10-Q 1 a18-8612_110q.htm 10-Q

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, 2018

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number:  1-16129

 

FLUOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0927079

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

6700 Las Colinas Boulevard

 

 

Irving, Texas

 

75039

(Address of principal executive offices)

 

(Zip Code)

 

469-398-7000
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)

 

 

 

 

 

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 27, 2018, 140,587,114 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

March 31, 2018

 

TABLE OF CONTENTS

 

PAGE

 

 

 

 

Part I:

Financial Information

 

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three Months Ended March  31, 2018 and 2017 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

 

Item 2:

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

 

28

 

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

 

37

 

 

 

 

 

 

Item 4:

Controls and Procedures

 

37

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

38

 

 

 

 

Part II:

Other Information

 

 

 

 

 

 

Item 1:

Legal Proceedings

39

 

 

 

 

 

Item 1A:

Risk Factors

39

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

 

Item 6:

Exhibits

40

 

 

 

 

Signatures

 

 

43

 

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)

 

2018

 

2017

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

4,823,770

 

$

4,835,905

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

4,765,975

 

4,685,904

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

Corporate general and administrative expense

 

57,271

 

45,048

 

Interest expense

 

17,112

 

17,563

 

Interest income

 

(7,533

)

(6,035

)

Total cost and expenses

 

4,832,825

 

4,742,480

 

 

 

 

 

 

 

EARNINGS (LOSS) BEFORE TAXES

 

(9,055

)

93,425

 

INCOME TAX EXPENSE

 

3,006

 

16,071

 

 

 

 

 

 

 

NET EARNINGS (LOSS)

 

(12,061

)

77,354

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

5,529

 

16,743

 

 

 

 

 

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO FLUOR CORPORATION

 

$

(17,590

)

$

60,611

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

$

(0.13

)

$

0.43

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE

 

$

(0.13

)

$

0.43

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

BASIC

 

140,099

 

139,443

 

DILUTED

 

140,099

 

140,958

 

 

 

 

 

 

 

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)

 

2018

 

2017

 

 

 

 

 

 

 

NET EARNINGS (LOSS)

 

$

(12,061

)

$

77,354

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

Foreign currency translation adjustment

 

26,358

 

30,490

 

Ownership share of equity method investees’ other comprehensive income

 

4,981

 

8,433

 

Defined benefit pension and postretirement plan adjustments

 

1,176

 

393

 

Unrealized gain (loss) on derivative contracts

 

(3,602

)

5,348

 

Unrealized gain on available-for-sale securities

 

709

 

83

 

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX

 

29,622

 

44,747

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

17,561

 

122,101

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

5,869

 

17,001

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

11,692

 

$

105,100

 

 

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)

 

2018

 

2017

 

 

 

 

 

 

 

ASSETS 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($583,168 and $516,046 related to variable interest entities (“VIEs”))

 

$

1,685,954

 

$

1,804,075

 

Marketable securities, current ($89,295 and $91,295 related to VIEs)

 

142,503

 

161,134

 

Accounts and notes receivable, net ($221,966 and $327,652 related to VIEs)

 

1,727,474

 

1,602,751

 

Contract assets ($196,233 and $132,500 related to VIEs)

 

1,557,966

 

1,458,533

 

Other current assets ($18,028 and $9,229 related to VIEs)

 

580,865

 

574,764

 

Total current assets

 

5,694,762

 

5,601,257

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

 

113,622

 

Property, plant and equipment (“PP&E”) ((net of accumulated depreciation of $1,204,484 and $1,201,929) (net PP&E of $41,180 and $44,004 related to VIEs))

 

1,097,833

 

1,093,681

 

Goodwill

 

581,298

 

564,683

 

Investments

 

898,724

 

878,863

 

Deferred taxes

 

435,675

 

316,472

 

Deferred compensation trusts

 

345,799

 

381,826

 

Other assets ($27,325 and $27,631 related to VIEs)

 

371,135

 

377,288

 

TOTAL ASSETS

 

$

9,425,226

 

$

9,327,692

 

 

 

 

 

 

 

LIABILITIES AND EQUITY 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($368,636 and $258,592 related to VIEs)

 

$

1,720,943

 

$

1,512,740

 

Short-term borrowings

 

28,808

 

27,361

 

Contract liabilities ($314,675 and $361,701 related to VIEs)

 

1,193,465

 

874,036

 

Accrued salaries, wages and benefits ($34,677 and $32,678 related to VIEs)

 

724,798

 

706,520

 

Other accrued liabilities ($48,259 and $44,211 related to VIEs)

 

410,292

 

453,513

 

Total current liabilities

 

4,078,306

 

3,574,170

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

1,607,653

 

1,591,598

 

NONCURRENT LIABILITIES

 

609,960

 

669,525

 

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 — 140,597,739 and 139,918,324 shares in 2018 and 2017, respectively

 

1,406

 

1,399

 

Additional paid-in capital

 

99,028

 

88,222

 

Accumulated other comprehensive loss

 

(372,960

)

(402,242

)

Retained earnings

 

3,268,837

 

3,654,931

 

Total shareholders’ equity

 

2,996,311

 

3,342,310

 

Noncontrolling interests

 

132,996

 

150,089

 

Total equity

 

3,129,307

 

3,492,399

 

TOTAL LIABILITIES AND EQUITY

 

$

9,425,226

 

$

9,327,692

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Three Months Ended 

 

 

 

March 31,

 

(in thousands)

 

2018

 

2017

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings (loss)

 

$

(12,061

)

$

77,354

 

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

 

 

 

 

 

Depreciation of fixed assets

 

51,907

 

50,718

 

Amortization of intangibles

 

4,747

 

5,059

 

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

 

1,854

 

1,072

 

Gain on sale of property, plant and equipment

 

(2,153

)

(3,665

)

Amortization of stock-based awards

 

13,917

 

15,666

 

Deferred compensation trust

 

1,025

 

(14,573

)

Deferred compensation obligation

 

930

 

14,620

 

Deferred taxes

 

(37,920

)

52,081

 

Net retirement plan accrual (contributions)

 

(5,235

)

(7,604

)

Changes in operating assets and liabilities

 

(151,051

)

82,779

 

Other items

 

(1,962

)

(3,272

)

Cash provided (utilized) by operating activities

 

(136,002

)

270,235

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of marketable securities

 

(44,868

)

(30,521

)

Proceeds from the sales and maturities of marketable securities

 

175,784

 

71,900

 

Capital expenditures

 

(65,082

)

(66,884

)

Proceeds from disposal of property, plant and equipment

 

16,494

 

14,652

 

Investments in partnerships and joint ventures

 

(15,574

)

(86,026

)

Other items

 

128

 

611

 

Cash provided (utilized) by investing activities

 

66,882

 

(96,268

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Dividends paid

 

(30,242

)

(29,996

)

Repayment of borrowings under revolving lines of credit

 

 

(53,455

)

Distributions paid to noncontrolling interests

 

(23,226

)

(12,251

)

Capital contributions by noncontrolling interests

 

365

 

3,606

 

Taxes paid on vested restricted stock

 

(5,455

)

(6,171

)

Stock options exercised

 

4,019

 

5,787

 

Other items

 

(3,440

)

14,991

 

Cash utilized by financing activities

 

(57,979

)

(77,489

)

Effect of exchange rate changes on cash

 

8,978

 

20,667

 

Increase (decrease) in cash and cash equivalents

 

(118,121

)

117,145

 

Cash and cash equivalents at beginning of period

 

1,804,075

 

1,850,436

 

Cash and cash equivalents at end of period

 

$

1,685,954

 

$

1,967,581

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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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, 2017 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, 2018 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, 2018 and December 31, 2017 and its consolidated results of operations and cash flows for the interim periods presented. All significant intercompany transactions of consolidated subsidiaries are eliminated. During the first quarter of 2018, the operations of the company’s mining and metals business, previously included in the Energy & Chemicals segment, have been included in the Mining, Industrial, Infrastructure & Power segment. Therefore, certain amounts disclosed in 2017 have been reclassified to conform to the 2018 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.

 

In the first quarter of 2018, the company adopted Accounting Standards Update (“ASU”) 2014-09 (ASC Topic 606), “Revenue from Contracts with Customers” using the modified retrospective method in which the new guidance was applied retrospectively to contracts that were not completed as of January 1, 2018. Results for the reporting period beginning after January 1, 2018 have been presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with previous guidance. See Note 3 for a further discussion of the adoption and the impact on the company’s financial statements.

 

(2)                  Recent Accounting Pronouncements

 

New accounting pronouncements implemented by the company during the first quarter of 2018 are discussed below or in the related notes, where appropriate.

 

In the first quarter of 2018, the company adopted ASU 2014-09 (ASC Topic 606), “Revenue from Contracts with Customers” and related ASUs. See Note 3 for a further discussion of the adoption and the impact on the company’s financial statements.

 

In the first quarter of 2018, the company adopted ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU amends the Financial Accounting Standards Board’s (“FASB”) hedge accounting model to enable entities to better portray their risk management activities in the financial statements. ASU 2017-12 expands an entity’s ability to hedge nonfinancial and financial risk components and eliminates the requirement to separately measure and report hedge ineffectiveness. The adoption of ASU 2017-12 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2018, the company adopted ASU 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The adoption of ASU 2017-09 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2018, the company adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires employers to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately from the service cost component. As a result of the adoption of ASU 2017-07, the service cost component of net periodic pension expense has been presented in “Total cost of revenue” and the other components of net periodic pension expense have been presented in “Corporate general and administrative expense” on the Condensed Consolidated Statement of Earnings for the three months

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

ended March 31, 2018. Amounts in the 2017 period have not been reclassified to conform to the new presentation as the impact to the results of operations was not material. The adoption of ASU 2017-07 did not have any impact on the company’s financial position or cash flows.

 

In the first quarter of 2018, the company adopted ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The adoption of ASU 2017-01 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2018, the company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” ASU 2016-18 requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The adoption of ASU 2016-18 did not have any impact on the company’s cash flows.

 

In the first quarter of 2018, the company adopted ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 amends the guidance in Accounting Standards Codification (“ASC”) 230, which often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities, and has resulted in diversity in practice in how certain cash receipts and cash payments are classified. The adoption of ASU 2016-15 did not have any impact on the company’s cash flows.

 

In the first quarter of 2018, the company adopted ASU 2016-01, “Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to recognize any changes in fair value in net income unless the investments qualify for a practicability exception. The adoption of ASU 2016-01 did not have any impact on the company’s financial position, results of operations or cash flows.

 

New accounting pronouncements requiring implementation in future periods are discussed below.

 

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify the tax effects stranded in accumulated other comprehensive income as a result of the enactment of comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act, to retained earnings. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact that the adoption of ASU 2018-02 will have on the company’s financial position, results of operations and cash flows.

 

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

 

In February 2016, the FASB issued ASU 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification,” and issued subsequent amendments to the initial guidance in September 2017 within ASU 2017-13 which continues to amend the existing guidance on accounting for leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASU 2016-02 also requires the recognition of lease assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. The new guidance will be applied to leases that exist or are entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. Management is

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

currently evaluating the impact of adopting ASU 2016-02 on the company’s financial position, results of operations and cash flows.

 

(3)                  Revenue Recognition

 

On January 1, 2018, the company adopted ASC Topic 606, “Revenue from Contracts with Customers,” including the following ASUs:

 

ASU 2014-09, “Revenue from Contracts with Customers” 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 represent separate performance obligations, how variable consideration (which may include change orders and claims) is recognized, whether revenue should be recognized at a point in time or over time and ensuring the time value of money is considered in the transaction price.

 

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

 

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

 

ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” also clarifies certain aspects of ASU 2014-09 including the assessment of collectability, presentation of sales taxes, treatment of noncash consideration, and accounting for completed contracts and contract modifications at transition.

 

ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” allows an entity to determine the provision for loss contracts at either the contract level or the performance obligation level as an accounting policy election. The company determines its provision for loss contracts at the contract level.

 

ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” clarifies that the scope and application of ASC 610-20 on accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, applies only when the asset (or asset group) does not meet the definition of a business.

 

ASU 2017-13, “Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” provides guidance related to the effective dates of the ASUs noted above.

 

The company adopted ASC Topic 606 using the modified retrospective method, and accordingly the new guidance was applied retrospectively to contracts that were not completed as of January 1, 2018 (the date of initial application). As a result, the company has recorded a cumulative effect adjustment to decrease retained earnings by $339 million as of January 1, 2018 as well as the following cumulative effect adjustments:

 

·                  A decrease to accounts receivable of $50 million;

·                  A decrease to contract assets of $19 million;

·                  A decrease to investments of $4 million;

·                  A decrease to other assets of $14 million;

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

·                  An increase to contract liabilities of $357 million;

·                  A decrease to other accrued liabilities of $14 million;

·                  A decrease to noncurrent liabilities of $1 million;

·                  An increase to deferred taxes assets of $89 million; and

·                  A decrease to noncontrolling interests of $1 million.

 

The decrease in retained earnings primarily resulted from a change in the manner in which the company determines the unit of account for its projects (i.e., performance obligations). Under the previous guidance, the company typically segmented revenue and margin recognition between the engineering and construction phases of its contracts. Upon adoption of ASC Topic 606, engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation), resulting in a more constant recognition of revenue and margin over the term of the contract. In accordance with ASU 2017-13, certain of the company’s unconsolidated partnerships and joint ventures will not adopt ASC Topic 606 until January 1, 2019, at which time the company will record a cumulative effect adjustment which is not expected to be significant.

 

The following table presents how the adoption of ASC Topic 606 affected certain line items in the Condensed Consolidated Statement of Earnings:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

(in thousands)

 

Recognition
Under Previous
Guidance

 

Impact of the
Adoption of
ASC Topic 606

 

Recognition
Under ASC
Topic 606

 

Total revenue

 

$

4,822,060

 

$

1,710

 

$

4,823,770

 

Total cost of revenue

 

4,765,277

 

698

 

4,765,975

 

Corporate general and administrative expense

 

57,585

 

(314

)

57,271

 

Interest expense

 

17,112

 

 

17,112

 

Interest income

 

(7,533

)

 

(7,533

)

Earnings (loss) before taxes

 

(10,381

)

1,326

 

(9,055

)

Income tax expense

 

3,006

 

 

3,006

 

Net earnings (loss)

 

(13,387

)

1,326

 

(12,061

)

Net earnings attributable to noncontrolling interests

 

5,374

 

155

 

5,529

 

Net earnings (loss) attributable to Fluor Corporation

 

(18,761

)

1,171

 

(17,590

)

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The following table presents how the adoption of ASC Topic 606 affected certain line items in the Condensed Consolidated Balance Sheet:

 

 

 

As of March 31, 2018

 

(in thousands)

 

Recognition
Under Previous
Guidance

 

Impact of the
Adoption of
ASC Topic 606

 

Recognition
Under ASC
Topic 606

 

Accounts and notes receivable, net

 

$

1,766,502

 

$

(39,028

)

$

1,727,474

 

Contract assets (previously presented as contract work in progress)

 

1,591,293

 

(33,327

)

1,557,966

 

Investments

 

902,007

 

(3,283

)

898,724

 

Deferred taxes assets

 

345,009

 

90,666

 

435,675

 

Other assets

 

384,802

 

(13,667

)

371,135

 

Contract liabilities (previously presented as advance billings on contracts)

 

831,991

 

361,474

 

1,193,465

 

Other accrued liabilities

 

423,059

 

(12,767

)

410,292

 

Noncurrent liabilities

 

611,078

 

(1,118

)

609,960

 

Accumulated other comprehensive loss

 

(365,107

)

(7,853

)

(372,960

)

Retained earnings

 

3,606,404

 

(337,567

)

3,268,837

 

Noncontrolling interests

 

133,804

 

(808

)

132,996

 

 

The following table presents how the adoption of ASC Topic 606 affected certain line items in the Condensed Consolidated Statement of Cash Flows:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

(in thousands)

 

Recognition
Under Previous
Guidance

 

Impact of the
Adoption of
ASC Topic 606

 

Recognition
Under ASC
Topic 606

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(13,387

)

$

1,326

 

$

(12,061

)

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

 

1,156

 

698

 

1,854

 

Deferred taxes

 

(35,947

)

(1,973

)

(37,920

)

Changes in operating assets and liabilities

 

(151,000

)

(51

)

(151,051

)

Cash utilized by operating activities

 

(136,002

)

 

(136,002

)

 

Update to Major Accounting Policies

 

Upon adoption of ASC Topic 606, the company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2017. The revised accounting policy on revenue recognition is provided below.

 

Engineering & Construction Contracts and Service Contracts

 

The company recognizes engineering and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services. The company recognizes revenue using the percentage-of-completion method, based primarily on contract cost incurred to date compared to total estimated contract cost. The percentage-of-completion method (an input method) is the most faithful depiction of the company’s performance because it directly measures the value of the services transferred to the customer. Cost of revenue includes an allocation of depreciation and amortization. Customer-furnished materials, labor and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials, labor and equipment

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

into the deliverables promised to the customer). Customer-furnished materials are only included in revenue and cost when the contract includes construction activity and the company has visibility into the amount the customer is paying for the materials or there is a reasonable basis for estimating the amount. The company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.

 

For service contracts (including maintenance contracts) in which the company has the right to consideration from the customer in an amount that corresponds directly with the value to the customer of the company’s performance completed to date, revenue is recognized when services are performed and contractually billable. For all other service contracts, the company recognizes revenue over time using the cost-to-cost percentage-of-completion method. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, the company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as a current asset under contract assets on the Condensed Consolidated Balance Sheet. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under contract liabilities. Customer payments on service contracts are typically due within 30 to 90 days of billing, depending on the contract.

 

Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of $1.3 billion and contract work in progress (typically for fixed-price contracts) of $306 million as of March 31, 2018. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed under the terms of the contract. Advances that are payments on account of contract assets of $410 million and $337 million as of March 31, 2018 and December 31, 2017, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. The company recognized revenue of $510 million during the three months ended March 31, 2018 that was included in contract liabilities as of January 1, 2018. The company anticipates that substantially all incurred cost associated with contract assets as of March 31, 2018 will be billed and collected within one year.

 

Variable Consideration

 

The nature of the company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees; and liquidated damages and penalties. The company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (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. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.

 

The company generally provides limited warranties for work performed under its engineering and construction contracts. The warranty periods typically extend for a limited duration following substantial completion of the company’s work on a project. Historically, warranty claims have not resulted in material costs incurred.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Practical Expedients

 

If the company has a right to consideration from a customer in an amount that corresponds directly with the value of the company’s performance completed to date (a service contract in which the company bills a fixed amount for each hour of service provided), the company recognizes revenue in the amount to which it has a right to invoice for services performed.

 

The company does not adjust the contract price for the effects of a significant financing component if the company expects, at contract inception, that the period between when the company transfers a service to a customer and when the customer pays for that service will be one year or less.

 

The company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by the company from its customers (use taxes, value added taxes, some excise taxes).

 

Remaining Unsatisfied Performance Obligations

 

The company’s remaining unsatisfied performance obligations (“RUPO”) as of March 31, 2018 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The company had $26.5 billion in RUPO as of March 31, 2018.

 

The company expects to satisfy its RUPO as of March 31, 2018 over the following periods (in millions):

 

Within 1 year

 

$

13,297

 

1 to 2 years

 

9,377

 

Thereafter

 

3,800

 

Total remaining unsatisfied performance obligations

 

$

26,474

 

 

Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPO is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate.

 

Disaggregation of Revenue

 

Revenue disaggregated by reportable segment for the three months ended March 31, 2018 and 2017 is presented in Note 17.

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The following table presents revenue disaggregated by the geographic area where the work was performed for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

Revenue by Geographic Area (in millions)

 

2018

 

2017(1)

 

United States

 

$

2,319.0

 

$

2,530.9

 

Canada

 

75.7

 

496.9

 

Asia Pacific (includes Australia)

 

231.7

 

197.2

 

Europe

 

1,185.8

 

1,032.8

 

Central and South America

 

541.0

 

163.0

 

Middle East and Africa

 

470.6

 

415.1

 

Total revenue by geographic area

 

$

4,823.8

 

$

4,835.9

 

 


(1)         Prior period amounts have not been adjusted for the adoption of ASC Topic 606 under the modified retrospective method.

 

(4)                   Other Comprehensive Income (Loss)

 

The tax effects of the components of other comprehensive income (loss) (“OCI”) for the three months ended March 31, 2018 and 2017 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Tax

 

 

 

 

 

Tax

 

 

 

 

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

(in thousands)

 

Amount

 

(Expense)

 

Amount

 

Amount

 

(Expense)

 

Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

26,918

 

$

(560

)

$

26,358

 

$

48,658

 

$

(18,168

)

$

30,490

 

Ownership share of equity method investees’ other comprehensive income

 

6,259

 

(1,278

)

4,981

 

13,387

 

(4,954

)

8,433

 

Defined benefit pension and postretirement plan adjustments

 

1,517

 

(341

)

1,176

 

628

 

(235

)

393

 

Unrealized gain (loss) on derivative contracts

 

(4,530

)

928

 

(3,602

)

8,436

 

(3,088

)

5,348

 

Unrealized gain on available-for-sale securities

 

1,134

 

(425

)

709

 

132

 

(49

)

83

 

Total other comprehensive income

 

31,298

 

(1,676

)

29,622

 

71,241

 

(26,494

)

44,747

 

Less: Other comprehensive income attributable to noncontrolling interests

 

340

 

 

340

 

258

 

 

258

 

Other comprehensive income attributable to Fluor Corporation

 

$

30,958

 

$

(1,676

)

$

29,282

 

$

70,983

 

$

(26,494

)

$

44,489

 

 

13



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in accumulated other comprehensive income (“AOCI”) balances by component (after-tax) for the three months ended March 31, 2018 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership
Share of
Equity Method
Investees’ Other
Comprehensive
Income
(Loss)

 

Defined
Benefit
Pension and
Postretirement
Plans

 

Unrealized
Gain (Loss)
on Derivative
Contracts

 

Unrealized
Gain (Loss)
on Available-for-
Sale Securities

 

Accumulated
Other
Comprehensive
Income
(Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

$

(211,177

)

$

(32,614

)

$

(152,058

)

$

(5,684

)

$

(709

)

$

(402,242

)

Other comprehensive income (loss) before reclassifications

 

26,018

 

4,476

 

 

(3,761

)

 

26,733

 

Amounts reclassified from AOCI

 

 

505

 

1,176

 

159

 

709

 

2,549

 

Net other comprehensive income (loss)

 

26,018

 

4,981

 

1,176

 

(3,602

)

709

 

29,282

 

Balance as of March 31, 2018

 

$

(185,159

)

$

(27,633

)

$

(150,882

)

$

(9,286

)

$

 

$

(372,960

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

$

(1,462

)

$

 

$

 

$

 

$

 

$

(1,462

)

Other comprehensive income (loss) before reclassifications

 

340

 

 

 

 

 

340

 

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive income (loss)

 

340

 

 

 

 

 

340

 

Balance as of March 31, 2018

 

$

(1,122

)

$

 

$

 

$

 

$

 

$

(1,122

)

 

The changes in AOCI balances by component (after-tax) for the three months ended March 31, 2017 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership
Share of
Equity Method
Investees’ Other
Comprehensive
Income
(Loss)

 

Defined
Benefit
Pension and
Postretirement
Plans

 

Unrealized
Gain (Loss)
on Derivative
Contracts

 

Unrealized
Gain (Loss)
on Available-for-
Sale Securities

 

Accumulated
Other
Comprehensive
Income
(Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(286,449

)

$

(31,913

)

$

(167,667

)

$

(10,375

)

$

(265

)

$

(496,669

)

Other comprehensive income before reclassifications

 

30,280

 

8,433

 

 

4,744

 

76

 

43,533

 

Amounts reclassified from AOCI

 

 

 

393

 

556

 

7

 

956

 

Net other comprehensive income

 

30,280

 

8,433

 

393

 

5,300

 

83

 

44,489

 

Balance as of March 31, 2017

 

$

(256,169

)

$

(23,480

)

$

(167,274

)

$

(5,075

)

$

(182

)

$

(452,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(614

)

$

 

$

 

$

(52

)

$

 

$

(666

)

Other comprehensive income before reclassifications

 

210

 

 

 

15

 

 

225

 

Amounts reclassified from AOCI

 

 

 

 

33

 

 

33

 

Net other comprehensive income

 

210

 

 

 

48

 

 

258

 

Balance as of March 31, 2017

 

$

(404

)

$

 

$

 

$

(4

)

$

 

$

(408

)

 

14



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 Consolidated

 

March 31,

 

(in thousands)

 

Statement of Earnings

 

2018

 

2017

 

Component of AOCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ownership share of equity method investees’ other comprehensive loss

 

Total cost of revenue

 

$

(696

)

$

 

Income tax benefit

 

Income tax expense

 

191

 

 

Net of tax

 

 

 

$

(505

)

$

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(1,516

)

$

(628

)

Income tax benefit

 

Income tax expense

 

340

 

235

 

Net of tax

 

 

 

$

(1,176

)

$

(393

)

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts:

 

 

 

 

 

 

 

Commodity and foreign currency contracts

 

Total cost of revenue

 

$

214

 

$

(513

)

Interest rate contracts

 

Interest expense

 

(420

)

(419

)

Income tax benefit (expense)

 

Income tax expense

 

47

 

343

 

Net of tax

 

 

 

(159

)

(589

)

Less: Noncontrolling interests

 

Net earnings attributable to noncontrolling interests

 

 

(33

)

Net of tax and noncontrolling interests

 

 

 

$

(159

)

$

(556

)

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

Corporate general and administrative expense

 

$

(1,134

)

$

(12

)

Income tax benefit

 

Income tax expense

 

425

 

5

 

Net of tax

 

 

 

$

(709

)

$

(7

)

 


(1)            Defined benefit pension plan adjustments were reclassified to “Corporate general and administrative expense” in 2018 and to “Total cost of revenue” and “Corporate general and administrative expense” in 2017.

 

(5)                     Income Taxes

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the U.S. corporate federal income tax rate down to 21% from 35%, requires companies to pay a one-time transition tax on earnings from certain foreign subsidiaries and creates new taxes on certain foreign sourced earnings. The company applied the guidance in SAB 118 when accounting for the enactment date effects of the Tax Act, which allowed the company to make reasonable estimates at December 31, 2017. Given the complexity of the Tax Act, the company is still evaluating the tax impact and obtaining the information required to complete its accounting. Accordingly, all amounts recognized associated with the Tax Act during the first quarter of 2018 are provisional. Changes to the provisional estimates of the Tax Act will be recorded as a discrete item in the interim period the amounts are considered complete.

 

The Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Taxes Income (“GILTI”) earned by foreign subsidiaries.  The company has not yet determined its accounting policy with respect to GILTI and has therefore included the estimate of current quarter GILTI entirely as a period cost.

 

15



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The effective tax rates for the three months ended March 31, 2018 and 2017 were (33.2) percent and 17.2 percent, respectively.  The effective rate for the three months ended March 31, 2018, which reflected the lower U.S. corporate income tax rate enacted by the Tax Act, was unfavorably impacted by higher tax rates on foreign earnings and the inability to offset the losses recognized in certain jurisdictions against the income recognized in other jurisdictions. The effective rate for the three months ended March 31, 2017 benefitted from a worthless stock deduction on an insolvent foreign subsidiary. Both periods benefitted from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company.

 

The company conducts business globally and, as a result, the company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, the Netherlands, South Africa, the United Kingdom and the United States. Although the company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be materially different, both favorably and unfavorably. With a 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 2013.

 

(6)                  Cash Paid for Interest and Taxes

 

Cash paid for interest was $24 million and $23 million for the three months ended March 31, 2018 and 2017, respectively. Income tax payments, net of refunds, were $36 million and $34 million during the three-month periods ended March 31, 2018 and 2017, respectively.

 

(7)                   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, 2018 and 2017 are presented below:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2018

 

2017

 

 

 

 

 

 

 

Net earnings (loss) attributable to Fluor Corporation

 

$

(17,590

)

$

60,611

 

 

 

 

 

 

 

Basic EPS attributable to Fluor Corporation:

 

 

 

 

 

Weighted average common shares outstanding

 

140,099

 

139,443

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.13

)

$

0.43

 

 

 

 

 

 

 

Diluted EPS attributable to Fluor Corporation:

 

 

 

 

 

Weighted average common shares outstanding

 

140,099

 

139,443

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

Employee stock options, restricted stock units and shares and Value Driver Incentive units (1)

 

 

1,515

 

Weighted average diluted shares outstanding

 

140,099

 

140,958

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.13

)

$

0.43

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

4,159

 

3,844

 

 


(1)         Employee stock options, restricted stock units and shares, and Value Driver Incentive units of 1,143,000 were excluded from weighted average diluted shares outstanding for the three months ended March 31, 2018 as the shares would have an anti-dilutive effect on the net loss.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(8)                  Fair Value Measurements

 

The fair value hierarchy established by ASC 820, “Fair Value Measurement,” prioritizes the use of inputs used in valuation techniques into the following three levels:

 

·

Level 1 —

quoted prices in active markets for identical assets and liabilities

·

Level 2 —

inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly

·

Level 3 —

unobservable inputs

 

The company measures and reports assets and liabilities at fair value utilizing pricing information received from third parties. The company performs procedures to verify the reasonableness of pricing information received for significant assets and liabilities classified as Level 2.

 

The following table presents, for each of the fair value hierarchy levels required under ASC 820-10, the company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

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)

 

$

 

$

 

$

 

$

 

$

1,301

 

$

701

 

$

600

 

$

 

Marketable securities, current(2)

 

 

 

 

 

57,783

 

 

57,783

 

 

Deferred compensation trusts(3)

 

24,939

 

24,939

 

 

 

23,256

 

23,256

 

 

 

Marketable securities, noncurrent(4)

 

 

 

 

 

113,622

 

 

113,622

 

 

Derivative assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

23,494

 

 

23,494

 

 

29,766

 

 

29,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

28,375

 

$

 

$

28,375

 

$

 

$

29,127

 

$

 

$

29,127

 

$

 

 


(1)     Consists of registered money market funds and investment in U.S. agency securities with maturities of three months or less at the date of purchase. The fair value of the money market funds represents the net asset value of the shares of such funds as of the close of business at the end of the period. The fair value of the investments in U.S. agency securities is based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

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

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(5)     See Note 9 for the classification of foreign currency contracts on the Condensed Consolidated Balance Sheet. 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.

 

The company’s financial instruments presented in the table above included available-for-sale securities as of December 31, 2017. The available-for-sale securities were made up of the following security types as of December 31, 2017: money market funds of $1 million, U.S. agency securities of $3 million, U.S. Treasury securities of $69 million, corporate debt securities of $97 million and commercial paper of $3 million. The amortized cost of these available-for-sale securities was not materially different from the fair value. The company determined that there was no other-than-temporary impairment of available-for-sale securities with unrealized losses as of December 31, 2017. During the three months ended March 31, 2018 and 2017, proceeds from sales and maturities of available-for-sale securities were $175 million and $25 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, 2018

 

December 31, 2017

 

 

 

Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in thousands)

 

Hierarchy

 

Value

 

Value

 

Value

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,137,269

 

$

1,137,269

 

$

1,104,316

 

$

1,104,316

 

Cash equivalents(2)

 

Level 2

 

548,685

 

548,685

 

698,458

 

698,458

 

Marketable securities, current(3)

 

Level 2

 

142,503

 

142,503

 

103,351

 

103,351

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

31,813

 

31,813

 

26,006

 

26,006

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

1.750% Senior Notes(5)

 

Level 2

 

$

613,028

 

$

644,659

 

$

597,674

 

$

622,277

 

3.375% Senior Notes(5)

 

Level 2

 

497,070

 

505,760

 

496,859

 

512,475

 

3.5% Senior Notes(5)

 

Level 2

 

493,560

 

502,085

 

493,320

 

513,480

 

Other borrowings, including noncurrent portion(6)

 

Level 2

 

32,803

 

32,803

 

31,106

 

31,106

 

 


(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 1.750% Senior Notes, 3.375% Senior Notes and 3.5% Senior Notes were estimated based on quoted market prices for similar issues.

 

(6)     Other borrowings primarily represent bank loans and other financing arrangements resulting from the acquisition of Stork. The majority of these borrowings mature within one year. The carrying amount of borrowings under these arrangements approximates fair value because of the short-term maturity.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(9)                  Derivatives and Hedging

 

The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility, may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally implements a hedging strategy utilizing derivative instruments or hedging instruments to mitigate the risk. The company’s 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, its risk management objectives and strategies for undertaking the hedge transaction, and the initial quantitative assessment of the hedging instrument’s effectiveness in offsetting changes in the fair value of the hedged items. The company subsequently assesses hedge effectiveness qualitatively, unless the facts and circumstances of the hedge relationship change to an extent that the company can no longer assert qualitatively that the hedge is highly effective. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, 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 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. For derivatives that are not designated or do not qualify as hedging instruments, the change in the fair value of the derivative is offset against the change in the fair value of the underlying asset or liability through earnings. The company does not enter into derivative instruments for speculative purposes. Under ASC 815, in certain limited circumstances, foreign currency payment provisions could be deemed embedded derivatives. If an embedded foreign currency derivative is identified, the derivative is bifurcated from the host contract and the change in fair value is recognized through earnings. 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, 2018, the company had total gross notional amounts of $709 million of foreign currency contracts outstanding (primarily related to the British Pound, Kuwaiti Dinar, Indian Rupee, Philippine Peso and South Korean Won) that were designated as hedging instruments. The foreign currency contracts are of varying duration, none of which extend beyond January 2020. There were no commodity contracts outstanding as of March 31, 2018.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of March 31, 2018 and December 31, 2017 were as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

March 31,

 

December 31,

 

Balance Sheet

 

March 31,

 

December 31,

 

(in thousands)

 

Location

 

2018

 

2017

 

Location

 

2018

 

2017

 

Foreign currency contracts

 

Other current assets

 

$

16,409

 

$

18,667

 

Other accrued liabilities

 

$

21,335

 

$

19,046

 

Foreign currency contracts

 

Other assets

 

3,400

 

6,472

 

Noncurrent liabilities

 

6,110

 

8,654

 

Total

 

 

 

$

19,809

 

$

25,139

 

 

 

$

27,445

 

$

27,700

 

 

During the three months ended March 31, 2017, the company recognized a pre-tax net gain of $2.9 million in “Corporate general and administrative expense” associated with foreign currency contracts designated as fair value hedges. There were no fair value hedges outstanding as of March 31, 2018. The pre-tax net gain recognized in earnings associated with the hedging instruments designated as fair value hedges offset the amount of losses recognized in earnings on the hedged items in the same location on the Condensed Consolidated Statement of Earnings.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2018 and 2017 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)

 

2018

 

2017

 

Location of Gain (Loss)

 

2018

 

2017

 

Commodity contracts

 

 

$

3

 

Total cost of revenue

 

 

$

(34

)

Foreign currency contracts

 

(3,761

)

4,741

 

Total cost of revenue

 

103

 

(260

)

Interest rate contracts

 

 

 

Interest expense

 

(262

)

(262

)

Total

 

$

(3,761

)

$

4,744

 

 

 

$

(159

)

$

(556

)

 

As of March 31, 2018, the company also had total gross notional amounts of $115 million of foreign currency contracts outstanding that were not designated as hedging instruments. These contracts primarily related to engineering contract obligations and monetary assets and liabilities denominated in nonfunctional currencies. As of March 31, 2018, the company had total gross notional amounts of $90 million associated with contractual foreign currency payment provisions that were deemed embedded derivatives. Net losses of $1 million associated with the company’s derivatives and embedded derivatives were included in “Total cost of revenue” and “Corporate general and administrative expense” for the three months ended March 31, 2018. There were no similar contracts of significance as of March 31, 2017.

 

(10)            Retirement Benefits

 

Net periodic pension expense for the company’s defined benefit pension plans includes the following components:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

 

2018

 

2017

 

Service cost

 

$

4,671

 

$

4,394

 

Interest cost

 

5,867

 

5,293

 

Expected return on assets

 

(10,256

)

(9,591

)

Amortization of prior service credit

 

(243

)

(195

)

Recognized net actuarial loss

 

1,911

 

831

 

Net periodic pension expense

 

$

1,950

 

$

732

 

 

As a result of the adoption of ASU 2017-07 in the first quarter of 2018, the service cost component of net periodic pension expense has been presented in “Total cost of revenue” and the other components of net periodic pension expense have been presented in “Corporate general and administrative expense” on the Condensed Consolidated Statement of Earnings for the three months ended March 31, 2018. Amounts in the 2017 period have not been reclassified to conform to the new presentation as the impact to the results of operations was not material.

 

The company currently expects to contribute up to $25 million into its defined benefit pension plans during 2018, which is expected to be in excess of the minimum funding required. During the three months ended March 31, 2018, contributions of approximately $7 million were made by the company.

 

(11)            Financing Arrangements

 

As of March 31, 2018, the company had both committed and uncommitted lines of credit available to be used for revolving loans and letters of credit. As of March 31, 2018, letters of credit and borrowings totaling $1.7 billion were outstanding under these committed and uncommitted lines of credit. The committed lines of credit include 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 February 

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

2022. The company may utilize up to $1.75 billion in the aggregate of the combined $3.5 billion committed lines of credit for revolving loans, which may be used for acquisitions and/or general purposes. 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 the greater of $750 million or €750 million for the company’s subsidiaries. Borrowings under both facilities, which may be denominated in USD, EUR, GBP or CAD, bear interest at rates based on the Eurodollar Rate or an alternative base rate, plus an applicable borrowing margin.

 

In connection with the Stork acquisition, the company assumed a €110 million Super Senior Revolving Credit Facility that bore interest at EURIBOR plus 3.75%. In April 2016, the company repaid and replaced the €110 million Super Senior Revolving Credit Facility with a €125 million Revolving Credit Facility which was used for revolving loans, bank guarantees, letters of credit and to fund working capital in the ordinary course of business. This replacement facility, which bore interest at EURIBOR plus .75%, expired in April 2017. Outstanding borrowings of $53 million under the €125 million Revolving Credit Facility were repaid in 2017.

 

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. Surety bonds may be used as an alternative to letters of credit.

 

In March 2016, the company issued €500 million of 1.750% Senior Notes (the “2016 Notes”) due March 21, 2023 and received proceeds of €497 million (or approximately $551 million), net of underwriting discounts. Interest on the 2016 Notes is payable annually on March 21 of each year, beginning on March 21, 2017. Prior to December 21, 2022, the company may redeem the 2016 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 December 21, 2022, the company may redeem the 2016 Notes at 100 percent of the principal amount plus accrued and unpaid interest, if any, to the date of redemption. Additionally, the company may redeem the 2016 Notes at any time upon the occurrence of certain changes in U.S. tax laws, as described in the indenture, at 100 percent of the principal amount plus accrued and unpaid interest, if any, to the date of redemption.

 

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, and began 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 redemption.

 

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 the 2016 Notes, 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 applicable notes at a purchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest, if any, to the date of redemption. The company is generally not limited under the indentures governing the 2016 Notes, 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. We may, from time to time, repurchase the 2016 Notes, the 2014 Notes or the 2011 Notes in the open market, in privately-negotiated transactions or otherwise in such volumes, at such prices and upon such other terms as we deem appropriate.

 

Other borrowings of $33 million as of March 31, 2018 and $31 million as of December 31, 2017 primarily represent bank loans and other financing arrangements associated with Stork.

 

As of March 31, 2018, the company was in compliance with all of the financial covenants related to its debt agreements.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(12)           Stock-Based Plans

 

The company’s executive and director stock-based compensation plans are described, and informational disclosures are provided, in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2017. In the first quarter of 2018 and 2017, restricted stock units totaling 570,969 and 363,051, respectively, were granted to executives, at weighted-average grant date fair values of $58.15 per share and $53.36 per share, respectively. Restricted stock units granted to executives in 2018 and 2017 generally vest ratably over three years. Restricted stock units awarded to certain executives in 2017 are subject to a post-vest holding period of three years. The fair value of restricted stock units represents the closing price of the company’s common stock on the date of grant discounted for the post-vest holding period, when applicable.

 

During the first quarter of 2018 and 2017, stock options for the purchase of 33,615 shares at a weighted-average exercise price of $58.15 per share and 1,103,817 shares at a weighted-average exercise price of $55.35 per share, respectively, were awarded to executives. The exercise price of options represents the closing price of the company’s common stock on the date of grant. The options granted in 2018 and 2017 vest ratably over three years and expire ten years after the grant date.

 

In the first quarter of 2018 and 2017, performance-based Value Driver Incentive (“VDI”) units totaling 206,598 and 249,204, respectively, were awarded to executives. These awards vest after a period of approximately three years and contain annual performance conditions for each of the three years of the vesting period. The performance targets for each year are generally established in the first quarter of that year. Under ASC 718, performance-based awards are not deemed granted for accounting purposes until the performance targets have been established. Accordingly, only one-third of the units awarded in any given year are deemed to be granted each year of the three year vesting period. During the first quarter of 2018, units totaling 68,866, 72,601 and 90,931 under the 2018, 2017 and 2016 VDI plans, respectively, were granted at weighted-average grant date fair values of $66.38 per share, $56.30 per share and $52.31 per share, respectively. VDI units granted under the 2017 and 2016 VDI plans are subject to a post-vest holding period of three years. The grant date fair value is determined by adjusting the closing price of the company’s common stock on the date of grant for the post-vest holding period discount and for the effect of the market condition, when applicable. For awards granted under the 2018 and 2017 VDI plans, the number of units will be adjusted at the end of each performance period based on achievement of certain performance targets and market conditions, as defined in the VDI award agreements. For awards granted under the 2016 VDI plan, the number of units is adjusted at the end of each performance period based only on the achievement of certain performance targets, as defined in the VDI award agreement. Units granted under the 2018, 2017 and 2016 VDI plans can only be settled in company stock and are accounted for as equity awards in accordance with ASC 718.

 

(13)           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, 2018 and 2017, net earnings attributable to noncontrolling interests were $6 million and $17 million, respectively. Income taxes associated with earnings attributable to noncontrolling interests were immaterial in both periods presented. Distributions paid to noncontrolling interests were $23 million and $12 million for the three months ended March 31, 2018 and 2017, respectively. Capital contributions by noncontrolling interests were $0.4 million and $4 million for the three months ended March 31, 2018 and 2017, respectively.

 

(14)           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. Although the asserted value of these matters may be significant, 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.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Fluor Australia Ltd., a wholly-owned subsidiary of the company (“Fluor Australia”), completed a cost reimbursable engineering, procurement and construction management services project for Santos Ltd. (“Santos”) involving a large network of natural gas gathering and processing facilities in Queensland, Australia. On December 13, 2016, Santos filed an action in Queensland Supreme Court against Fluor Australia, asserting various causes of action and seeking damages of approximately AUD $1.47 billion. Santos has joined Fluor Corporation to the matter on the basis of a parent company guarantee issued for the project. The company believes that the claims asserted by Santos are without merit and is vigorously defending these claims. Based upon the present status of this matter, the company does not believe it is probable that a loss will be incurred. Accordingly, the company has not recorded a charge as a result of this action.

 

Other Matters

 

The company has made claims arising from the performance under its contracts. The company recognizes revenue for certain claims (including change orders in dispute and unapproved change orders in regard to both scope and price) when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The company estimates the amount of revenue to be recognized on claims using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims should be recognized include the following: (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.    Similarly, the company recognizes disputed back charges to suppliers or subcontractors as a reduction of cost when the same requirements have been satisfied. The company periodically evaluates its positions and the amounts recognized with respect to all its claims and back charges. As of March 31, 2018 and December 31, 2017, the company had recorded $134 million and $124 million, respectively, of claim revenue for costs incurred to date and such costs are included in contract assets. Additional costs, which will increase the claim revenue balance over time, are expected to be incurred in future periods. The company had also recorded disputed back charges totaling $18 million as of both March 31, 2018 and December 31, 2017, respectively. The company believes the ultimate recovery of amounts related to these claims and back charges is probable in accordance with ASC 606.

 

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.

 

(15)           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 $13 billion as of March 31, 2018. 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, 2018 and December 31, 2017 in accordance with ASC 460, “Guarantees,” and the carrying value of the liability was not material.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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.

 

(16)           Partnerships and Joint Ventures

 

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. Accounts receivable related to work performed for unconsolidated partnerships and joint ventures included in “Accounts and notes receivable, net” on the Condensed Consolidated Balance Sheet were $76 million and $83 million as of March 31, 2018 and December 31, 2017, respectively. Notes receivable from unconsolidated partnerships and joint ventures included in “Accounts and notes receivable, net” and “Other assets” on the Condensed Consolidated Balance Sheet were $29 million and $22 million as of March 31, 2018 and December 31, 2017, respectively.

 

For unconsolidated construction partnerships and joint ventures, the company generally 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 on the Condensed Consolidated Balance Sheet, which is a common application of ASC 810-10-45-14 in the construction industry. The equity method of accounting is also used for other investments in entities where the company has significant influence. The company’s investments in unconsolidated partnerships and joint ventures accounted for under these methods amounted to $748 million and $726 million as of March 31, 2018 and December 31, 2017, respectively, and were classified under “Investments” and “Other accrued liabilities” on the Condensed Consolidated Balance Sheet.

 

In the fourth quarter of 2017, the company made a cash investment of $26 million in COOEC Fluor Heavy Industries Co., Ltd. (“CFHI”), a joint venture in which the company has a 49% ownership interest and Offshore Oil Engineering Co., Ltd., a subsidiary of China National Offshore Oil Corporation, has 51% ownership interest. Through CFHI, the two companies own, operate and manage the Zhuhai Fabrication Yard in China’s Guangdong province. The company has a future funding commitment of $52 million.

 

Variable Interest Entities

 

In accordance with ASC 810, “Consolidation,” the company assesses its partnerships and joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). The company considers a partnership or joint venture a VIE if it has any of the following characteristics: (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

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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.

 

The net carrying value of the unconsolidated VIEs classified under “Investments” and “Other accrued liabilities” on the Condensed Consolidated Balance Sheet was a net asset of $240 million and $216 million as of March 31, 2018 and December 31, 2017, 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 necessary to satisfy the contractual obligations of the VIE. Future funding commitments as of March 31, 2018 for the unconsolidated VIEs were $65 million.

 

In some cases, the company is required to consolidate certain VIEs. As of March 31, 2018, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.2 billion and $768 million, respectively. As of December 31, 2017, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $1.2 billion and $700 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 15 for a further discussion of such agreements.

 

(17)           Operating Information by Segment

 

During the first quarter of 2018, the company changed the composition of its reportable segments to align them with the manner in which the chief executive officer manages the business and allocates resources. The operations of the company’s mining and metals business, previously included in the Energy & Chemicals segment, have been included in the Mining, Industrial, Infrastructure & Power segment. The company now reports its operating results in the following four reportable segments: Energy & Chemicals; Mining, Industrial, Infrastructure & Power; Government; and Diversified Services. Segment operating information and assets for 2017 have been recast to reflect these changes.

 

The Energy & Chemicals segment focuses on opportunities in the upstream, midstream, downstream, chemical, petrochemical, offshore and onshore oil and gas production, liquefied natural gas and pipeline markets. This segment has long served a broad spectrum of industries as an integrated solutions provider offering a full range of design, engineering, procurement, construction, fabrication and project management services.

 

The Mining, Industrial, Infrastructure & Power segment provides design, engineering, procurement, construction and project management services to the mining and metals, transportation, life sciences, advanced manufacturing, water and power sectors. The operations of NuScale Power, LLC, which is managed as a separate operating segment, has been aggregated with the Mining, Industrial, Infrastructure & Power segment for financial reporting purposes.

 

The Government and Diversified Services segments remain unchanged from the previous year and a description of these reportable segments is provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2017.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Operating information by reportable segment is as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

External Revenue (in millions)

 

2018

 

2017

 

Energy & Chemicals

 

$

1,943.0

 

$

2,128.6

 

Mining, Industrial, Infrastructure & Power

 

910.3

 

1,372.9

 

Government

 

1,327.2

 

765.2

 

Diversified Services

 

643.3

 

569.2

 

Total external revenue

 

$

4,823.8

 

$

4,835.9

 

 

Intercompany revenue for the Diversified Services segment, excluded from the amounts shown above, was $129 million and $147 million for the three months ended March 31, 2018 and 2017, respectively.

 

Segment profit is an earnings measure that the company utilizes to evaluate and manage its business performance. 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.

 

 

 

Three Months Ended

 

 

 

March 31,

 

Segment Profit (Loss) (in millions)

 

2018

 

2017

 

Energy & Chemicals

 

$

105.7

 

$

84.4

 

Mining, Industrial, Infrastructure & Power

 

(144.1

)

(2.8

)

Government

 

71.9

 

29.0

 

Diversified Services

 

18.8

 

22.6

 

Total segment profit

 

$

52.3

 

$

133.2

 

 

Segment profit for the Mining, Industrial, Infrastructure & Power segment during 2018 was adversely affected by forecast revisions of approximately $125 million (or $0.69 per diluted share) for estimated cost growth for a fixed-price, gas-fired power plant project, while segment profit during 2017 was adversely affected by forecast revisions totaling approximately $30 million for estimated cost growth for a fixed-price, gas-fired power plant project and a roadway project. Segment profit for both periods 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. A discussion of the cooperative agreement between NuScale and the U.S. Department of Energy (“DOE”) is provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2017. NuScale expenses included in the determination of segment profit were $23 million and $16 million for the three months ended March 31, 2018 and 2017, respectively. NuScale expenses for the 2018 and 2017 periods were reported net of qualified reimbursable expenses of $15 million and $10 million, respectively. The company anticipates that it will have received the maximum amount of funding from the DOE under its cooperative agreement early in the second quarter of 2018.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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

 

 

 

Three Months Ended

 

Reconciliation of Total Segment Profit to Earnings (Loss) Before Taxes

 

March 31,

 

(in millions)

 

2018

 

2017

 

Total segment profit

 

$

52.3

 

$

133.2

 

Corporate general and administrative expense

 

(57.3

)

(45.0

)

Interest income (expense), net

 

(9.6

)

(11.5

)

Earnings attributable to noncontrolling interests

 

5.5

 

16.7

 

Earnings (loss) before taxes

 

$

(9.1

)

$

93.4

 

 

Total assets by segment are as follows:

 

 

 

March 31,

 

December 31,

 

Total Assets by Segment (in millions)

 

2018

 

2017

 

Energy & Chemicals

 

$

1,595.2

 

$

1,674.2

 

Mining, Industrial, Infrastructure & Power

 

1,075.6

 

1,067.3

 

Government

 

1,096.6

 

732.0

 

Diversified Services

 

2,078.3

 

2,120.4

 

 

The increase in total assets in the Government segment resulted from increased working capital in support of project execution activities for the power restoration project in Puerto Rico.

 

Total assets in the Mining, Industrial, Infrastructure & Power segment as of March 31, 2018 included accounts receivable related to two subcontracts with Westinghouse Electric Company LLC (“Westinghouse”) to manage the construction workforce at the Plant Vogtle and V.C. Summer nuclear power plant projects. On March 29, 2017, Westinghouse filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, Southern District of New York. In the third quarter of 2017, the V.C. Summer project was cancelled by the owner. In the fourth quarter of 2017, the remaining scope of work on the Plant Vogtle project was transferred to a new contractor. In addition to amounts due for post-petition services, total assets as of March 31, 2018 included amounts due of $66 million and $2 million for services provided to the V.C. Summer and Plant Vogtle projects, respectively, prior to the date of the bankruptcy petition. The company has filed mechanic’s liens in South Carolina against the property of the owner of the V.C. Summer project for amounts due for pre-petition services rendered to Westinghouse. Based on the company’s evaluation of available information, the company does not expect the close-out of these projects to have a material impact on the company’s results of operations.

 

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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, 2017 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 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  and our client’s vulnerability to downturns, which may result in decreased capital investment or expenditures and reduced demand for our services;

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

·                  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;

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

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

·                  Failure of our joint venture partners to perform their venture obligations, which could impact the success of those ventures and 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;

·                  Cybersecurity breaches of our systems and information technology;

·                  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;

·                  Project cancellations, scope adjustments or deferrals, or foreign currency fluctuations, that could reduce the amount of our backlog and the revenue and profits that the company earns;

·                  Client delays or defaults in making payments;

·                  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;

·                  Uncertainties, restrictions and regulations impacting our government contracts;

·                  Failure of our employees, agents or partners to comply with laws, which could result in harm to our reputation and reduced profits or losses;

·                  The potential impact of changes in tax laws and other 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 new or changing legal requirements, as well as past and future environmental, health and safety regulations including climate change regulations;

·                  The failure to be adequately indemnified for our nuclear services;

·                  Foreign exchange risks;

·                  The availability of credit and restrictions imposed by credit facilities, both for the company and our clients, suppliers,

 

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subcontractors or other partners;

·                  Failure to maintain safe work sites;

·                  The inability to hire and retain qualified personnel;

·                  Possible limitations of bonding or letter of credit capacity;

·                  The risks associated with acquisitions, dispositions or other investments, including the failure to successfully integrate acquired businesses;

·                  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 20, 2018. 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) 398-7070. 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 of $4.8 billion for the three months ended March 31, 2018 remained flat compared to the three months ended March 31, 2017. Revenue growth in the Government and Diversified Services segments was offset by revenue declines in the Mining, Industrial, Infrastructure & Power and Energy & Chemicals segments. The company’s adoption of ASC Topic 606 on January 1, 2018 did not have a material effect on consolidated revenue during the three months ended March 31, 2018. (See Note 3 to the Condensed Consolidated Financial Statements.)

 

For the three months ended March 31, 2018, the company recognized a net loss attributable to Fluor Corporation of $18 million compared to net earnings attributable to Fluor Corporation of $61 million for the three months ended March 31, 2017. During the first quarter of 2018, losses in the Mining, Industrial, Infrastructure & Power and lower earnings contributions from the Diversified Services segments were partially offset by higher earnings contributions from the Government and Energy & Chemicals segments. Earnings in the first quarter of 2018 and 2017 were adversely affected by after-tax charges totaling approximately $96 million and $22 million, respectively, resulting from forecast revisions for estimated cost growth on certain fixed-price projects.

 

The effective tax rates for the three months ended March 31, 2018 and 2017 were (33.2) percent and 17.2 percent, respectively.  The effective rate for the three months ended March 31, 2018, which reflected the lower U.S. corporate income tax rate enacted by the Tax Cuts and Jobs Act, was unfavorably impacted by higher tax rates on foreign earnings and the inability to offset the losses recognized in certain jurisdictions against the income recognized in other jurisdictions. The effective rate for the three months ended March 31, 2017 benefitted from a worthless stock deduction on an insolvent foreign subsidiary. Both periods benefitted from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company.

 

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For the three months ended March 31, 2018, the company recognized a diluted loss per share of $0.13 compared to diluted earnings per share of $0.43 for the corresponding period of 2017. The decline was primarily due to the charge of $0.69 per diluted share resulting from forecast revisions for estimated cost growth on a fixed-price project in the current period.

 

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.

 

The company’s margins, in some cases, may be favorably or unfavorably impacted by a change in the amount of materials and customer-furnished materials, which are accounted for as pass-through costs.

 

Consolidated new awards were $2.5 billion for the three months ended March 31, 2018 compared to new awards of $2.3 billion for the three months ended March 31, 2017. The Mining, Industrial, Infrastructure & Power and Energy & Chemicals segments were the major contributors to the new award activity in the first quarter of 2018. The Energy & Chemicals segment remains well positioned for new project activity; however, delays in final investment decisions continue to affect the timing of new awards. Approximately 64 percent of consolidated new awards for the three months ended March 31, 2018 were for projects located outside of the United States compared to 55 percent for the first quarter of 2017.

 

Consolidated backlog as of March 31, 2018 was $29.1 billion compared to $41.6 billion as of March 31, 2017. The decrease in backlog primarily resulted from the removal of two nuclear power plant projects for Westinghouse Electric Company LLC (“Westinghouse”) as well as new award activity being outpaced by work performed. As of March 31, 2018, approximately 60 percent of consolidated backlog related to projects outside of the United States compared to 48 percent as of March 31, 2017. Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Consolidated backlog differs from the company’s remaining unsatisfied performance obligations (“RUPO”) discussed in Note 3 to the Condensed Consolidated Financial Statements. Backlog includes the amount of revenue the company expects to recognize under ongoing operations and maintenance contracts for the remainder of the current year renewal period plus up to three additional years if renewal is considered to be probable, while RUPO includes only the amount of revenue the company expects to recognize under ongoing operations and maintenance contracts with definite terms and/or substantive termination provisions.

 

During the first quarter of 2018, the company changed the composition of its reportable segments to align them with the manner in which the chief executive officer manages the business and allocates resources. The operations of the company’s mining and metals business, previously included in the Energy & Chemicals segment, have been included in the Mining, Industrial, Infrastructure & Power segment. The company now reports its operating results in the following four reportable segments: Energy & Chemicals; Mining, Industrial, Infrastructure & Power; Government; and Diversified Services. Segment operating information and assets for 2017 have been recast to reflect these changes.

 

The company is in the process of exiting the gas-fired power plant market and does not intend to offer engineering, construction and procurement services for new build projects once its existing contracts are completed. Consolidated revenue of $4.8 billion for both the three months ended March 31, 2018 and 2017 included revenue of $76 million and $238 million, respectively, associated with the gas-fired power plant business. Net loss attributable to Fluor Corporation of $18 million and net earnings attributable to Fluor Corporation of $61 million for the three months ended March 31, 2018 and 2017, respectively, included after-tax losses of $93 million and $9 million, respectively, associated with the gas-fired power plant business. Excluding the losses attributable to the gas-fired power plant business, adjusted net earnings attributable to Fluor Corporation, a non-GAAP measure, would have been of $75 million and $70 million for the three months ended March 31, 2018 and 2017, respectively. The company believes this non-GAAP measure allows investors to better evaluate the company’s future earnings potential taking into account the business decision to exit the gas-fired power plant market.

 

Energy & Chemicals

 

Revenue and segment profit for the Energy & Chemicals segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2018

 

2017

 

 

 

 

 

 

 

Revenue

 

$

1,943.0

 

$

2,128.6

 

Segment profit

 

105.7

 

84.4

 

 

Revenue for the three months ended March 31, 2018 decreased by 9 percent compared to the three months ended March 31, 2017, primarily due to reduced volume of project execution activity for several chemicals and downstream projects that were completed or nearing completion in 2017. This revenue decline was partially offset by an increase in project execution activities for a large upstream project.

 

Segment profit for the three months ended March 31, 2018 increased by 25 percent compared to the corresponding period in 2017. The increase in segment profit was primarily driven by the favorable effect of close out adjustments for projects completed or nearing completion in the first quarter of 2018 and an increase in project execution activities for the large upstream project mentioned above. Segment profit contributions from the company’s joint venture in Mexico were adversely affected in both periods by foreign currency losses attributable to the strengthening Mexican Peso against the U.S. Dollar. Segment profit margin for the three months ended March 31, 2018 was 5.4 percent compared to 4.0 percent for the

 

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corresponding period in 2017. The improvement in segment profit margin was primarily attributable to the same factors affecting segment profit.

 

New awards for the three months ended March 31, 2018 were $721 million compared to $705 million for the corresponding period of 2017. New awards in the current quarter included a mechanical construction contract for a chemicals facility in Texas, as well as an engineering and procurement contract for a refinery in Texas. Backlog of $14.1 billion as of March 31, 2018 decreased from $19.1 billion as of March 31, 2017. The reduction in backlog resulted primarily from new award activity being outpaced by work performed. While commodity prices have improved, clients continue to delay final investment decisions.

 

Total assets in the segment were flat at $1.6 billion as of March 31, 2018 compared to $1.7 billion as of December 31, 2017.

 

Mining, Industrial, Infrastructure & Power

 

Revenue and segment profit (loss) for the Mining, Industrial, Infrastructure & Power segment are summarized as follows:

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2018

 

2017

 

 

 

 

 

 

 

Revenue

 

$

910.3

 

$

1,372.9

 

Segment profit (loss)

 

(144.1

)

(2.8

)

 

Revenue for the three months ended March 31, 2018 decreased by 34 percent compared to the three months ended March 31, 2017, primarily due to reduced volume of project execution activities for several power projects, including cancellation of two nuclear projects, as well as forecast revisions for estimated cost growth for a fixed-price, gas-fired power plant project. The decrease in revenue was partially offset by increased levels of project execution activity in the mining and metals business line for several projects, including a large mining project in Chile.

 

Segment profit for the three months ended March 31, 2018 decreased significantly compared to the corresponding period in 2017. The decrease in segment profit was primarily driven by forecast revisions of approximately $125 million for estimated cost growth for the fixed-price, gas-fired power plant project discussed above. The decline in segment profit was also driven by the reduced volume of project execution activities in the power business line mentioned above, as well as an increase in NuScale expenses, net of qualified reimbursable expenditures. Segment profit during 2017 was adversely affected by forecast revisions totaling approximately $30 million for estimated cost growth for a fixed-price, gas-fired power plant project and a roadway project. The decrease in segment profit margin was primarily attributable to the same factors that affected segment profit.

 

The Mining, Industrial, Infrastructure & Power segment includes the operations of NuScale, which are primarily research and development activities. NuScale expenses, net of qualified reimbursable expenditures, included in the determination of segment profit, were $23 million for the three months ended March 31, 2018 compared to $16 million for the three months ended March 31, 2017.

 

New awards for the three months ended March 31, 2018 were $1.3 billion compared to $889 million for the corresponding period of 2017. New awards in the current quarter included a mine expansion project in Peru. Backlog decreased to $10.3 billion as of March 31, 2018 from $15.8 billion as of March 31, 2017, primarily due to the removal of two Westinghouse nuclear power plant projects during the latter part of 2017. Although mining and metals customers have been deferring their major capital investment decisions for the past several years, the company is beginning to see a renewed interest for projects in the bauxite, copper and gold markets.

 

Total assets in the Mining, Industrial, Infrastructure & Power segment were $1.1 billion as of both March 31, 2018 and December 31, 2017.

 

Total assets in the Mining, Industrial, Infrastructure & Power segment as of March 31, 2018 included accounts receivable related to the two subcontracts with Westinghouse to manage the construction workforce at the Plant Vogtle and V.C. Summer nuclear power plant projects. On March 29, 2017, Westinghouse filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, Southern District of New York. In the third quarter of 2017, the V.C. Summer project was cancelled by the owner. In the fourth quarter of 2017, the remaining scope of work on the Plant Vogtle project was transferred to a new contractor. In addition to amounts due for post-petition services, total assets as of March 31, 2018 included amounts due of $66 million and $2 million for services provided to the V.C. Summer and Plant Vogtle projects, respectively, prior to the date of the bankruptcy petition. See Note 17 to the Condensed Consolidated Financial Statements.

 

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Government

 

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

 

 

 

Three Months Ended
March 31,

 

(in millions)

 

2018

 

2017

 

 

 

 

 

 

 

Revenue

 

$

1,327.2

 

$

765.2

 

Segment profit

 

71.9

 

29.0

 

 

Revenue for the three months ended March 31, 2018 increased 73 percent compared to the same period in 2017. The revenue growth resulted primarily from project execution activities for a power restoration project in Puerto Rico, which commenced in the fourth quarter of 2017 and was substantially completed in the first quarter of 2018.

 

Segment profit for the three months ended March 31, 2018 significantly increased when compared to the same period in 2017, substantially driven by contributions from the power restoration project in Puerto Rico. Segment profit margin for the first quarter of 2018 was 5.4 percent compared to 3.8 percent for the same period in the prior year. The increase in segment profit margin was primarily driven by the same factor that drove the increase in segment profit.

 

New awards for the three months ended March 31, 2018 were $43 million compared to $173 million for the same period in the prior year. Backlog was $2.4 billion as of March 31, 2018 compared to $3.7 billion as of March 31, 2017. The decrease in backlog primarily resulted from new award activity being outpaced by work performed. Total backlog included $350 million and $1.5 billion of unfunded government contracts as of March 31, 2018 and 2017, respectively.

 

Total assets in the Government segment were $1.1 billion as of March 31, 2018 compared to $732 million as of December 31, 2017. The increase in total assets primarily resulted from increased working capital in support of project execution activities for the power restoration project in Puerto Rico.

 

Diversified Services

 

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

 

 

 

Three Months Ended
March 31,