10-Q 1 a18-18988_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 September 30, 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
(State or other jurisdiction of
incorporation or organization)

 

33-0927079
(I.R.S. Employer
Identification No.)

 

 

 

6700 Las Colinas Boulevard
Irving, Texas
(Address of principal executive offices)

 

75039
(Zip Code)

 

469-398-7000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

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 October 26, 2018, 140,668,441 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 


Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PAGE

 

 

 

 

 

Part I:

Financial Information

 

 

 

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 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

 

31

 

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

 

 

 

 

Item 4:

Controls and Procedures

 

41

 

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

 

42

 

 

 

 

 

Part II:

Other Information

 

 

 

 

 

 

 

 

Item 1:

Legal Proceedings

 

43

 

 

 

 

 

 

Item 1A:

Risk Factors

 

43

 

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

 

Item 4:

Mine Safety Disclosures

 

43

 

 

 

 

 

 

Item 6:

Exhibits

 

44

 

 

 

 

 

Signatures

 

47

 

1


Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

4,657,956

 

$

4,941,634

 

$

14,365,522

 

$

14,493,631

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

4,432,165

 

4,720,071

 

13,871,784

 

14,090,091

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

64,738

 

45,973

 

139,785

 

138,336

 

Interest expense

 

24,238

 

16,955

 

58,134

 

50,991

 

Interest income

 

(9,693

)

(6,749

)

(25,269

)

(20,647

)

Total cost and expenses

 

4,511,448

 

4,776,250

 

14,044,434

 

14,258,771

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE TAXES

 

146,508

 

165,384

 

321,088

 

234,860

 

INCOME TAX EXPENSE

 

50,483

 

52,495

 

105,960

 

51,249

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

96,025

 

112,889

 

215,128

 

183,611

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,680

 

18,426

 

40,541

 

52,562

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

77,345

 

$

94,463

 

$

174,587

 

$

131,049

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.55

 

$

0.68

 

$

1.24

 

$

0.94

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.55

 

$

0.67

 

$

1.23

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

140,713

 

139,887

 

140,489

 

139,716

 

DILUTED

 

141,549

 

140,830

 

141,366

 

140,847

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.21

 

$

0.21

 

$

0.63

 

$

0.63

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

96,025

 

$

112,889

 

$

215,128

 

$

183,611

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(11,733

)

25,228

 

(44,356

)

63,115

 

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

 

(6,495

)

6,485

 

6,055

 

8,409

 

Defined benefit pension and postretirement plan adjustments

 

(39,803

)

1,026

 

(35,933

)

2,936

 

Unrealized gain (loss) on derivative contracts

 

(1,952

)

(1,544

)

(7,694

)

2,006

 

Unrealized gain on available-for-sale securities

 

 

31

 

709

 

20

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

(59,983

)

31,226

 

(81,219

)

76,486

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

36,042

 

144,115

 

133,909

 

260,097

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,280

 

18,485

 

39,258

 

52,473

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FLUOR CORPORATION

 

$

17,762

 

$

125,630

 

$

94,651

 

$

207,624

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

 

 

September 30,

 

December 31,

 

(in thousands, except share and per share amounts)

 

2018

 

2017

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($511,244 and $516,046 related to variable interest entities (“VIEs”))

 

$

1,679,796

 

$

1,804,075

 

Marketable securities, current ($230,956 and $91,295 related to VIEs)

 

243,048

 

161,134

 

Accounts and notes receivable, net ($208,373 and $327,652 related to VIEs)

 

1,724,091

 

1,602,751

 

Contract assets ($236,847 and $132,500 related to VIEs)

 

1,464,370

 

1,458,533

 

Other current assets ($19,460 and $9,229 related to VIEs)

 

472,856

 

574,764

 

Total current assets

 

5,584,161

 

5,601,257

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

 

113,622

 

Property, plant and equipment (“PP&E”) ((net of accumulated depreciation of $1,211,050 and $1,201,929) (net PP&E of $38,058 and $44,004 related to VIEs))

 

1,029,162

 

1,093,681

 

Goodwill

 

553,294

 

564,683

 

Investments

 

859,216

 

878,863

 

Deferred taxes

 

425,313

 

316,472

 

Deferred compensation trusts

 

361,740

 

381,826

 

Other assets ($25,850 and $27,631 related to VIEs)

 

335,090

 

377,288

 

TOTAL ASSETS

 

$

9,147,976

 

$

9,327,692

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($407,696 and $258,592 related to VIEs)

 

$

1,619,222

 

$

1,512,740

 

Short-term borrowings

 

56,945

 

27,361

 

Contracts Liabilities ($371,444 and $361,701 related to VIEs)

 

892,860

 

874,036

 

Accrued salaries, wages and benefits ($26,871 and $32,678 related to VIEs)

 

683,743

 

706,520

 

Other accrued liabilities ($39,447 and $44,211 related to VIEs)

 

409,333

 

453,513

 

Total current liabilities

 

3,662,103

 

3,574,170

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

1,667,359

 

1,591,598

 

NONCURRENT LIABILITIES

 

618,585

 

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 — 140,749,228 and 139,918,324 shares in 2018 and 2017, respectively

 

1,407

 

1,399

 

Additional paid-in capital

 

122,267

 

88,222

 

Accumulated other comprehensive loss

 

(482,178

)

(402,242

)

Retained earnings

 

3,401,528

 

3,654,931

 

Total shareholders’ equity

 

3,043,024

 

3,342,310

 

Noncontrolling interests

 

156,905

 

150,089

 

Total equity

 

3,199,929

 

3,492,399

 

TOTAL LIABILITIES AND EQUITY

 

$

9,147,976

 

$

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

 

 

 

Nine Months Ended 

 

 

 

September 30,

 

(in thousands)

 

2018

 

2017

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

215,128

 

$

183,611

 

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

 

 

 

 

 

Depreciation of fixed assets

 

150,592

 

153,881

 

Amortization of intangibles

 

14,327

 

14,074

 

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

 

506

 

(378

)

Gain on sale of joint venture interest

 

(124,942

)

 

Gain on sale of property, plant and equipment

 

(15,595

)

(11,740

)

Amortization of stock-based awards

 

34,735

 

31,076

 

Deferred compensation trust

 

(14,915

)

(37,251

)

Deferred compensation obligation

 

19,320

 

35,988

 

Deferred taxes

 

30,969

 

99,763

 

Net retirement plan accrual (contributions)

 

(16,552

)

(7,095

)

Changes in operating assets and liabilities

 

(305,467

)

86,815

 

Other items

 

609

 

1,893

 

Cash provided (utilized) by operating activities

 

(11,285

)

550,637

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of marketable securities

 

(317,747

)

(204,808

)

Proceeds from the sales and maturities of marketable securities

 

347,131

 

150,857

 

Capital expenditures

 

(148,671

)

(216,336

)

Proceeds from disposal of property, plant and equipment

 

60,863

 

55,858

 

Investments in partnerships and joint ventures

 

(33,799

)

(241,577

)

Return of capital from partnerships and joint ventures

 

20,484

 

3,249

 

Other items

 

(1

)

(3,255

)

Cash utilized by investing activities

 

(71,740

)

(456,012

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Dividends paid

 

(89,193

)

(88,623

)

Proceeds from issuance of 4.250% Senior Notes

 

598,722

 

 

Repayment of 3.375% Senior Notes

 

(503,285

)

 

Repayment of borrowings under revolving lines of credit

 

 

(53,455

)

Net proceeds from issuance of commercial paper

 

24,449

 

 

Debt issuance costs

 

(4,974

)

 

Distributions paid to noncontrolling interests

 

(34,688

)

(23,842

)

Capital contributions by noncontrolling interests

 

4,293

 

4,672

 

Taxes paid on vested restricted stock

 

(5,686

)

(6,186

)

Stock options exercised

 

7,170

 

8,803

 

Other items

 

(5,182

)

(1,551

)

Cash utilized by financing activities

 

(8,374

)

(160,182

)

Effect of exchange rate changes on cash

 

(32,880

)

42,150

 

Decrease in cash and cash equivalents

 

(124,279

)

(23,407

)

Cash and cash equivalents at beginning of period

 

1,804,075

 

1,850,436

 

Cash and cash equivalents at end of period

 

$

1,679,796

 

$

1,827,029

 

 

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as adjusted (the “2017 10-K”). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended September 30, 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 September 30, 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. 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 nine months 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 (ASC 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 and nine months ended September 30, 2018. Amounts in the 2017 period have not been reclassified to conform to the new presentation

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 (ASC 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 (ASC 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 August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rules under SEC Release No. 33-10532, Disclosure Update and Simplification. The final rules amend the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. The analysis should reconcile the beginning and ending balances of each caption in stockholders’ equity for each period in which an income statement is presented. The final rules are effective on November 5, 2018. Therefore, the company will include a condensed consolidated statement of changes in equity in its interim financial statements beginning with the first quarter of 2019.

 

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. Management does not expect the adoption of ASU 2018-15 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU amends ASC 715 to add, remove and clarify certain disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. Management does not expect the adoption of ASU 2018-14 to have any impact on the company’s financial position, results of operations or cash flows.

 

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements. For example, public companies will now be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. Management does not expect the adoption of ASU 2018-13 to have any impact on the company’s financial position, results of operations or cash flows.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 (ASC Topic 842)” which amends the existing guidance on accounting for leases. Topic 842 was further clarified and amended within ASU 2017-13, ASU 2018-01, ASU 2018-10 and ASU 2018-11. The new guidance requires the recognition of right-to-use assets and lease liabilities on the balance sheet for leases with terms greater than twelve months. Lessees will classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase. 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. Topic 842 is effective for interim and annual reporting periods beginning after December 15, 2018. The company will adopt Topic 842 during the first quarter of 2019 using the modified retrospective method that will result in a cumulative effect adjustment to retained earnings as of the date of adoption. 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. The company expects to utilize the package of practical expedients that allows entities to retain the classification of lease contracts (e.g., operating or finance lease) existing as of the date of adoption. The company is currently in the process of evaluating its existing lease portfolio, including accumulating all of the necessary information required to properly account for leases under the new guidance. Additionally, the company is implementing an enterprise-wide lease management system and is evaluating additional changes to its processes and internal controls. Management is continuing to assess the impact of adopting Topic 842 on the company’s financial position, results of operations, cash flows and related disclosures.

 

(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.

 

8


Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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;

·                  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 tax 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.

 

9


Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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

 

 

 

Three Months Ended

 

 

 

September 30, 2018

 

(in thousands)

 

Recognition
Under Previous
Guidance

 

Impact of the
Adoption of
ASC Topic 606

 

Recognition
Under ASC
Topic 606

 

Total revenue

 

$

4,606,109

 

$

51,847

 

$

4,657,956

 

Total cost of revenue

 

4,431,691

 

474

 

4,432,165

 

Corporate general and administrative expense

 

63,480

 

1,258

 

64,738

 

Interest expense

 

24,238

 

 

24,238

 

Interest income

 

(9,693

)

 

(9,693

)

Earnings before taxes

 

96,393

 

50,115

 

146,508

 

Income tax expense

 

38,117

 

12,366

 

50,483

 

Net earnings

 

58,276

 

37,749

 

96,025

 

Net earnings attributable to noncontrolling interests

 

19,564

 

(884

)

18,680

 

Net earnings attributable to Fluor Corporation

 

38,712

 

38,633

 

77,345

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

(in thousands)

 

Recognition
Under Previous
Guidance

 

Impact of the
Adoption of
ASC Topic 606

 

Recognition
Under ASC
Topic 606

 

Total revenue

 

$

14,281,520

 

$

84,002

 

$

14,365,522

 

Total cost of revenue

 

13,870,528

 

1,256

 

13,871,784

 

Corporate general and administrative expense

 

137,939

 

1,846

 

139,785

 

Interest expense

 

58,134

 

 

58,134

 

Interest income

 

(25,269

)

 

(25,269

)

Earnings before taxes

 

240,188

 

80,900

 

321,088

 

Income tax expense

 

87,898

 

18,062

 

105,960

 

Net earnings

 

152,290

 

62,838

 

215,128

 

Net earnings attributable to noncontrolling interests

 

40,132

 

409

 

40,541

 

Net earnings attributable to Fluor Corporation

 

112,158

 

62,429

 

174,587

 

 

10


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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 September 30, 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

 

$

1,765,879

 

$

(41,788

)

$

1,724,091

 

Contract assets (previously presented as contract work in progress)

 

1,532,906

 

(68,536

)

1,464,370

 

Investments

 

867,524

 

(8,308

)

859,216

 

Deferred tax assets

 

351,604

 

73,709

 

425,313

 

Other assets

 

348,696

 

(13,606

)

335,090

 

Contract liabilities (previously presented as advance billings on contracts)

 

668,203

 

224,657

 

892,860

 

Other accrued liabilities

 

421,335

 

(12,002

)

409,333

 

Noncurrent liabilities

 

619,685

 

(1,100

)

618,585

 

Accumulated other comprehensive loss

 

(488,954

)

6,776

 

(482,178

)

Retained earnings

 

3,677,669

 

(276,141

)

3,401,528

 

Noncontrolling interests

 

157,624

 

(719

)

156,905

 

 

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

 

 

 

Nine Months Ended

 

 

 

September 30, 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

 

$

152,290

 

$

62,838

 

$

215,128

 

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

 

(750

)

1,256

 

506

 

Deferred taxes

 

15,985

 

14,984

 

30,969

 

Changes in operating assets and liabilities

 

(226,389

)

(79,078

)

(305,467

)

Cash utilized by operating activities

 

(11,285

)

 

(11,285

)

 

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 2017 10-K. 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

 

11


Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 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 $1.1 billion and contract work in progress (typically for fixed-price contracts) of $347 million as of September 30, 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 $547 million and $337 million as of September 30, 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 $690 million during the nine months ended September 30, 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 September 30, 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.

 

12


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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 September 30, 2018 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The company had $33 billion in RUPO as of September 30, 2018.

 

The company expects to satisfy its RUPO as of September 30, 2018 over the following periods (in millions):

 

Within 1 year

 

$

16,227

 

1 to 2 years

 

11,226

 

Thereafter

 

5,330

 

Total remaining unsatisfied performance obligations

 

$

32,783

 

 

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 and nine months ended September 30, 2018 and 2017 is presented in Note 17.

 

The following table presents revenue disaggregated by the geographic area where the work was performed for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Revenue by Geographic Area (in millions)

 

2018

 

2017(1)

 

2018

 

2017(1)

 

United States

 

$

1,786.2

 

$

2,579.2

 

$

6,325.4

 

$

7,594.5

 

Canada

 

83.8

 

336.6

 

202.1

 

1,258.0

 

Asia Pacific (includes Australia)

 

414.0

 

281.5

 

1,043.3

 

686.1

 

Europe

 

1,338.8

 

1,077.3

 

3,777.0

 

3,087.8

 

Central and South America

 

526.3

 

262.7

 

1,412.2

 

635.3

 

Middle East and Africa

 

508.9

 

404.3

 

1,605.5

 

1,231.9

 

Total revenue by geographic area

 

$

4,658.0

 

$

4,941.6

 

$

14,365.5

 

$

14,493.6

 

 


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

 

13


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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(4)                   Other Comprehensive Income (Loss)

 

The tax effects of the components of other comprehensive income (loss) (“OCI”) for the three months ended September 30, 2018 and 2017 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2018

 

September 30, 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

 

$

(10,357

)

$

(1,376

)

$

(11,733

)

$

40,397

 

$

(15,169

)

$

25,228

 

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

 

(8,051

)

1,556

 

(6,495

)

9,763

 

(3,278

)

6,485

 

Defined benefit pension and postretirement plan adjustments

 

(48,463

)

8,660

 

(39,803

)

1,641

 

(615

)

1,026

 

Unrealized loss on derivative contracts

 

(2,189

)

237

 

(1,952

)

(2,424

)

880

 

(1,544

)

Unrealized gain on available-for-sale securities

 

 

 

 

50

 

(19

)

31

 

Total other comprehensive income (loss)

 

(69,060

)

9,077

 

(59,983

)

49,427

 

(18,201

)

31,226

 

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

 

(400

)

 

(400

)

59

 

 

59

 

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

(68,660

)

$

9,077

 

$

(59,583

)

$

49,368

 

$

(18,201

)

$

31,167

 

 

The tax effects of the components of OCI for the nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2018

 

September 30, 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

 

$

(59,024

)

$

14,668

 

$

(44,356

)

$

101,068

 

$

(37,953

)

$

63,115

 

Ownership share of equity method investees’ other comprehensive income

 

7,560

 

(1,505

)

6,055

 

13,339

 

(4,930

)

8,409

 

Defined benefit pension and postretirement plan adjustments

 

(43,580

)

7,647

 

(35,933

)

4,697

 

(1,761

)

2,936

 

Unrealized gain (loss) on derivative contracts

 

(9,274

)

1,580

 

(7,694

)

3,273

 

(1,267

)

2,006

 

Unrealized gain on available-for-sale securities

 

1,134

 

(425

)

709

 

31

 

(11

)

20

 

Total other comprehensive income (loss)

 

(103,184

)

21,965

 

(81,219

)

122,408

 

(45,922

)

76,486

 

Less: Other comprehensive loss attributable to noncontrolling interests

 

(1,283

)

 

(1,283

)

(89

)

 

(89

)

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

(101,901

)

$

21,965

 

$

(79,936

)

$

122,497

 

$

(45,922

)

$

76,575

 

 

14


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 September 30, 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 June 30, 2018

 

$

(242,917

)

$

(20,064

)

$

(148,188

)

$

(11,426

)

$

 

$

(422,595

)

Other comprehensive income (loss) before reclassifications

 

(11,333

)

(6,646

)

(56,191

)

(3,736

)

 

(77,906

)

Amounts reclassified from AOCI

 

 

151

 

16,388

 

1,784

 

 

18,323

 

Net other comprehensive income (loss)

 

(11,333

)

(6,495

)

(39,803

)

(1,952

)

 

(59,583

)

Balance as of September 30, 2018

 

$

(254,250

)

$

(26,559

)

$

(187,991

)

$

(13,378

)

$

 

$

(482,178

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

 

$

(2,345

)

$

 

$

 

$

 

$

 

$

(2,345

)

Other comprehensive loss before reclassifications

 

(400

)

 

 

 

 

(400

)

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive loss

 

(400

)

 

 

 

 

(400

)

Balance as of September 30, 2018

 

$

(2,745

)

$

 

$

 

$

 

$

 

$

(2,745

)

 

The changes in AOCI balances by component (after-tax) for the nine months ended September 30, 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

 

(43,073

)

5,247

 

(56,191

)

(10,785

)

 

(104,802

)

Amounts reclassified from AOCI

 

 

808

 

20,258

 

3,091

 

709

 

24,866

 

Net other comprehensive income (loss)

 

(43,073

)

6,055

 

(35,933

)

(7,694

)

709

 

(79,936

)

Balance as of September 30, 2018

 

$

(254,250

)

$

(26,559

)

$

(187,991

)

$

(13,378

)

$

 

$

(482,178

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

$

(1,462

)

$

 

$

 

$

 

$

 

$

(1,462

)

Other comprehensive loss before reclassifications

 

(1,283

)

 

 

 

 

(1,283

)

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive loss

 

(1,283

)

 

 

 

 

(1,283

)

Balance as of September 30, 2018

 

$

(2,745

)

$

 

$

 

$

 

$

 

$

(2,745

)

 

15


Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the three months ended September 30, 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 June 30, 2017

 

$

(248,362

)

$

(29,989

)

$

(165,757

)

$

(6,877

)

$

(276

)

$

(451,261

)

Other comprehensive income (loss) before reclassifications

 

25,169

 

6,485

 

 

(974

)

7

 

30,687

 

Amounts reclassified from AOCI

 

 

 

1,026

 

(570

)

24

 

480

 

Net other comprehensive income (loss)

 

25,169

 

6,485

 

1,026

 

(1,544

)

31

 

31,167

 

Balance as of September 30, 2017

 

$

(223,193

)

$

(23,504

)

$

(164,731

)

$

(8,421

)

$

(245

)

$

(420,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2017

 

$

(814

)

$

 

$

 

$

 

$

 

$

(814

)

Other comprehensive income before reclassifications

 

59

 

 

 

 

 

59

 

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive income

 

59

 

 

 

 

 

59

 

Balance as of September 30, 2017

 

$

(755

)

$

 

$

 

$

 

$

 

$

(755

)

 

The changes in AOCI balances by component (after-tax) for the nine months ended September 30, 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 (loss) before reclassifications

 

63,256

 

8,409

 

 

2,151

 

(6

)

73,810

 

Amounts reclassified from AOCI

 

 

 

2,936

 

(197

)

26

 

2,765

 

Net other comprehensive income

 

63,256

 

8,409

 

2,936

 

1,954

 

20

 

76,575

 

Balance as of September 30, 2017

 

$

(223,193

)

$

(23,504

)

$

(164,731

)

$

(8,421

)

$

(245

)

$

(420,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(614

)

$

 

$

 

$

(52

)

$

 

$

(666

)

Other comprehensive income (loss) before reclassifications

 

(141

)

 

 

13

 

 

(128

)

Amounts reclassified from AOCI

 

 

 

 

39

 

 

39

 

Net other comprehensive income (loss)

 

(141

)

 

 

52

 

 

(89

)

Balance as of September 30, 2017

 

$

(755

)

$

 

$

 

$

 

$

 

$

(755

)

 

16


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:

 

 

 

Location in

 

Three Months Ended

 

Nine Months Ended

 

 

 

Condensed Consolidated

 

September 30,

 

September 30,

 

(in thousands)

 

Statement of Earnings

 

2018

 

2017

 

2018

 

2017

 

Component of AOCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ownership share of equity method investees’ other comprehensive loss

 

Total cost of revenue

 

$

(200

)

$

 

$

(1,099

)

$

 

Income tax benefit

 

Income tax expense

 

49

 

 

291

 

 

Net of tax

 

 

 

$

(151

)

 

$

(808

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(20,062

)

$

(1,641

)

$

(24,945

)

$

(4,697

)

Income tax benefit

 

Income tax expense

 

3,674

 

615

 

4,687

 

1,761

 

Net of tax

 

 

 

$

(16,388

)

(1,026

)

$

(20,258

)

(2,936

)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

Commodity and foreign currency contracts

 

Total cost of revenue

 

$

(2,257

)

$

1,346

 

$

(3,375

)

$

1,546

 

Interest rate contracts

 

Interest expense

 

(419

)

(419

)

(1,258

)

(1,258

)

Income tax benefit (expense)

 

Income tax expense

 

892

 

(357

)

1,542

 

(130

)

Net of tax

 

 

 

(1,784

)

570

 

(3,091

)

158

 

Less: Noncontrolling interests

 

Net earnings attributable to noncontrolling interests

 

 

 

 

(39

)

Net of tax and noncontrolling interests

 

 

 

$

(1,784

)

570

 

$

(3,091

)

197

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

Corporate general and administrative expense

 

$

 

$

(39

)

$

(1,134

)

$

(42

)

Income tax benefit

 

Income tax expense

 

 

15

 

425

 

16

 

Net of tax

 

 

 

$

 

(24

)

$

(709

)

$

(26

)

 


(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 created new taxes on certain foreign sourced earnings. The company applied the guidance in the SEC’s Staff Accounting Bulletin (“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 three quarters 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 Taxed 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.

 

The effective tax rates for the three and nine months ended September 30, 2018 were 34.5 percent and 33.0 percent, respectively, compared to 31.7 percent and 21.8 percent for the corresponding periods of 2017. The effective rates for the three and nine months ended September 30, 2018, which reflected the lower U.S. corporate income tax rate enacted by the Tax Act, were 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 nine months ended September 30, 2017 benefitted from a worthless stock deduction on an insolvent foreign subsidiary. All periods benefitted from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company.

 

17


Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 $52 million and $48 million for the nine months ended September 30, 2018 and 2017, respectively. Income tax payments, net of refunds, were $66 million and $168 million during the nine-month periods ended September 30, 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 and nine months ended September 30, 2018 and 2017 are presented below:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

77,345

 

$

94,463

 

$

174,587

 

$

131,049

 

 

 

 

 

 

 

 

 

 

 

Basic EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

140,713

 

139,887

 

140,489

 

139,716

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.55

 

$

0.68

 

$

1.24

 

$

0.94

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

140,713

 

139,887

 

140,489

 

139,716

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

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

 

836

 

943

 

877

 

1,131

 

Weighted average diluted shares outstanding

 

141,549

 

140,830

 

141,366

 

140,847

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.55

 

$

0.67

 

$

1.23

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

3,988

 

5,045

 

4,063

 

4,639

 

 

18


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 September 30, 2018 and December 31, 2017:

 

 

 

September 30, 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)

 

27,055

 

27,055

 

 

 

23,256

 

23,256

 

 

 

Marketable securities, noncurrent(4)

 

 

 

 

 

113,622

 

 

113,622

 

 

Derivative assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

14,448

 

 

14,448

 

 

29,766