1,946

)

Deferred compensation obligation

 

6,164

 

4,649

 

Deferred taxes

 

143,601

 

23,605

 

Excess tax benefit from stock-based plans

 

867

 

(3,115

)

Net retirement plan accrual (contributions)

 

3,391

 

(7,306

)

Changes in operating assets and liabilities

 

(52,775

)

(76,456

)

Cash outflows from discontinued operations

 

(306,490

)

 

Other items

 

971

 

(3,210

)

Cash provided by operating activities

 

39,282

 

186,714

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

(147,068

)

(134,264

)

Proceeds from the sales and maturities of marketable securities

 

194,635

 

88,643

 

Capital expenditures

 

(73,883

)

(66,628

)

Proceeds from disposal of property, plant and equipment

 

29,905

 

24,557

 

Investments in partnerships and joint ventures

 

(21,537

)

(4,978

)

Other items

 

(197

)

(1,070

)

Cash utilized by investing activities

 

(18,145

)

(93,740

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

(111,658

)

(192,301

)

Dividends paid

 

(32,363

)

(25,966

)

Distributions paid to noncontrolling interests

 

(3,508

)

(15,898

)

Capital contributions by noncontrolling interests

 

698

 

46

 

Taxes paid on vested restricted stock

 

(7,588

)

(9,979

)

Stock options exercised

 

923

 

14,070

 

Excess tax benefit from stock-based plans

 

(867

)

3,115

 

Other items

 

393

 

1,896

 

Cash utilized by financing activities

 

(153,970

)

(225,017

)

Effect of exchange rate changes on cash

 

(48,999

)

(9,481

)

Decrease in cash and cash equivalents

 

(181,832

)

(141,524

)

Cash and cash equivalents at beginning of period

 

1,993,125

 

2,283,582

 

Cash and cash equivalents at end of period

 

$

1,811,293

 

$

2,142,058

 

 

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, 2014 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 months ended March 31, 2015 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 March 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 2014 have been reclassified to conform to the 2015 presentation. 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.

 

(2)                  Recent Accounting Pronouncements

 

New accounting pronouncements implemented by the company during the first quarter of 2015 or requiring implementation in future periods are discussed below or elsewhere in the notes, where appropriate.

 

In the first quarter of 2015, the company adopted Accounting Standards Update (“ASU”) 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures,” which makes limited amendments to the guidance in Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing,” on accounting for certain repurchase agreements (“repos”). The ASU (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements); (2) eliminates accounting guidance on linked repurchase financing transactions; and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions and repurchase-to-maturity transactions) accounted for as secured borrowings. The adoption of ASU 2014-11 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first of 2015, the company adopted ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amends the definition of a discontinued operation and requires entities to provide additional disclosures about disposal transactions that do not meet the discontinued operations criteria. This ASU requires discontinued operations treatment for disposals of a component or group of components of an entity that represent a strategic shift that has or will have a major impact on an entity’s operations or financial results. ASU 2014-08 also expands the scope of ASC 205-20, “Discontinued Operations,” to disposals of equity method investments and acquired businesses held for sale. The adoption of ASU 2014-08 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2015, the company adopted ASU 2014-05, “Service Concession Arrangements.” This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. The adoption of ASU 2014-05 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Management does not expect the adoption of ASU 2015-05 to have a material impact on the company’s financial position, result of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” 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. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015. Management does not expect the adoption of ASU 2015-03 to have a material impact on the company’s financial position, results of operations or cash flows.

 

6



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

In February 2015, the FASB issued 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. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Management does not expect the adoption of ASU 2015-02 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In January 2015, the FASB issued 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. ASU 2015-01 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Upon adoption, the company may elect prospective or retrospective application. Management does not expect the adoption of ASU 2015-01 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. The adoption of ASU 2014-15 will not have any impact on the company’s financial position, results of operations or cash flows.

 

In June 2014, the FASB issued 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. ASU 2014-12 is effective for interim and annual reporting periods beginning after December 15, 2015. Management does not expect the adoption of ASU 2014-12 to have a material impact on the company’s financial position, results of operations or cash flows.

 

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, 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. This ASU is currently effective for interim and annual reporting periods beginning after December 15, 2016 and can be applied either retrospectively to each prior period presented or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating the impact of adopting ASU 2014-09 on the company’s financial position, results of operations and cash flows.

 

7



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(3)                  Other Comprehensive Income (Loss)

 

The tax effects of the components of other comprehensive income (loss) (“OCI”) are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2015

 

March 31, 2014

 

 

 

 

 

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

 

$

(78,271

)

$

29,547

 

$

(48,724

)

$

(17,800

)

$

5,071

 

$

(12,729

)

Ownership share of equity method investees’ other comprehensive loss

 

(6,002

)

1,521

 

(4,481

)

(944

)

(1,054

)

(1,998

)

Defined benefit pension and postretirement plan adjustments

 

4,301

 

(1,613

)

2,688

 

2,636

 

(988

)

1,648

 

Unrealized gain (loss) on derivative contracts

 

1,414

 

(520

)

894

 

(645

)

216

 

(429

)

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

 

974

 

(365

)

609

 

(29

)

11

 

(18

)

Total other comprehensive loss

 

(77,584

)

28,570

 

(49,014

)

(16,782

)

3,256

 

(13,526

)

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

 

591

 

 

591

 

(4,339

)

 

(4,339

)

Other comprehensive loss attributable to Fluor Corporation

 

$

(78,175

)

$

28,570

 

$

(49,605

)

$

(12,443

)

$

3,256

 

$

(9,187

)

 

The changes in accumulated other comprehensive income (“AOCI”) balances by component (after-tax) for the three months ended March 31, 2015 are as follows:

 

(in thousands)

 

Foreign 
Currency 
Translation

 

Ownership Share
 of Equity Method 
Investees’ Other 
Comprehensive 
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

 

(49,244

)

(4,481

)

 

596

 

678

 

(52,451

)

Amounts reclassified from AOCI

 

 

 

2,688

 

227

 

(69

)

2,846

 

Net other comprehensive income (loss)

 

(49,244

)

(4,481

)

2,688

 

823

 

609

 

(49,605

)

Balance as of March 31, 2015

 

$

(168,660

)

$

(34,917

)

$

(322,457

)

$

(8,131

)

$

348

 

$

(533,817

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

$

1,328

 

$

 

$

 

$

(685

)

$

 

$

643

 

Other comprehensive income (loss) before reclassifications

 

520

 

 

 

(3

)

 

517

 

Amounts reclassified from AOCI

 

 

 

 

74

 

 

74

 

Net other comprehensive income

 

520

 

 

 

71

 

 

591

 

Balance as of March 31, 2015

 

$

1,848

 

$

 

$

 

$

(614

)

$

 

$

1,234

 

 

8



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the three months ended March 31, 2014 are as follows:

 

(in thousands)

 

Foreign 
Currency 
Translation

 

Ownership Share 
of Equity Method 
Investees’ Other 
Comprehensive 
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, 2013

 

$

(164

)

$

(32,274

)

$

(258,297

)

$

(7,642

)

$

176

 

$

(298,201

)

Other comprehensive loss before reclassifications

 

(8,451

)

(1,998

)

(403

)

(544

)

(26

)

(11,422

)

Amounts reclassified from AOCI

 

 

 

2,051

 

176

 

8

 

2,235

 

Net other comprehensive income (loss)

 

(8,451

)

(1,998

)

1,648

 

(368

)

(18

)

(9,187

)

Balance as of March 31, 2014

 

$

(8,615

)

$

(34,272

)

$

(256,649

)

$

(8,010

)

$

158

 

$

(307,388

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2013

 

$

7,885

 

$

 

$

 

$

67

 

$

 

$

7,952

 

Other comprehensive loss before reclassifications

 

(4,278

)

 

 

(64

)

 

(4,342

)

Amounts reclassified from AOCI

 

 

 

 

3

 

 

3

 

Net other comprehensive loss

 

(4,278

)

 

 

(61

)

 

(4,339

)

Balance as of March 31, 2014

 

$

3,607

 

$

 

$

 

$

6

 

$

 

$

3,613

 

 

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

 

 

 

 

 

Three Months Ended

 

 

 

Location in Condensed

 

March 31,

 

(in thousands)

 

Consolidated Statement of Earnings

 

2015

 

2014

 

Component of AOCI:

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(4,301

)

$

(3,281

)

Income tax benefit

 

Income tax expense

 

1,613

 

1,230

 

Net of tax

 

 

 

$

(2,688

)

$

(2,051

)

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts:

 

 

 

 

 

 

 

Commodity and foreign currency contracts

 

Total cost of revenue

 

$

(62

)

$

129

 

Interest rate contracts

 

Interest expense

 

(419

)

(419

)

Income tax benefit (net)

 

Income tax expense

 

180

 

111

 

Net of tax

 

 

 

(301

)

(179

)

Less: Noncontrolling interests

 

Net earnings attributable to noncontrolling interests

 

(74

)

(3

)

Net of tax and noncontrolling interests

 

 

 

$

(227

)

$

(176

)

 

 

 

 

 

 

 

 

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

 

Corporate general and administrative expense

 

$

110

 

$

(13

)

Income tax benefit (expense)

 

Income tax expense

 

(41

)

5

 

Net of tax

 

 

 

$

69

 

$

(8

)

 


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

 

9



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(4)                Income Taxes

 

The effective tax rates for the three months ended March 31, 2015 and 2014 were 33.5 percent and 28.8 percent, respectively. Both periods benefited from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company. The lower effective tax rate for the three months ended March 31, 2014 was primarily due to the recognition of a deferred tax benefit for foreign taxes previously paid on certain unremitted foreign earnings, as well as higher earnings attributable to noncontrolling interests.

 

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 2008.

 

(5)                  Cash Paid for Interest and Taxes

 

Cash paid for interest was $10 million for both the three months ended March 31, 2015 and 2014. Income tax payments, net of refunds, were $62 million and $37 million during the three-month periods ended March 31, 2015 and 2014, 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 months ended March 31, 2015 and 2014 are presented below:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

144,079

 

$

149,074

 

 

 

 

 

 

 

Basic EPS attributable to Fluor Corporation:

 

 

 

 

 

Weighted average common shares outstanding

 

147,731

 

160,213

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.98

 

$

0.93

 

 

 

 

 

 

 

Diluted EPS attributable to Fluor Corporation:

 

 

 

 

 

Weighted average common shares outstanding

 

147,731

 

160,213

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

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

 

1,825

 

1,709

 

Conversion equivalent of dilutive convertible debt

 

359

 

438

 

Weighted average diluted shares outstanding

 

149,915

 

162,360

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.96

 

$

0.92

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

3,162

 

440

 

 

During the three months ended March 31, 2015 and 2014, the company repurchased and cancelled 1,939,997 and 2,461,800 shares of its common stock, respectively, under its stock repurchase program for $112 million and $192 million, respectively.

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(7)                  Fair Value of Financial Instruments

 

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 March 31, 2015 and December 31, 2014:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

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)

 

$

7,269

 

$

7,269

 

$

 

$

 

$

14,419

 

$

14,419

 

$

 

$

 

Marketable securities, current(2)

 

64,937

 

 

64,937

 

 

80,706

 

 

80,706

 

 

Deferred compensation trusts(3)

 

54,913

 

54,913

 

 

 

94,893

 

94,893

 

 

 

Marketable securities, noncurrent(4)

 

254,761

 

 

254,761

 

 

343,644

 

 

343,644

 

 

Derivative assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

315

 

 

315

 

 

561

 

 

561

 

 

Foreign currency contracts

 

2,710

 

 

2,710

 

 

180

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

2,000

 

$

 

$

2,000

 

$

 

$

2,290

 

$

 

$

2,290

 

$

 

Foreign currency contracts

 

3,670

 

 

3,670

 

 

4,392

 

 

4,392

 

 

 


(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.

 

(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 in 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.

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 March 31, 2015: money market funds of $7 million, U.S. agency securities of $56 million, U.S. Treasury securities of $60 million and corporate debt securities of $204 million. As of December 31, 2014, available-for-sale securities consisted of money market funds of $14 million, U.S. agency securities of $73 million, U.S. Treasury securities of $107 million and corporate debt securities of $245 million. The amortized cost of these available-for-sale securities is not materially different from the fair value. During the three months ended March 31, 2015 and 2014, proceeds from sales and maturities of available-for-sale securities were $183 million and $64 million, respectively.

 

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:

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in thousands)

 

Hierarchy

 

Value

 

Value

 

Value

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,034,253

 

$

1,034,253

 

$

1,224,834

 

$

1,224,834

 

Cash equivalents(2)

 

Level 2

 

769,771

 

769,771

 

753,872

 

753,872

 

Marketable securities, current(3)

 

Level 2

 

80,631

 

80,631

 

24,425

 

24,425

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

17,614

 

17,614

 

19,284

 

19,284

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

3.375% Senior Notes(5)

 

Level 2

 

$

497,155

 

$

519,925

 

$

497,045

 

$

510,465

 

3.5% Senior Notes(5)

 

Level 2

 

494,774

 

515,545

 

494,640

 

498,914

 

1.5% Convertible Senior Notes(5)

 

Level 2

 

18,324

 

38,333

 

18,324

 

40,826

 

Other borrowings(6)

 

Level 2

 

9,716

 

9,716

 

10,418

 

10,418

 

 


(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, 3.5% Senior Notes and 1.5% Convertible Senior Notes are estimated based on quoted market prices for similar issues.

 

(6)     Other borrowings primarily 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.

 

(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

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 March 31, 2015, the company had total gross notional amounts of $636 million of foreign currency contracts and $10 million of commodity contracts outstanding relating to 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 2017. 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 months ended March 31, 2015 and 2014.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of March 31, 2015 and December 31, 2014 were as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

March 31,

 

December 31,

 

Balance Sheet

 

March 31,

 

December 31,

 

(in thousands)

 

Location

 

2015

 

2014

 

Location

 

2015

 

2014

 

Commodity contracts

 

Other current assets

 

$

106

 

$

365

 

Other accrued liabilities

 

$

1,057

 

$

1,362

 

Foreign currency contracts

 

Other current assets

 

1,422

 

128

 

Other accrued liabilities

 

1,755

 

3,721

 

Commodity contracts

 

Other assets

 

209

 

196

 

Noncurrent liabilities

 

943

 

928

 

Foreign currency contracts

 

Other assets

 

1,288

 

52

 

Noncurrent liabilities

 

1,915

 

671

 

Total

 

 

 

$

3,025

 

$

741

 

 

 

$

5,670

 

$

6,682

 

 

The pre-tax net gains (losses) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

Fair Value Hedges (in thousands)

 

Location of Gain

 

2015

 

2014

 

Foreign currency contracts

 

Corporate general and administrative expense

 

$

(1,154

)

$

1,259

 

 

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 in the Condensed Consolidated Statement of Earnings.

 

13



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

The after-tax amount of gain (loss) recognized in OCI and reclassified from AOCI into earnings associated with the derivative instruments designated as cash flow hedges for the three months ended March 31, 2015 and 2014 was as follows:

 

 

 

After-Tax Amount of Gain
(Loss) Recognized in OCI

 

 

 

After-Tax Amount of Gain 
(Loss) Reclassified from 
AOCI into Earnings

 

 

 

Three Months Ended
March 31,

 

 

 

Three Months Ended
March 31,

 

Cash Flow Hedges (in thousands)

 

2015

 

2014

 

Location of Gain (Loss)

 

2015

 

2014

 

Commodity contracts

 

$

(112

)

$

(143

)

Total cost of revenue

 

$

(91

)

$

78

 

Foreign currency contracts

 

708

 

(401

)

Total cost of revenue

 

126

 

8

 

Interest rate contracts

 

 

 

Interest expense

 

(262

)

(262

)

Total

 

$

596

 

$

(544

)

 

 

$

(227

)

$

(176

)

 

(9)                     Retirement Benefits

 

Net periodic pension expense for the U.S. and non-U.S. defined benefit pension plans included the following components:

 

 

 

U.S. Pension Plan

 

Non-U.S. Pension Plans

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

1,700

 

$

950

 

$

5,202

 

$

4,153

 

Interest cost

 

3,799

 

7,919

 

6,641

 

8,804

 

Expected return on assets

 

(5,275

)

(7,526

)

(12,305

)

(12,248

)

Amortization of prior service cost

 

217

 

187

 

(206

)

 

Recognized net actuarial loss

 

2,351

 

1,109

 

1,939

 

1,984

 

Net periodic pension expense

 

$

2,792

 

$

2,639

 

$

1,271

 

$

2,693

 

 

The company currently expects to contribute up to $100 million into its defined benefit pension plans during 2015, which is expected to be in excess of the minimum funding required and includes estimated additional funding to settle the U.S. defined benefit pension plan (the “U.S. plan”). During the three months ended March 31, 2015, contributions of approximately $0.9 million were made by the company.

 

The company’s Board of Directors previously approved amendments to freeze the accrual of future service-related benefits for salaried participants of the U.S. plan as of December 31, 2011 and craft participants of the U.S. plan as of December 31, 2013. During the fourth quarter of 2014, the company’s Board of Directors approved an amendment to terminate the U.S. plan effective December 31, 2014. The U.S. plan is expected to be settled in late 2015, subject to regulatory approval. The company’s ultimate settlement obligation will depend upon the nature and timing of participant settlements and prevailing market conditions. Upon settlement, the company expects to recognize additional expense, consisting of unrecognized actuarial losses included in AOCI that totaled approximately $271 million as of March 31, 2015, adjusted for the difference between the ultimate settlement obligation and the company’s accrued pension liability, which could be significant. The company does not expect the settlement of the plan obligations to have a material impact on its cash position.

 

(10)              Financing Arrangements

 

As of March 31, 2015, the company had a combination of committed and uncommitted lines of credit that totaled $5.3 billion. These lines may be used for revolving loans, letters of credit and/or general purposes. The committed lines of credit consist of a $1.7 billion Revolving Loan and Letter of Credit Facility and a $1.8 billion Revolving Loan and Letter of Credit Facility. Both facilities mature in May 2019. The company may utilize up to $1.75 billion in the aggregate of the combined $3.5 billion committed lines of credit for revolving advances. Each of the credit facilities may be increased up to an additional $500 million subject to certain conditions, and contain customary financial and restrictive covenants, including a maximum ratio of

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

consolidated debt to tangible net worth of one-to-one and a cap on the aggregate amount of debt of $750 million for the company’s subsidiaries. Borrowings under both facilities bear interest at rates based on the Eurodollar Rate or an alternative base rate, plus an applicable borrowing margin.

 

In November 2014, the company issued $500 million of 3.5% Senior Notes (the “2014 Notes”) due December 15, 2024 and received proceeds of $491 million, net of underwriting discounts. Interest on the 2014 Notes is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2015. Prior to September 15, 2024, the company may redeem the 2014 Notes at a redemption price equal to 100 percent of the principal amount, plus a “make whole” premium described in the indenture. On or after September 15, 2024, the company may redeem the 2014 Notes at 100 percent of the principal amount plus accrued and unpaid interest, if any, to the date of purchase.

 

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. 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.

 

For both the 2014 Notes and the 2011 Notes, if a change of control triggering event occurs, as defined by the terms of the respective indentures, the company will be required to offer to purchase the 2014 Notes and 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 indentures governing the 2014 Notes and 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 2014 and first quarter of 2015, and the 2004 Notes were therefore classified as short-term debt as of December 31, 2014 and March 31, 2015. In March 2015, the company notified the holders of the 2004 Notes of its election to redeem all of the outstanding 2004 Notes on May 7, 2015. The redemption price is equal to 100 percent of the principal amount plus accrued and unpaid interest up to (but excluding) May 7, 2015. The holders of the 2004 Notes may, at their option, convert the 2004 Notes at any time before the close of business on May 6, 2015.

 

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

 

 

 

March 31,

 

December 31,

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Carrying value of the equity component

 

$

19,516

 

$

19,516

 

Principal amount and carrying value of the liability component

 

18,324

 

18,324

 

 

The 2004 Notes are convertible into shares of the company’s common stock (par value $0.01 per share) at a conversion rate of 37.0997 shares per each $1,000 principal amount of the 2004 Notes. Interest expense for the first quarter of both 2015 and 2014 included original coupon interest of less than $0.1 million. The if-converted value of $39 million was in excess of the principal value as of March 31, 2015.

 

During the third quarter of 2013, the company established a short-term credit facility to purchase land and construction equipment associated with the equipment operations in the Global Services segment. Outstanding borrowings under the facility were $9 million and $10 million as of March 31, 2015 and December 31, 2014, respectively.

 

As of March 31, 2015, the company was in compliance with all of the financial covenants related to its debt agreements.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

(11)           Stock-Based Plans

 

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, 2014. In the first quarter of 2015 and 2014, 520,947 and 357,138 restricted stock units, respectively, were granted to executives, at weighted-average per share prices of $59.05 and $79.19, respectively. For the company’s executives, the restricted units granted in 2015 and 2014 generally vest ratably over three years. During the first quarter of 2015 and 2014, options for the purchase of 963,288 shares at a weighted-average exercise price of $59.05 per share and 684,486 shares at a weighted-average exercise price of $79.19 per share, respectively, were awarded to executives. The options granted in 2015 and 2014 vest ratably over three years. The options expire ten years after the grant date.

 

In the first quarter of 2015 and 2014, performance-based Value Driver Incentive (“VDI”) units totaling 430,970 and 315,551, respectively, were granted to executives at weighted-average per share prices of $59.05 and $79.19, respectively. The number of units is adjusted at the end of each performance period based on the achievement of certain performance criteria. The VDI awards granted in 2015 can only be settled in company stock and are accounted for as equity awards in accordance with ASC 718. The VDI awards granted in 2014 may be settled in cash, based on the closing price of the company’s common stock on the vesting date, or company stock. In accordance with ASC 718, the awards granted in 2014 are classified as liabilities and remeasured at fair value at the end of each reporting period until the awards are settled. Both the VDI awards granted in 2015 and 2014 vest after a period of approximately three years.

 

(12)           Noncontrolling Interests

 

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 months ended March 31, 2015 and 2014, net earnings attributable to noncontrolling interests were $22 million and $44 million, respectively. Income taxes associated with earnings attributable to noncontrolling interests were immaterial in both periods presented. Distributions paid to noncontrolling interests were $4 million and $16 million for the three months ended March 31, 2015 and 2014, respectively. Capital contributions by noncontrolling interests were $0.7 million and less than $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

(13)           Contingencies and Commitments

 

The company and certain of its subsidiaries are subject to litigation, claims and other commitments and contingencies arising in the ordinary course of business, including matters related to government contracting and environmental regulations. The company currently does not expect that the ultimate resolution of any open matters will have a material adverse effect on its consolidated financial position or results of operations.

 

As of March 31, 2015, 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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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.

 

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.

 

In June 2014, the Missouri Court of Appeals issued its opinion reversing and remanding to the trial court the award of $240 million in punitive damages against Fluor. In addition, the appellate court upheld the judgment for $38.5 million in compensatory and economic damages and $80 million of punitive damages against the company and its former subsidiaries to whom the company has provided certain indemnities relating to the St. Joe and Doe Run businesses.

 

In October 2014, the company entered into a settlement agreement with counsel for a number of plaintiffs (including the 16 plaintiffs described above). In January 2015, the company paid $306 million pursuant to the settlement agreement. While the company is unable to estimate a range of possible losses in the remaining lawsuits, it does not expect any material charges to result from these cases. In addition, the company will continue to take steps to enforce its rights to indemnification described above for both the settled matters and outstanding claims.

 

Other Matters

 

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 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 $21 million as of both March 31, 2015 and December 31, 2014 and are included in contract work in progress in the accompanying Condensed Consolidated Balance Sheet.

 

From time to time, the company enters into significant contracts with the U.S. government and its agencies. Government contracts are subject to audits and investigations by government representatives with respect to the company’s compliance with various restrictions and regulations applicable to government contractors, including but not limited to the allowability of costs incurred under reimbursable contracts. In connection with performing government contracts, the company maintains reserves for estimated exposures associated with these matters.

 

(14)           Guarantees

 

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 project 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 $15.5 billion as of March 31, 2015. 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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

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 March 31, 2015 and December 31, 2014 in accordance with ASC 460, “Guarantees,” and the carrying value of the liability was not material.

 

Financial guarantees, made in the ordinary course of business in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate the company to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation.

 

(15)       Variable Interest Entities

 

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, “Consolidation.”

 

In accordance with ASC 810, the company assesses its partnerships and joint ventures at inception to determine if any meet the qualifications of a VIE. The company considers a partnership or joint venture a VIE if either (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, the company reassesses its initial determination of whether the partnership or joint venture is a VIE. The majority of the company’s partnerships and joint ventures qualify as VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional subordinated financial support.

 

The company also performs a qualitative assessment of each VIE to determine if the company is its primary beneficiary, as required by ASC 810. The company concludes that it is the primary beneficiary and consolidates the VIE if the company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting 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 cost and equity methods of accounting are also used, depending on the company’s respective ownership interest and amount of influence on the entity, as well as other factors. 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 $131 million and $107 million as of March 31, 2015 and December 31, 2014, 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 March 31, 2015 for the unconsolidated VIEs were $20 million.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

In some cases, the company is required to consolidate certain VIEs. As of March 31, 2015, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $977 million and $471 million, respectively. As of December 31, 2014, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $891 million and $442 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.

 

The company has agreements with certain VIEs to provide financial or performance assurances to clients. See Note 14 for a further discussion of such agreements. A discussion of the company’s more significant or unique VIEs is provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2014.

 

(16)       Operating Information by Segment

 

Effective January 1, 2015, the company implemented certain organizational changes that impacted the composition of its reportable segments. The company’s fabrication activities, previously included in the Global Services segment, have been integrated into the reporting segments for which the activities are being performed, primarily the Oil & Gas segment. Additionally, certain plant engineering offices located in Europe, Africa and the Middle East, which were previously included in the industrial services business line of the Industrial & Infrastructure segment, have been integrated into the Oil & Gas segment. Segment operating information for 2014 has been recast to reflect these organizational changes.

 

Operating information by reportable segment is as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

External Revenue (in millions)

 

2015

 

2014

 

Oil & Gas

 

$

2,471.6

 

$

2,782.8

 

Industrial & Infrastructure

 

1,080.2

 

1,615.7

 

Government

 

646.0

 

593.2

 

Global Services

 

129.7

 

142.0

 

Power

 

221.1

 

250.9

 

Total external revenue

 

$

4,548.6

 

$

5,384.6

 

 

The Global Services segment represents a combination of other operating segments that do not meet the ASC 280, “Segment Reporting,” requirements for separate disclosure or aggregation. Intercompany revenue for the Global Services segment, excluded from the amounts shown above, was $115 million and $136 million for the three months ended March 31, 2015 and 2014, respectively.

 

 

 

Three Months Ended

 

 

 

March 31,

 

Segment Profit (Loss) (in millions)

 

2015

 

2014

 

Oil & Gas

 

$

183.3

 

$

139.1

 

Industrial & Infrastructure

 

71.1

 

97.2

 

Government

 

14.8

 

12.5

 

Global Services

 

15.3

 

20.7

 

Power

 

(8.6

)

(1.4

)

Total segment profit

 

$

275.9

 

$

268.1

 

 

Power segment profit for the three months ended March 31, 2015 and 2014 included the operations of NuScale, which are primarily for research and development activities associated with the licensing and commercialization of small modular nuclear reactor technology. In May 2014, NuScale entered into a cost-sharing agreement with the U.S. Department of Energy (“DOE”) establishing the terms and conditions of a multi-year funding award that allows certain qualified expenditures to be reimbursed.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

UNAUDITED

 

NuScale expenses included in the determination of segment profit were $17 million and $13 million for the three months ended March 31, 2015 and 2014, respectively. NuScale expenses for 2015 were net of qualified reimbursable expenses of $14 million. The company recognizes the cost-sharing award with the DOE, when earned, as a reduction of “Total cost of revenue” in the Condensed Consolidated Statement of Earnings and, correspondingly, as an increase to segment profit in the period for which the related costs are recognized, with the exception of certain pre-award costs which were recognized in the second quarter of 2014 upon entering into the cost-sharing agreement.

 

A reconciliation of total segment profit to earnings before taxes is as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

Reconciliation of Total Segment Profit to Earnings Before Taxes (in millions)

 

2015

 

2014

 

Total segment profit

 

$

275.9

 

$

268.1

 

Corporate general and administrative expense

 

(41.1

)

(37.8

)

Interest income (expense), net

 

(7.4

)

(3.0

)

Earnings attributable to noncontrolling interests

 

21.5

 

44.2

 

Earnings before taxes

 

$

248.9

 

$

271.5

 

 

Total assets by segment are as follows:

 

 

 

March 31,

 

December 31,

 

Total Assets by Segment (in millions)

 

2015

 

2014

 

Oil & Gas

 

$

1,476.5

 

$

1,745.3

 

Industrial & Infrastructure

 

842.2

 

848.2

 

Government

 

510.1

 

540.1

 

Global Services

 

763.2

 

781.9

 

Power

 

196.4

 

178.6

 

 

The above changes in total assets by segment are primarily due to fluctuations in project working capital related to project execution activities.

 

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FLUOR CORPORATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes and the company’s December 31, 2014 Annual Report on Form 10-K. For purposes of reviewing this document, “segment profit” is calculated as revenue less cost of revenue and earnings attributable to noncontrolling interests excluding: corporate general and administrative expense; interest expense; interest income; domestic and foreign income taxes; and other non-operating income and expense items.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements made herein, including statements regarding the company’s projected revenue and earnings levels, cash flow and liquidity, new awards and backlog levels and the implementation of strategic initiatives and organizational changes are forward-looking in nature. We wish to caution readers that forward-looking statements, including disclosures which use words such as the company “believes,” “anticipates,” “expects,” “estimates” and similar statements are subject to various risks and uncertainties which could cause actual results of operations to differ materially from expectations. Factors potentially contributing to such differences include, among others:

 

·                  The cyclical nature of many of the markets the company serves, including our commodity-based business lines, and our vulnerability to downturns;

·                  The company’s failure to receive anticipated new contract awards and the related impact on revenue, earnings, staffing levels and cost;

·                  Difficulties or delays incurred in the execution of contracts, or failure to accurately estimate the resources and time necessary for our contracts, resulting in cost overruns or liabilities, including those caused by the performance of our clients, subcontractors, suppliers and joint venture or teaming partners;

·                  Client cancellations of, or scope adjustments to, existing contracts and the related impacts on staffing levels and cost;

·                  Intense competition in the global engineering, procurement and construction industry, which can place downward pressure on our contract prices and profit margins;

·                  Current economic conditions affecting our clients, partners, subcontractors and suppliers, which may result in decreased capital investment or expenditures, or a failure to make anticipated increased capital investment or expenditures, by the company’s clients or other financial difficulties by our partners, subcontractors or suppliers;

·                  Changes in global business, economic (including currency risk), political and social conditions;

·                  Civil unrest, security issues, labor conditions and other unforeseeable events in the countries in which we do business, resulting in unanticipated losses;

·                  Failure of our joint venture partners to perform their venture obligations, which could impose additional financial and performance obligations on us, resulting in reduced profits or losses;

·                  Failure to obtain favorable results in existing or future litigation or dispute resolution proceedings (including claims for indemnification), or claims against project owners, subcontractors or suppliers;

·                  Client delays or defaults in making payments;

·                  Failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects;

·                  Liabilities arising from faulty services that could result in significant professional or product liability, warranty or other claims;

·                  Failure of our suppliers or subcontractors to provide supplies or services at the agreed-upon levels or times;

·                  Repercussions of events beyond our control, such as severe weather conditions, that may significantly affect operations, result in higher cost or subject the company to liability claims by our clients;

·                  Failure of our employees, agents or partners to comply with laws;

·                  The potential impact of certain tax matters including, but not limited to, those from foreign operations and the ongoing audits by tax authorities;

·                  Possible systems and information technology interruptions or the failure to adequately protect intellectual property rights;

·                  The impact of anti-bribery and international trade laws and regulations;

·                  The impact of past and future environmental, health and safety regulations including climate change regulations;

·                  Foreign exchange risks;

·                  Failure to maintain safe work sites;

·                  The availability of credit and restrictions imposed by credit facilities, both for the company and our clients, suppliers, subcontractors or other partners;

 

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·                  Possible limitations of bonding or letter of credit capacity;

·                  The risks associated with acquisitions, dispositions or other investments;

·                  The company’s ability to secure appropriate insurance;

·                  Restrictions on possible transactions imposed by our charter documents and Delaware law.

 

Any forward-looking statements that we may make are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those anticipated by us. Any forward-looking statements are subject to the risks, uncertainties and other factors that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements.

 

Due to known and unknown risks, the company’s actual results may differ materially from its expectations or projections. While most risks affect only future cost or revenue anticipated by the company, some risks may relate to accruals that have already been reflected in earnings. The company’s failure to receive payments of accrued amounts or incurrence of liabilities in excess of amounts previously recognized could result in a charge against future earnings. As a result, the reader is cautioned to recognize and consider the inherently uncertain nature of forward-looking statements and not to place undue reliance on them.

 

Additional information concerning these and other factors can be found in the company’s press releases and periodic filings with the Securities and Exchange Commission, including the discussion under the heading “Item 1A. — Risk Factors” in the company’s Form 10-K filed February 18, 2015. These filings are available publicly on the SEC’s website at http://www.sec.gov, on the company’s website at http://investor.fluor.com or upon request from the company’s Investor Relations Department at (469) 398-7220. The company cannot control such risk factors and other uncertainties, and in many cases, cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties should be considered when evaluating the company and deciding whether to invest in its securities. Except as otherwise required by law, the company undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

 

RESULTS OF OPERATIONS

 

Summary

 

Consolidated revenue for the three months ended March 31, 2015 decreased 16 percent to $4.5 billion from $5.4 billion for the three months ended March 31, 2014. The revenue decrease in the current year period was principally due to a significant decline in project execution activities in the mining and metals business line of the Industrial & Infrastructure segment. Reduced project execution activities in the Oil & Gas segment also contributed to the revenue decline.

 

Net earnings attributable to Fluor Corporation of $144 million for the three months ended March 31, 2015 were comparable to net earnings attributable to Fluor Corporation of $149 million for the corresponding period of 2014. The first quarter of 2015 benefited from significantly higher contributions from the Oil & Gas segment, largely offset by lower contributions from the mining and metals business line.

 

The effective tax rates for the three months ended March 31, 2015 and 2014 were 33.5 percent and 28.8 percent, respectively. Both periods benefited from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company. The lower effective tax rate for the three months ended March 31, 2014 was primarily due to the recognition of a deferred tax benefit for foreign taxes previously paid on certain unremitted foreign earnings, as well as higher earnings attributable to noncontrolling interests.

 

Diluted earnings per share was $0.96 for the three months ended March 31, 2015 compared to $0.92 for the corresponding period of 2014. The principal reason for the 2015 increase in earnings per share was a lower share count resulting from the repurchase of common stock.

 

The company’s results reported by foreign subsidiaries with non-U.S. dollar functional currencies are affected by foreign currency volatility. When the U.S. dollar appreciates against the non-U.S. dollar functional currencies of these subsidiaries, the company’s reported revenue, cost and earnings, after translation into U.S. dollars, are lower than what they would have been had the U.S. dollar depreciated against the same foreign currencies or if there had been no change in the exchange rates. Although the company is exposed to foreign currency risk for both translation and remeasurement, the net impact on earnings was not  significant for either the three months ended March 31, 2015 or March 31, 2014.

 

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The company is still experiencing a highly competitive business environment, with pressure on margins. In some cases, margins may be favorably or unfavorably impacted by a change in the mix of work performed or a change in the amount of customer-furnished materials, which are accounted for as pass-through costs. During the first quarter of 2015, the Oil & Gas segment experienced higher segment profit margin that was partially due to a shift in the mix of work from lower margin construction activities to higher margin engineering activities. This shift corresponds to an increase in the volume of project execution activities for projects that are in the earlier stages of the project life cycle compared to a year ago.

 

The Oil & Gas segment has continued to show strength, but declining oil prices since the latter part of 2014 could affect the segment’s current projects and the timing of new awards. In the Industrial & Infrastructure segment, mining and metals business has continued to slow as major capital investment decisions by most mining customers have been deferred. Revenue in the Government segment continues to be adversely impacted by reduced project execution activities of the Logistics Civil Augmentation Program (“LOGCAP IV”).

 

Consolidated new awards were $4.4 billion for the three months ended March 31, 2015 compared to new awards of $10.7 billion for the three months ended March 31, 2014. The Oil & Gas and Industrial & Infrastructure segments were the major contributors to the new award activity in the first quarter of 2015. Approximately 41 percent of consolidated new awards for the three months ended March 31, 2015 were for projects located outside of the United States compared to 85 percent for the first quarter of 2014.

 

Consolidated backlog as of March 31, 2015 was $41.2 billion compared to $40.2 billion as of March 31, 2014. The increase in backlog was primarily due to new awards booked after the first quarter of 2014 in the Oil & Gas and Government segments, partially offset by a decline in backlog in the mining and metals business line of the Industrial & Infrastructure segment. Backlog as of March 31, 2015 was reduced by approximately $1.6 billion due to a strengthening U.S. dollar compared to most major foreign currencies. As of March 31, 2015, approximately 63 percent of consolidated backlog related to projects outside of the United States compared to 68 percent as of March 31, 2014. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost, and deferrals, as appropriate.

 

Oil & Gas

 

Revenue and segment profit for the Oil & Gas segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

2,471.6

 

$

2,782.8

 

Segment profit

 

183.3

 

139.1

 

 

Revenue for the three months ended March 31, 2015 decreased by 11 percent compared to the three months ended March 31, 2014, primarily due to reduced volume of project execution activities for certain large projects progressing to completion, including a coal bed methane project in Australia, two oil sands facilities in Canada and a petrochemical project in the Middle East. This revenue decline was largely offset by an increase in project execution activities for various petrochemicals projects, the majority of which are on the Gulf Coast of the United States, and numerous downstream projects across various regions.

 

Segment profit for the first three months of 2015 increased by 32 percent compared to the corresponding period in 2014. The increase in segment profit was primarily due to the increase in project execution activities for numerous downstream projects in various regions. Segment profit margin increased to 7.4 percent in the three months ended March 31, 2015 compared to 5.0 percent for the same period of the prior year. Segment profit margin in the current quarter was more favorably impacted by the positive effect of forecast revisions associated with the reassessment of risk for projects progressing toward completion. Another significant contributing factor to the improved segment profit margin was a shift in the mix of work from lower margin construction activities to higher margin engineering services. This shift corresponds to an increase in the volume of project execution activities for projects that are in the earlier stages of the project life cycle as compared to prior years.

 

New awards for the first three months of 2015 were $2.9 billion compared to $8.9 billion for the first quarter of 2014. Current quarter new awards included a large, domestic natural gas transmission project. Backlog as of March 31, 2015 increased to $27.8 billion from $25.8 billion as of March 31, 2014. The growth in backlog is reflective of the higher levels of new award activity during 2014 which reflects continued demand for new capacity in oil and gas production, petrochemicals and gas liquefaction. The segment’s backlog as of March 31, 2015 was reduced by approximately $1.5 billion due to a

 

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strengthening U.S. dollar compared to most major foreign currencies. The segment remains well positioned for new project activity in these markets; however, declining oil prices since the latter part of 2014 could affect the segment’s current projects and the timing of new awards. Market conditions remain competitive.

 

Total assets in the segment decreased to $1.5 billion as of March 31, 2015 from $1.7 billion as of December 31, 2014 due to lower levels of working capital on projects.

 

Industrial & Infrastructure

 

Revenue and segment profit for the Industrial & Infrastructure segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

1,080.2

 

$

1,615.7

 

Segment profit

 

71.1

 

97.2

 

 

Revenue for the three months ended March 31, 2015 decreased by 33 percent compared to the first quarter 2014, primarily due to a significant decline in volume in the mining and metals business line.

 

Segment profit for the first three months of 2015 decreased by 27 percent compared to the corresponding period in 2014 due to the decline in project execution activities of the mining and metals business line noted above. Segment profit margin increased to 6.6 percent for the three months ended March 31, 2015 compared to 6.0 percent for the three months ended March 31, 2014, principally driven by forecast revisions associated with the reassessment of risk for certain infrastructure projects completed in the current year period.

 

New awards in the Industrial and Infrastructure segment for the first three months of 2015 were $1.4 billion, compared to $904 million for the first quarter of 2014. New awards for the current quarter were primarily in the industrial services and mining and metals business lines.

 

Backlog decreased to $7.3 billion as of March 31, 2015 compared to $9.8 billion as of March 31, 2014. This decline was primarily due to the work off of backlog outpacing the new award activity in the mining and metals and infrastructure business lines. The mining and metals business line continues to experience the deferral of major capital investment decisions by some mining customers as a result of softening commodity demand. The timing of when capital investment by these mining customers could resume is uncertain, and the weakened mining market conditions could be prolonged.

 

The total assets in the Industrial & Infrastructure segment were $842 million as of March 31, 2015, compared to $848 million as of December 31, 2014.

 

Government

 

Revenue and segment profit for the Government segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

646.0

 

$

593.2

 

Segment profit

 

14.8

 

12.5

 

 

Revenue for the three months ended March 31, 2015 increased 9 percent compared to the three months ended March 31, 2014, driven primarily by project execution activities for a nuclear decommissioning project in the United Kingdom (the “Magnox RSRL Project”), the Strategic Petroleum Reserve Project and the Paducah Gaseous Diffusion Plant Project (the “Paducah Project”), all awarded in 2014. This increase was partially offset by a decline in project execution activities associated with LOGCAP IV.

 

Segment profit for the three months ended March 31, 2015 increased 18 percent when compared to the same period in the prior year. Increased contributions in the current quarter for the Magnox RSRL Project and the Strategic Petroleum Reserve Project,

 

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as well as improved contributions from a base operations support services contract, more than offset the reduced contributions associated with the decline in project execution activities for LOGCAP IV. Segment profit margin for the first quarter of 2015 was essentially flat when compared to the same period in the prior year.

 

New awards were $74 million during the three months ended March 31, 2015 compared to $748 million for the same period in the prior year.

 

Backlog as of March 31, 2015 increased to $4.2 billion compared to $2.6 billion as of March 31, 2014. This increase was primarily due to new awards for the Magnox RSRL Project and the Paducah Project, both awarded after the first quarter of 2014. Total backlog included $1.6 billion of unfunded government contracts as of both March 31, 2015 and March 31, 2014.

 

Total assets in the Government segment were $510 million as of March 31, 2015 compared to $540 million as of December 31, 2014.

 

Global Services

 

Revenue and segment profit for the Global Services segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

129.7

 

$

142.0

 

Segment profit

 

15.3

 

20.7

 

 

Revenue decreased 9 percent for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to the equipment business line which experienced reduced volume in Mexico and Afghanistan, as well as reduced activities supporting mining projects in Latin America and Africa. The current period revenue decrease was partially offset by revenue improvement in the equipment business line’s operations in the United States and in the temporary staffing business line.

 

Segment profit decreased 26 percent for the first three months of 2015 compared to the first three months of 2014, principally as the result of reduced contributions in Afghanistan and Latin America from the equipment business line.

 

The equipment, temporary staffing and supply chain solutions business lines do not report backlog or new awards.

 

Total assets in the Global Services segment were $763 million as of March 31, 2015 compared to $782 million as of December 31, 2014.

 

Power

 

Revenue and segment profit (loss) for the Power segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

221.1

 

$

250.9

 

Segment profit (loss)

 

(8.6

)

(1.4

)

 

Revenue for the three months ended March 31, 2015 decreased 12 percent compared to the three months ended March 31, 2014, primarily due to a decrease in project execution activities on a solar power project in the western United States and a gas-fired power plant in Texas, both of which reached substantial completion during 2014. This decline was partially offset by an increased level of project execution activities on a large gas-fired power plant in Virginia.

 

Segment profit and segment profit margin for the first quarter of 2015 decreased significantly compared to the first three months of 2014 primarily due to reduced contributions resulting from the decrease in project execution activities mentioned above and an increase in NuScale expenses, net of qualified reimbursable expenditures. These items were partially offset by a reduction in segment overhead expenses in the current year resulting from cost optimization activities and improved performance on various other projects of the segment, none of which were significant individually or in the aggregate.

 

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The Power segment includes the operations of NuScale, which are primarily research and development activities. Although part of the Power segment, these activities could provide future benefits to both commercial and government clients. In May 2014, NuScale entered into a Cooperative Agreement establishing the terms and conditions of a funding award totaling $217 million under the DOE’s Small Modular Reactor Licensing Technical Support Program. This cost-sharing award requires NuScale to use the DOE funds to cover first-of-a-kind engineering costs associated with small modular reactor design development and certification. The DOE is to provide cost reimbursement for up to 43 percent of qualified expenditures incurred during the period from June 1, 2014 to May 31, 2019. The Cooperative Agreement also provided for reimbursement of pre-award costs incurred from September 18, 2013 to May 31, 2014, which were recognized in the second quarter of 2014. The company is recognizing the cost-sharing award on an ongoing basis as a reduction of “Total cost of revenue” in the Condensed Consolidated Statement of Earnings and, correspondingly, as an increase to segment profit in the period for which the related costs are recognized. NuScale expenses, net of qualified reimbursable expenditures, included in the determination of segment profit, were $17 million and $13 million for the first quarter of 2015 and 2014, respectively.

 

Although there has been a recent increase in bidding and proposal activity, the Power segment continues to be impacted by relatively weak demand for new power generation. Market segments with the most likely new near-term opportunities include gas-fired combined cycle generation, renewable energy and air emissions compliance projects for existing coal-fired power plants. New awards in the first quarter of 2015 were $114 million compared to $166 million in the first quarter of 2014. Backlog was $1.9 billion as of both March 31, 2015 and 2014.

 

Total assets in the Power segment were $196 million as of March 31, 2015 and $179 million as of December 31, 2014.

 

Other

 

Corporate general and administrative expense for the three months ended March 31, 2015 was $41 million compared to $38 million for the three months ended March 31, 2014. Net interest expense was $7 million for the three months ended March 31, 2015 compared to $3 million during the corresponding period of 2014. Interest expense increased in 2015 due to the issuance of $500 million of 3.5% Senior Notes in November 2014. Income tax expense for the three months ended March 31, 2015 and 2014 is discussed above under “— Summary.”

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 2 of the Notes to Condensed Consolidated Financial Statements.

 

LITIGATION AND MATTERS IN DISPUTE RESOLUTION

 

See Note 13 of the Notes to Condensed Consolidated Financial Statements.

 

LIQUIDITY AND FINANCIAL CONDITION

 

Liquidity is provided by available cash and cash equivalents and marketable securities, cash generated from operations, credit facilities and access to capital markets. The company has committed and uncommitted lines of credit totaling $5.3 billion, which may be used for revolving loans, letters of credit and/or general purposes. The company believes that for at least the next 12 months, cash generated from operations, along with its unused credit capacity of $3.9 billion and substantial cash position, is sufficient to support operating requirements. However, the company regularly reviews its sources and uses of liquidity and may pursue opportunities to increase its liquidity position. The company’s conservative financial strategy and consistent performance have earned it strong credit ratings, resulting in competitive advantage and continued access to the capital markets. As of March 31, 2015, the company was in compliance with all its covenants related to its debt agreements. The company’s total debt to total capitalization (“debt-to-capital”) ratio as of March 31, 2015 was 24.9 percent compared to 24.7 percent as of December 31, 2014.

 

Cash Flows

 

Cash and cash equivalents were $1.8 billion as of March 31, 2015 compared to $2.0 billion as of December 31, 2014. Cash and cash equivalents combined with current and noncurrent marketable securities were $2.2 billion and $2.4 billion as of March 31, 2015 and December 31, 2014, respectively. Cash and cash equivalents are held in numerous accounts throughout the world to fund the company’s global project execution activities. As of March 31, 2015 and December 31, 2014, non-U.S. cash and cash equivalents amounted to $1.0 billion and $1.1 billion, respectively. Non-U.S. cash and cash equivalents exclude deposits of U.S. legal entities that are either swept into overnight, offshore accounts or invested in short-term, offshore time deposits, for which there is unrestricted access.

 

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In evaluating its liquidity needs, the company considers cash and cash equivalents held by its consolidated VIEs (joint ventures and partnerships). These amounts (which totaled $343 million and $353 million as of March 31, 2015 and December 31, 2014, respectively, as reflected in the Condensed Consolidated Balance Sheet) were not necessarily readily available for general purposes. In its evaluation, the company also considers the extent to which the current balance of its advance billings on contracts (which totaled $586 million and $569 million as of March 31, 2015 and December 31, 2014, respectively, as reflected in the Condensed Consolidated Balance Sheet) is likely to be sustained or consumed over the near term for project execution activities and the cash flow requirements of its various foreign operations. In some cases, it may not be advantageous to move cash and cash equivalents between countries due to statutory dividend limitations or adverse tax consequences. The company did not consider any cash to be permanently reinvested overseas as of March 31, 2015 and December 31, 2014 and, as a result, has accrued the U.S. deferred tax liability on foreign earnings, as appropriate.

 

Operating Activities

 

Cash flows from operating activities result primarily from earnings sources and are affected by changes in operating assets and liabilities which consist primarily of working capital balances for projects. Working capital levels vary from period to period and are primarily affected by the company’s volume of work. These levels are also impacted by the mix, stage of completion and commercial terms of engineering and construction projects, as well as the company’s execution of its projects within budget. Working capital requirements also vary by project and relate to clients in various industries and locations throughout the world. Most contracts require payments as the projects progress. The company evaluates the counterparty credit risk of third parties as part of its project risk review process and in determining the appropriate level of reserves. The company maintains adequate reserves for potential credit losses and generally such losses have been minimal and within management’s estimates. Additionally, certain projects receive advance payments from clients. A normal trend for these projects is to have higher cash balances during the initial phases of execution which then level out toward the end of the construction phase. As a result, the company’s cash position is reduced as customer advances are worked off, unless they are replaced by advances on other projects. The company maintains cash reserves and borrowing facilities to provide additional working capital in the event that a project’s net operating cash outflows exceed its available cash balances.

 

During the three months ended March 31, 2015, working capital increased primarily due to an increase in prepaid income taxes and a decrease in accounts payable partially offset by a decrease in accounts receivable. Significant drivers of these fluctuations were:

 

·                  A decrease in accounts payable in the Oil & Gas segment. The lower accounts payable balance in 2015 resulted primarily from normal invoicing and payment activities for numerous projects.

 

·                  A decrease in accounts receivable in the Oil & Gas segment, primarily for the coal bed methane gas project in Australia.

 

During the three months ended March 31, 2014, working capital increased primarily due to a decrease in accounts payable and accrued salaries, wages and benefits partially offset by a decrease in accounts receivable. Significant drivers of these fluctuations were:

 

·                  A decrease in accounts payable in the Industrial & Infrastructure segment. The lower accounts payable balance as of the end of the first quarter of 2014 resulted primarily from normal invoicing and payment activities associated with numerous projects.

 

·                  A decrease in accrued salaries, wages and benefits resulting primarily from the first quarter payment of incentive compensation from the prior year.

 

·                  Decreases in accounts receivable in the Oil & Gas and Industrial & Infrastructure segments. The lower accounts receivable balance in 2014   resulted primarily from normal billing and collection activities. A significant contributor to the decrease in accounts receivable in the Oil & Gas segment was the coal bed methane gas project in Australia. The decrease in accounts receivable in the Industrial & Infrastructure segment primarily resulted from numerous projects in the mining and metals business line.

 

Cash provided by operating activities was $39 million for the three months ended March 31, 2015 compared to $187 million for the corresponding period of the prior year. The period-over-period decrease in cash flows from operating activities was primarily attributable to cash outflows totaling $306 million associated with discontinued operations as discussed below.

 

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The company contributed $0.9 million into its defined benefit pension plans during the three months ended March 31, 2015 compared to $10 million during the corresponding period of the prior year. The company expects to contribute up to $100 million during 2015, which is expected to be in excess of the minimum funding required and includes estimated additional funding to settle the U.S. Plan.

 

In May 2014, NuScale entered into a Cooperative Agreement establishing the terms and conditions of a multi-year funding award totaling $217 million under the DOE’s Small Modular Reactor Licensing Technical Support Program. For further discussion of the Cooperative Agreement, see “Power” above.

 

During 2014, the company recorded a loss from discontinued operations in connection with the reassessment of estimated loss contingencies related to the previously divested lead business of St. Joe Minerals Corporation and The Doe Run Company in Herculaneum, Missouri. In October 2014, the company entered into a settlement agreement with counsel for a number of plaintiffs, and in January 2015, the company paid $306 million pursuant to the settlement agreement. See Note 13 of the Notes to Condensed Consolidated Financial Statements for further discussion of this matter.

 

Investing Activities

 

Cash utilized by investing activities amounted to $18 million and $94 million for the three months ended March 31, 2015 and 2014, respectively. The primary investing activities included purchases, sales and maturities of marketable securities; capital expenditures; disposals of property, plant and equipment; and investments in and sales of partnerships and joint ventures.

 

The company holds cash in bank deposits and marketable securities which are governed by the company’s investment policy. This policy focuses on, in order of priority, the preservation of capital, maintenance of liquidity and maximization of yield. These investments include money market funds which invest in U.S. Government-related securities, bank deposits placed with highly-rated financial institutions, repurchase agreements that are fully collateralized by U.S. Government-related securities, high-grade commercial paper and high quality short-term and medium-term fixed income securities. During the three months ended March 31, 2015, proceeds from sales and maturities of marketable securities exceeded purchases of such securities by $48 million. During the three months ended March 31, 2014, purchases of marketable securities exceeded proceeds from sales and maturities of such securities by $46 million. The company held combined current and noncurrent marketable securities of $400 million and $449 million as of March 31, 2015 and December 31, 2014, respectively.

 

Capital expenditures of $74 million and $67 million for the three months ended March 31, 2015 and 2014, respectively, primarily related to construction equipment associated with equipment operations in the Global Services segment, as well as expenditures for facilities and investments in information technology. Proceeds from the disposal of property, plant and equipment of $30 million and $25 million during the first quarter of 2015 and 2014, respectively, primarily related to the disposal of construction equipment associated with the equipment operations in the Global Services segment.

 

The company continues to make investments in partnerships or joint ventures primarily for the execution of single contracts or projects. Investments in unconsolidated partnerships and joint ventures were $22 million and $5 million during the three months ended March 31, 2015 and 2014, respectively.

 

Financing Activities

 

Cash utilized by financing activities during the three months ended March 31, 2015 and 2014 of $154 million and $225 million, respectively, included company stock repurchases, company dividend payments to stockholders and distributions paid to holders of noncontrolling interests.

 

Cash utilized by financing activities during the three months ended March 31, 2015 and 2014 included the repurchase and cancellation of 1,939,997 and 2,461,800 shares of the company’s common stock for $112 million and $192 million, respectively, under its stock repurchase program.

 

Quarterly cash dividends are typically paid during the month following the quarter in which they are declared. Therefore, dividends declared in the fourth quarter of 2014 were paid in the first quarter of 2015. Quarterly cash dividends of $0.21 per share were declared in the first quarter of 2015 and 2014. The payment and level of future cash dividends is subject to the discretion of the company’s Board of Directors.

 

In November 2014, the company issued $500 million of 3.5% Senior Notes (the “2014 Notes”) due December 15, 2024 and received proceeds of $491 million, net of underwriting discounts. Interest on the 2014 Notes is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2015. Prior to September 15, 2024, the company may redeem the 2014 Notes at a redemption price equal to 100 percent of the principal amount, plus a “make whole” premium described in the

 

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indenture. On or after September 15, 2024, the company may redeem the 2014 Notes at 100 percent of the principal amount plus accrued and unpaid interest, if any, to the date of purchase.

 

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. 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.

 

For both the 2014 Notes and the 2011 Notes, if a change of control triggering event occurs, as defined by the terms of the respective indentures, the company will be required to offer to purchase the 2014 Notes and 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 indentures governing the 2014 Notes and 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. Proceeds from the 2004 Notes were used to pay off the then-outstanding commercial paper and $100 million was used to obtain ownership of engineering and corporate office facilities in California through payoff of the lease financing. 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 2014 and first quarter of 2015, and the 2004 Notes were therefore classified as short-term debt as of December 31, 2014 and March 31, 2015. In March 2015, the company notified the holders of the 2004 Notes of its election to redeem all of the outstanding 2004 Notes on May 7, 2015. The redemption price is equal to 100 percent of the principal amount plus accrued and unpaid interest up to (but excluding) May 7, 2015. The holders of the 2004 Notes may, at their option, convert the 2004 Notes at any time before the close of business on May 6, 2015.

 

Distributions paid to holders of noncontrolling interests represent cash outflows to partners of consolidated partnerships or joint ventures created primarily for the execution of single contracts or projects. Distributions paid were $4 million and $16 million during the three months ended March 31, 2015 and 2014, respectively. Distributions in 2014 primarily related to a mining joint venture project in Argentina.

 

Effect of Exchange Rate Changes on Cash

 

Unrealized translation gains and losses resulting from changes in functional currency exchange rates are reflected in the cumulative translation component of accumulated other comprehensive loss. During the three months ended March 31, 2015 and 2014, most major foreign currencies weakened against the U.S. dollar resulting in unrealized translation losses of $78 million and $18 million, respectively, of which $49 million and $9 million, respectively, related to cash held by foreign subsidiaries. The cash held in foreign currencies will primarily be used for project-related expenditures in those currencies, and therefore the company’s exposure to exchange gains and losses is generally mitigated.

 

Off-Balance Sheet Arrangements

 

Guarantees and Commitments

 

As of March 31, 2015, the company had a combination of committed and uncommitted lines of credit that totaled $5.3 billion. These lines may be used for revolving loans, letters of credit and/or general purposes. The committed lines of credit consist of a $1.7 billion Revolving Loan and Letter of Credit Facility and a $1.8 billion Revolving Loan and Letter of Credit Facility. Both facilities mature in May 2019. The company may utilize up to $1.75 billion in the aggregate of the combined $3.5 billion committed lines of credit for revolving advances. Each of the credit facilities may be increased up to an additional $500 million subject to certain conditions, and contains customary financial and restrictive covenants, including a maximum ratio of consolidated debt to tangible net worth of one-to-one and a cap on the aggregate amount of debt of $750 million for the company’s subsidiaries. Borrowings under both facilities bear interest at rates based on the Eurodollar Rate or an alternative base rate, plus an applicable borrowing margin.

 

Letters of credit are provided in the ordinary course of business primarily to indemnify the company’s clients if the company fails to perform its obligations under its contracts. As of March 31, 2015, letters of credit and borrowings totaling $1.4 billion were outstanding under these committed and uncommitted lines of credit. As an alternative to letters of credit, surety bonds are used as a form of credit enhancement.

 

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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 project 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 $15.5 billion as of March 31, 2015. 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 March 31, 2015 and December 31, 2014 in accordance with ASC 460, “Guarantees,” and the carrying value of the liability was not material.

 

Financial guarantees, made in the ordinary course of business in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate the company to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation.

 

Variable Interest Entities

 

In the normal course of business, the company forms partnerships or joint ventures primarily for the execution of single contracts or projects. The company evaluates each partnership and joint venture to determine whether the entity is a VIE. If the entity is determined to be a VIE, the company assesses whether it is the primary beneficiary and needs to consolidate the entity.

 

For further discussion of the company’s VIEs, see Note 15 to the Condensed Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes to market risk in the first quarter of 2015. Accordingly, the disclosures provided in the Annual Report on Form 10-K for the year ended December 31, 2014 remain current.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) are effective, based upon an evaluation of those controls and procedures required by paragraph (b) of Rule    13a-15 or Rule 15d-15 of the Exchange Act.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

30



Table of Contents

 

FLUOR CORPORATION

CHANGES IN CONSOLIDATED BACKLOG

UNAUDITED

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in millions)

 

2015

 

2014

 

Backlog — beginning of period

 

$

42,481.5

 

$

34,907.1

 

New awards

 

4,447.7

 

10,668.5

 

Adjustments and cancellations, net(1)

 

(1,315.4

)

(171.1

)

Work performed

 

(4,419.0

)

(5,241.9

)

Backlog — end of period

 

$

41,194.8

 

$

40,162.6

 

 


(1)         Backlog as of March 31, 2015 was reduced by approximately $1