EX-13 2 0002.txt CERTAIN PROVISIONS OF THE 2000 ANNUAL REPORT EXHIBIT 13 FLUOR CORPORATION 2000 ANNUAL REPORT FLUOR DANIEL OPERATING STATISTICS
Year ended October 31, (in millions) 2000 1999 1998 ------------------------------------ ------- ------- ------- Revenues $ 6,998 $ 8,403 $ 9,736 Customer-furnished material included in revenues 2,009 3,125 3,916 Work performed $ 6,998 $ 8,403 $ 9,736 Gross margin percent 5.1% 5.7% 4.8% Operating profit $ 128 $ 160 $ 161 New awards $ 6,075 $ 4,757 $ 8,173 New awards gross margin percent 6.9% 7.2% 6.0% Backlog $ 6,730 $ 6,770 $10,403 Backlog gross margin percent 6.1% 4.6% 4.0% Salaried employees 12,347 18,147 24,060
Backlog by Strategic Business Unit (SBU)
2000 1999 1998 Year ended October 31, (in millions) Dollars Percent Dollars Percent Dollars Percent ------------------------------------ ------- ------- ------- ------- ------- ------- Energy & Chemicals $ 4,356 65% $ 4,124 60% $ 5,752 55% Manufacturing & Life Sciences 1,078 16% 1,592 24% 2,261 22% Mining 964 14% 658 10% 1,890 18% Infrastructure 332 5% 396 6% 500 5% ------- --- ------- --- -------- --- Total backlog $ 6,730 100% $ 6,770 100% $ 10,403 100% ======= === ======= === ======== ===
Backlog by Region
2000 1999 1998 Year ended October 31, (in millions) Dollars Percent Dollars Percent Dollars Percent ------------------------------------ ------- ------- ------- ------- ------- ------- United States $ 2,968 44% $ 2,870 42% $ 3,942 38% Asia Pacific (includes Australia) 526 8% 780 12% 2,018 19% EAME* 448 7% 1,062 16% 2,003 19% Americas 2,788 41% 2,058 30% 2,440 24% ------- --- ------- --- -------- --- Total backlog $ 6,730 100% $ 6,770 100% $ 10,403 100% ======= === ======= === ======== ===
____________ * EAME represents Europe, Africa and the Middle East. PAGE 14 FLUOR GLOBAL SERVICES OPERATING STATISTICS
Year ended October 31, (in millions) 2000 1999 1998 ------------------------------------ ------- ------- ------- Revenues $ 2,953 $ 2,931 $ 2,641 Work performed $ 2,232 $ 2,055 $ 1,857 Gross margin percent 9.9% 9.4% 11.2% Operating profit $ 77 $ 92 $ 81 New awards $ 3,569 $ 2,032 $ 1,819 New awards gross margin percent 6.8% 7.8% 7.6% Backlog $ 3,282 $ 2,372 $ 2,242 Backlog gross margin percent 6.3% 6.1% 6.4% Salaried employees 7,563 6,011 5,554
Backlog by Strategic Business Unit (SBU)
2000 1999 1998 Year ended October 31, (in millions) Dollars Percent Dollars Percent Dollars Percent ------------------------------------ ------- ------- ------- ------- ------- ------- Operations & Maintenance $ 1,571 48% $ 1,127 48% $ 1,217 54% Telecommunications 946 29% 525 22% 135 6% Fluor Federal Services 765 23% 710 30% 781 35% Consulting Services and Other -- --% 10 --% 109 5% ------- --- ------- --- -------- --- Total backlog $ 3,282 100% $ 2,372 100% $ 2,242 100% ======= === ======= === ======= ===
Backlog by Region
2000 1999 1998 Year ended October 31, (in millions) Dollars Percent Dollars Percent Dollars Percent ------------------------------------ ------- ------- ------- ------- ------- ------- United States $ 2,712 83% $ 2,137 90% $ 1,979 88% Asia Pacific (includes Australia) 156 5% 218 9% 243 11% EAME* 414 12% 12 1% 9 0% Americas 0 0% 5 0% 11 1% ------- --- ------- --- ------- --- Total backlog $ 3,282 100% $ 2,372 100% $ 2,242 100% ======= === ======= === ======= ===
____________ * EAME represents Europe, Africa and the Middle East. PAGE 18 Selected Financial Data
2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------ (in millions, except per share amounts) Consolidated Operating Results Revenues $ 9,970.2 $ 11,334.4 $ 12,377.5 $ 13,217.5 $ 10,054.4 Earnings from continuing operations before taxes 142.2 76.6 222.7 119.4 280.4 Earnings from continuing operations, net 99.8 26.7 135.9 50.5 173.4 Discontinued operations, net 24.1 77.5 99.4 95.7 94.7 Net earnings 123.9 104.2 235.3 146.2 268.1 Basic earnings per share Continuing operations 1.33 0.35 1.73 0.61 2.10 Discontinued operations 0.32 1.03 1.26 1.15 1.14 ------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share 1.65 1.38 2.99 1.76 3.24 Diluted earnings per share Continuing operations 1.31 0.35 1.72 0.60 2.08 Discontinued operations 0.31 1.02 1.25 1.15 1.13 ------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share $ 1.62 $ 1.37 $ 2.97 $ 1.75 $ 3.21 Return on average shareholders' equity 7.7% 6.8% 14.5% 8.7% 17.4% Cash dividends per common share $ 1.00 $ 0.80 $ 0.80 $ 0.76 $ 0.68 Consolidated Financial Position Current assets $ 1,447.8 $ 1,910.2 $ 2,277.2 $ 2,213.4 $ 1,796.8 Current liabilities 1,620.4 2,204.3 2,495.6 1,978.2 1,645.5 ------------------------------------------------------------------------------------------------------------------------------ Working capital (172.6) (294.1) (218.4) 235.2 151.3 Net assets of discontinued operations 866.2 -- -- -- -- Property, plant and equipment, net 756.8 2,223.0 2,147.3 1,938.8 1,677.7 Total assets 3,652.7 4,886.1 5,019.2 4,685.3 3,951.7 Capitalization Short-term debt* 253.5 247.9 430.7 88.8 67.2 Long-term debt 17.6 317.5 300.4 300.5 3.0 Shareholders' equity 1,609.2 1,581.4 1,525.6 1,741.1 1,669.7 ------------------------------------------------------------------------------------------------------------------------------ Total capitalization $ 1,880.3 $ 2,146.8 $ 2,256.7 $ 2,130.4 $ 1,739.9 Total debt as a percent of total capitalization 14.4% 26.3% 32.4% 18.3% 4.0% Pro forma total debt as a percent of total capitalization** 36.7% -- -- -- -- Shareholders' equity per common share $ 21.24 $ 20.80 $ 20.19 $ 20.79 $ 19.93 Common shares outstanding at October 31 75.7 76.0 75.6 83.7 83.8 Other Data New awards $ 9,644.2 $ 6,789.4 $ 9,991.9 $ 12,122.1 $ 12,487.8 Backlog at year end 10,012.2 9,142.0 12,645.3 14,370.0 15,757.4 Capital expenditures and acquisitions - continuing operations 284.1 277.0 304.5 340.8 258.7 Cash provided by operating activities $ 141.8 $ 464.9 $ 702.5 $ 328.6 $ 406.9 ------------------------------------------------------------------------------------------------------------------------------
*Includes commercial paper, loan notes, a note payable to affiliate, miscellaneous trade notes payable and the current portion of long-term debt. **As if the spin-off distribution had occurred on October 31, 2000. As discussed in the first note to the accompanying financial statements, on November 30, 2000 the shareholders approved a spin-off distribution that will separate the company into two publicly traded companies - a "new" Fluor and Massey Energy Company. The net assets of Massey Energy Company at October 31, 2000 and its results of operations for all periods presented have been reclassified and are presented as discontinued operations. See Management's Discussion and Analysis on pages 23 to 28 and Notes to Consolidated Financial Statements on pages 33 to 44 for information relating to significant items affecting the results of operations. FLUOR CORPORATION 2000 ANNUAL REPORT Management's Discussion and Analysis Overview On June 7, 2000, the Board of Directors of Fluor Corporation ("Old Fluor") announced a plan to separate the company into two publicly traded companies, a "new" Fluor Corporation ("New Fluor" or the "company") and Massey Energy Company ("Massey"). The plan was approved by the shareholders and the Board of Directors of Old Fluor on November 30, 2000. The separation of the two companies was accomplished through a distribution of 100% of the common stock of New Fluor to shareholders of Old Fluor (the "Distribution"), which will represent a continuing interest in businesses to be conducted by New Fluor. As a result of the Distribution, each Old Fluor shareholder received one share of New Fluor common stock for each share of Old Fluor common stock while retaining their shares in Old Fluor, whose name was changed to Massey. As a result of the Distribution, the shares of Massey represent a continuing interest only in the coal business and other operations formerly conducted by Old Fluor's coal subsidiary, A.T. Massey Coal Company, Inc. Prior to the Distribution, Old Fluor received a ruling from the Internal Revenue Service to the effect that the Distribution would be considered to be tax-free for Federal income tax purposes. For purposes of effecting the Distribution and governing certain of the ongoing relationships among New Fluor and Massey after the Distribution and to provide for an orderly transition, the companies entered into various agreements including, without limitation, a Distribution Agreement and a Tax Sharing Agreement. Because of the relative significance of the company's operations to Old Fluor, the company will be treated as the "accounting successor" for financial reporting purposes. Accordingly, pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements have been adjusted to reflect the distribution. Massey's results of operations for all periods presented and its net assets as of October 31, 2000 have been reclassified and are presented as discontinued operations. In connection with the separation of New Fluor and Massey, New Fluor will change to a calendar-year basis of reporting financial results. As a requirement of this change, the company will report results for November and December 2000 as a separate transition period. The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the consolidated financial statements and accompanying notes. For purposes of reviewing this document, "operating profit" is calculated as revenues less cost of revenues excluding: special provision; corporate administrative and general expense; interest expense; interest income; domestic and foreign income taxes; gain or loss on discontinued operations; and certain other miscellaneous non-operating income and expense items which are immaterial. Results of Operations As a result of a strategic reorganization initiated during 1999, the company realigned its operating units into four business segments (which the company refers to as Strategic Business Enterprises): Fluor Daniel, Fluor Global Services, Fluor Signature Services and Coal. The Fluor Daniel segment provides design, engineering, procurement and construction services on a worldwide basis to an extensive range of industrial, commercial, utility, natural resources and energy clients. The Fluor Global Services segment, which includes American Equipment Company, TRS Staffing Solutions, Fluor Federal Services, Telecommunications and Operations & Maintenance, provides outsourcing and asset management solutions to its customers. Fluor Signature Services, which commenced operations on November 1, 1999, was created to provide business administration and support services for the benefit of the company and ultimately, to unaffiliated customers. Commencing in November 2000, the operations of TRS Staffing Solutions were transferred to Fluor Signature Services. The Coal segment, which is reported as discontinued operations and is now part of Massey, produces, processes and sells high-quality, low-sulfur steam coal for the utility industry as well as industrial customers, and metallurgical coal for the steel industry. To implement the 1999 strategic reorganization, the company recorded a special provision of $117.2 million in 1999 and reversed $17.9 million of that provision in 2000 - see Strategic Reorganization Costs elsewhere in Management's Discussion and Analysis. The provision and subsequent adjustment were not allocated to the business segments. Fluor Daniel Segment The business units of Fluor Daniel were reorganized during 2000 and are presented on the new basis for each of the three years ended October 31, 2000. Total 2000 new awards were $6.1 billion compared with $4.8 billion in 1999 and $8.2 billion in 1998. The following table sets forth new awards for each of the segment's business units: 2000 1999 1998 Year ended October 31, Dollars Percent Dollars Percent Dollars Percent ------------------------------------------------------------------------------- (in millions) Energy & Chemicals $ 3,923 65% $ 3,363 70% $ 4,756 58% Manufacturing & Life Sciences 1,292 21% 1,232 26% 2,455 30% Mining 691 11% 26 1% 464 6% Infrastructure 169 3% 136 3% 498 6% ------------------------------------------------------------------------------- Total new awards $ 6,075 100% $ 4,757 100% $ 8,173 100% ======================================================= United States $ 2,983 49% $ 2,267 47% $ 4,112 37% International 3,092 51% 2,490 53% 4,061 63% ------------------------------------------------------------------------------- Total new awards $ 6,075 100% $ 4,757 100% $ 8,173 100% ======================================================= PAGE 23 New awards in 2000 were higher compared with 1999 as the principal result of a strengthening business environment. New awards in 1999 were lower compared with 1998, reflecting both the lingering impact of deferred capital spending by clients, primarily in the petrochemical and mining industries, and the company's emphasis on greater project selectivity. The large size and uncertain timing of complex, international projects can create variability in the company's award pattern; consequently, future award trends are difficult to predict with certainty. However, given the continuing strength of the global economic environment, including higher oil prices and increasing commodity prices, as well as a regulatory environment that continues to support increased investment in areas such as clean fuels, the company is optimistic about the level of new awards in 2001. Since 1998 the trend in new awards activity within each business unit reflects the impact of the economic conditions and operating strategies noted above. New awards for 2000 include the $800 million Hamaca crude oil upgrading project in Venezuela. There were no individual new awards in excess of $600 million in either of the years 1999 or 1998. In the fourth quarter of 2000, growth in new awards was concentrated in the Energy & Chemicals and Manufacturing & Life Sciences business units. The Mining business unit's new awards in 1999 and 1998 had been reduced by depressed commodity prices, thereby limiting new projects, as well as this unit's focus on project selectivity. The trend began to reverse during 2000, with a substantial increase in new awards. The decrease in new awards in 1999 compared with 1998 for the Manufacturing & Life Sciences business unit is primarily the result of an increased focus on project selectivity. Backlog at October 31, 2000, 1999 and 1998 was $6.7 billion, $6.8 billion and $10.4 billion, respectively. (See page 14 in this annual report for information relating to backlog by business unit.) The backlog level has stabilized during 2000 as a result of the higher level of new awards compared with 1999. The decrease in total backlog at the end of 1999 was consistent with substantially lower new awards during that year. Work performed on existing projects has exceeded new awards in each of the years 2000, 1999 and 1998, although the disparity was much less in 2000. The decrease in backlog from projects located outside the United States during 1999 resulted from work performed on international projects such as a copper and gold mine in Indonesia and a petrochemical project in Saudi Arabia, in addition to a 39 percent decrease in international-related new awards. Domestic backlog was also impacted during 1999 by lower new awards and work performed on existing projects. The relationship of domestic versus international backlog has remained relatively stable during all of the years 1998 through 2000, with international backlog constituting approximately one-half of total backlog. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward. Fluor Daniel revenues decreased to $7.0 billion in 2000 compared with $8.4 billion in 1999 and $9.7 billion in 1998, reflecting the impact of lower new awards in 1999 and the company's focus on project selectivity. Fluor Daniel operating profit was $128 million (1.83% of revenues) in 2000, $160 million (1.91% of revenues) in 1999 and $161 million (1.65% of revenues) in 1998. Margins have increased in response to greater project selectivity and execution, as well as improved overhead cost management. However, such margin improvements have been offset (in fiscal year 2000) or reduced (in fiscal year 1999) by loss provisions on specific projects. Operating profit during 2000 was adversely impacted by a provision totaling $60 million, or 0.86% of the segment's revenues for the year, on a Duke/Fluor Daniel joint venture project that is located in Dearborn, Michigan. The provision represents the company's equal share of the cost overruns on the project that were incurred due to a number of adverse factors, including labor productivity and substantial owner delays and scope of work changes. Results for the year ended October 31, 1999 for Fluor Daniel include a provision totaling $84 million for process design problems which arose on its Murrin Murrin Nickel Cobalt project located in Western Australia. The company anticipates recovering a portion of this amount and, accordingly, has recorded $64 million in expected insurance recoveries. The result on operating profit was a negative $20 million impact, or 0.24% of the segment's revenues for 1999, reflecting costs in excess of contract maximums and which are not otherwise recoverable from any insurance coverage. The majority of Fluor Daniel's engineering and construction contracts provide for reimbursement of costs plus a fixed or percentage fee. In the highly competitive markets served by this segment, there is an increasing trend for cost-reimbursable contracts with incentive-fee arrangements and fixed or unit price contracts. In certain instances, Fluor Daniel has provided guaranteed completion dates and/or achievement of other performance criteria. Failure to meet schedule or performance guarantees or increases in contract costs can result in non-recoverable costs, which could exceed revenues realized from the project. Fluor Daniel continues to focus on improving operating margins by enhancing selectivity in the projects it pursues, lowering overhead costs and improving project execution. PAGE 24 FLOUR CORPORATION 2000 ANNUAL REPORT Fluor Global Services Segment Total 2000 new awards were $3.6 billion compared with $2.0 billion in 1999 and $1.8 billion in 1998. The following table sets forth new awards for each of the segment's business units:
2000 1999 1998 Year ended October 31, Dollars Percent Dollars Percent Dollars Percent -------------------------------------------------------------------------------------------------------------- (in millions) Operations & Maintenance $ 1,660 47% $ 772 38% $ 1,106 61% Telecommunications 1,099 31% 646 32% 30 2% Fluor Federal Services 800 22% 582 29% 451 25% Consulting Services and Other 10 --% 32 1% 232 12% -------------------------------------------------------------------------------------------------------------- Total new awards $ 3,569 100% $ 2,032 100% $ 1,819 100% =================================================================================== United States $ 2,961 83% $ 1,928 95% $ 1,523 84% International 608 17% 104 5% 296 16% -------------------------------------------------------------------------------------------------------------- Total new awards $ 3,569 100% $ 2,032 100% $ 1,819 100% ===================================================================================
New awards were dramatically higher in 2000, evidencing a strong first full year of operations for Fluor Global Services as a separate Strategic Business Enterprise of Fluor. The Operations & Maintenance business unit has capitalized on the growing trend toward outsourcing of non-core activities, offering its customers improved performance at a lower cost. The Telecommunications unit supports the continuing evolution of that industry and has been selected to manage a number of large domestic and international projects. New awards in 1999 were higher compared with 1998, principally as a result of an increase in telecommunications projects. Because of the nature of the services performed by Fluor Global Services, primarily related to American Equipment Company (AMECO) and TRS Staffing Solutions, a significant portion of this segment's activities are not includable in backlog. Backlog at October 31, 2000, 1999 and 1998 was $3.3 billion, $2.4 billion and $2.2 billion, respectively. (See page 18 in this annual report for information relating to backlog by business unit.) The increase in total backlog is consistent with the increasing trend in new awards. Although backlog reflects business that is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward. Fluor Global Services revenues increased to $3.0 billion in 2000 compared with $2.9 billion in 1999 and $2.6 billion in 1998. Revenue gains by the Telecommunications and Operations & Maintenance business units during 2000 more than offset declines experienced by the other business units. The increase in revenues during 1999 resulted from higher revenues in its AMECO, Fluor Federal Services and Telecommunications business units. Operating profit for the segment was $77 million in 2000 (2.61% of revenues), $92 million in 1999 (3.14% of revenues) and $81 million in 1998 (3.07% of revenues). The 2000 operating profit includes a $25 million charge relating to an adjustment of the fair value of accounts receivable, equipment inventory and certain other assets of AMECO's dealership operations and a $19 million charge relating to the write-off of certain assets and a loss on the sale of a European-based consulting business. Excluding these 2000 impacts, operating profit increased to $121 million (4.10% of revenues), reflecting higher project gross margins and reductions in overhead compared with the $92 million operating profit for 1999. Operating profit increased in 1999 compared with 1998 primarily due to the elimination of certain unprofitable operations which negatively impacted 1998 results. The majority of Fluor Global Services' contracts provide for reimbursement of costs plus a fixed or percentage fee. Due to intense competitive market conditions, there is an increasing trend for contracts with incentive-fee arrangements or fixed or unit price contracts. In certain instances, contracts provide guaranteed completion dates and/or achievement of other performance criteria. Failure to meet schedule or performance guarantees or increases in contract costs can result in non-recoverable costs, which could exceed revenues realized from the project. In October 1998, the company entered into an agreement to sell its ownership interest in Fluor Daniel GTI, Inc. ("FD/GTI"), an environmental services company. Under terms of the agreement, the company sold its 4,400,000 shares in FD/GTI for $8.25 per share, or $36.3 million in cash, on December 3, 1998. This transaction did not have a material impact on the company's results of operations or financial position. Fluor Signature Services Segment The Fluor Signature Services segment, which was created to provide business and administrative support services to the operating units with distinct profit-and- loss accountability, officially began operations at the start of fiscal 2000. External revenues during the year totaled $18.9 million. The segment surpassed its goal of break-even performance during its first year of operations, reporting a modest operating profit of $1.4 million. Strategic Reorganization Costs As noted above, during 1999 the company reorganized its engineering and construction operations. The company recorded a special provision of $117.2 million ($100.5 million after-tax) to cover direct and other reorganization related costs, primarily for personnel, facilities and asset impairment adjustments. The provision was initially recorded during the second quarter of 1999 at the then estimated amount of $136.5 million ($119.8 million after-tax). Total estimated personnel costs associated with the reorganization were reduced during the fourth quarter of 1999 as both the actual number of employee terminations as well as the cost per employee termination were lower than originally estimated. In the second quarter of 2000, $17.9 million of the special provision was reversed into earnings as a result of the PAGE 25 FLUOR CORPORATION 2000 ANNUAL REPORT company's decision to retain ownership and remain in its current office location in Camberley, U.K. Under the reorganization plan, approximately 5,000 jobs were eliminated. The provision included amounts for personnel costs for certain affected employees that were entitled to receive severance benefits under established severance policies or by government regulations. Additionally, outplacement services were provided on a limited basis to some affected employees. The provision also included amounts for asset impairment, primarily for property, plant and equipment; intangible assets (goodwill); and certain investments. The asset impairments were recorded primarily because of the company's decision to exit certain non-strategic geographic locations and businesses. The carrying values of impaired assets were adjusted to their current market values based on estimated sale proceeds, using either discounted cash flows or contractual amounts. Lease termination costs were also included in the special provision. The company closed 15 non-strategic offices worldwide and downsized other office locations. The special provision liability as of October 31, 2000 totaled $12.6 million. The remaining liability for personnel costs ($9.7 million) relates to non-U.S. operations and is expected to be substantially utilized by December 31, 2000. The remaining liability associated with abandoned lease space ($2.9 million) is being amortized as an offset to lease expense over the remaining life of the respective leases starting on the dates of abandonment. Other Net interest expense for continuing operations in 2000 increased by $12.5 million compared with 1999 as the combined result of higher interest rates for commercial paper, lower cash balances and higher debt balances to support working capital needs. Net interest expense for 1999 increased by $8.3 million compared with 1998 due to an increase in interest expense resulting from higher average outstanding short-term borrowings used to fund the company's 1998 share repurchase program, combined with lower average cash balances outstanding during the year. Corporate administrative and general expense for the year ended October 31, 2000 was $65.3 million compared with $55.4 million for 1999 and $22.6 million for 1998. The 2000 increase is the net result of several factors. Development costs associated with the company's knowledge management and global sales development programs increased expenses significantly. Costs related to the company's Enterprise Resource Management System, Knowledge@Work(SM), totaled $25.8 million in 2000 compared with $7.8 million during 1999, when the project was started. The Global Business Development Organization had expenditures during 2000 of $18.8 million. Higher expenses in these areas were partially offset by the reversal of previously recorded long-term (stock-based) incentive compensation expense as a result of declines in trading prices of Fluor Corporation stock during the year. Corporate administrative and general expense increased in 1999 compared with 1998 due to the commencement of the Knowledge@Work implementation, costs associated with the company's strategic business planning effort, and higher executive severance and recruiting costs. In addition, expenses for 1998 included a credit of approximately $10 million related to a reversal of a previously accrued long-term incentive plan for which the performance target was not met. The effective tax rates of the company's continuing operations, exclusive of the impact of the special provision in each year and the non-recurring charges in 2000 for the disposition of the European-based consulting business and the $25 million loss provision recorded with respect to the AMECO dealerships, were 29.8 percent, 34.4 percent and 39.0 percent, for the years 2000, 1999 and 1998, respectively. The 2000 tax rate benefited from a favorable tax settlement which represents approximately 1.8 percent of pretax earnings from continuing operations exclusive of special non-recurring items. Coal Segment -- Discontinued Operations Revenues and operating profit from Coal operations in 2000 were $1.09 billion and $105 million, respectively, compared with $1.08 billion and $147 million, respectively, in 1999. Revenues and operating profit in 1998 were $1.13 billion and $173 million, respectively. Revenues remained essentially unchanged in 2000 compared with 1999. The volume of steam coal sold increased 14 percent during the year. However, the volume of the higher priced metallurgical coal decreased 6 percent during that same period. Additionally, the realized prices for both steam and metallurgical coal declined during 2000, by approximately 5 percent each. The metallurgical coal market continues to be adversely affected by a weak coal export market and the slow recovery of the domestic steel market. The market for steam coal, which is used to fire electric-generating plants, continues to be adversely impacted by high customer inventory levels resulting from recent mild weather and competition from western coals, which is increasing its penetration of the traditional eastern coal market areas. Operating profit declined by $42 million in 2000 compared with 1999. This decline resulted from a number of factors, including the declines in realized prices discussed above, operational problems and adverse geologic conditions encountered at several mines, a $10 million impairment charge relating to development cost of a longwall panel at the Upper Cedar Grove operation, a $46.5 million charge for estimated costs, net of $43.5 million in probable insurance recoveries, to remediate a slurry spill at the Martin County operations, and a $7.1 million bad debt expense associated with the bankruptcy of a major steel industry customer. Partially offsetting those factors that have reduced operating profit was an increase PAGE 26 FLUOR CORPORATION 2000 ANNUAL REPORT in gains from the sale or exchange of coal reserves in place. As the Coal segment manages its coal reserves, it regularly sells or exchanges non-strategic reserves for reserves located in more synergistic locations. During 2000, the Coal segment realized gains of $26.5 million from such transactions, compared with gains of $10.0 million during 1999. Additionally, during 2000 a $12.0 million credit for excise taxes paid on coal export sales tonnage was recorded. The payment of excise taxes on export coal was determined to be unconstitutional by a 1998 federal district court decision and the Internal Revenue Service has issued procedures for obtaining refunds related to such excise taxes. Revenues decreased $44 million in 1999 compared with 1998 primarily due to the combination of a reduction in volume of the higher priced metallurgical coal and a decline in prices. Metallurgical coal volume decreased nearly 18 percent during 1999 compared with 1998. This decrease was more than offset by an increase in lower priced steam coal volume. Also contributing to the decline in coal revenues were lower realized prices for both steam and metallurgical coal. Steam coal prices declined 4 percent while metallurgical coal prices declined 2 percent. The factors impacting the metallurgical and steam coal market discussed in the previous paragraph also impacted the 1999 operating results. Operating profit for 1999 was lower than 1998 due to higher fixed costs, primarily depreciation, depletion and amortization, as volume levels remained relatively flat. Other expense includes the results of operations for the Appalachian Synfuel, LLC synthetic fuel plant that is being combined with the Coal segment in conjunction with Massey's separation from Fluor. Interest expense has been allocated to discontinued operations, representing actual interest expense for debt obligations (including the 6.95% Senior Notes and up to $230 million of commercial paper) attributed to the Coal segment. Although the allocated interest was fairly constant in 1998 and 1999, it increased during 2000 as the combined result of higher commercial paper interest rates during that year and an increase in outstanding commercial paper borrowings. Effective tax rates for discontinued operations have remained constant at approximately 29 percent for each of the years ended October 31, 2000, 1999 and 1998. That rate is lower than the rates reported for continuing operations primarily due to favorable tax effects of percentage depletion. Coal segment acquisitions during the three years ended October 31, 2000 were primarily focused on the purchase of additional low-sulfur coal reserves in areas adjacent to existing mine and plant operations. All acquisitions have been accounted for under the purchase method of accounting and their results of operations have been included in the company's consolidated financial statements from the respective acquisition dates. If these acquisitions had been made at the beginning of the respective year acquired, pro forma consolidated results of operations would not have differed materially from actual results. Financial Position and Liquidity The decrease in cash provided by operating activities in 2000, compared with 1999, is primarily due to the substantial increase in net operating assets and liabilities associated with engineering and construction activities. The decrease in cash provided by operating activities in 1999, compared with 1998, is primarily due to lower net earnings (adjusted for the non-cash and unexpended amounts of the special provision in 1999) and an increase in net operating assets and liabilities associated with engineering and construction activities. Also contributing to the 1999 decline were increases in equipment and coal inventories, as the result of slowing markets. The receipt of a $30 million tax refund positively impacted operating cash flow in 1998. The levels of operating assets and liabilities vary from year to year and are affected by the mix, stage of completion and commercial terms of engineering and construction projects. Cash utilized by investing activities totaled $386.9 million in 2000 compared with $375.2 million in 1999. Capital expenditures in total were of comparable amounts for the two years; however, the capital investment in construction equipment by Fluor Global Services declined, while the company's increased investment in the Knowledge@Work system largely replaced those expenditures. During 2000, the company received $28.4 million of distributions from its equity investments compared with net investments of $4.7 million in 1999. In 1999, the company completed the sale of its ownership interest in FD/GTI and received proceeds of $36.3 million. The decrease in cash utilized by investing activities in 1999 compared with 1998 of $188.1 million resulted primarily from lower capital expenditures and acquisitions, net of proceeds from the sale of property, plant and equipment, as well as the proceeds from the FD/GTI sale during 1999. Capital expenditures in 1999 were primarily for the Fluor Global Services segment, specifically for AMECO and directed toward acquiring machinery and equipment for its rental business, and for the Coal segment, which were directed toward developing existing reserves. In addition, capital expenditures in 1999 include costs associated with Knowledge@Work. Cash provided by financing activities totaled $104.9 million in 2000 compared with cash utilized of $220.6 million in 1999. Operating liquidity during 2000 was provided by short-term borrowings, including increases in commercial paper of $137.1 million and bank borrowings of $13.0 million, and increases in a note payable to affiliate of $51.4 million. During 1999, the company reduced its short-term borrowings by $299.2 million, partially offset by the issuance of a $113.4 million note payable to an affiliate and $17.6 million in long-term municipal bonds. In connection with a stock buyback program PAGE 27 FLUOR CORPORATION 2000 ANNUAL REPORT approved by the Board of Directors on March 8, 2000, the company purchased 747,000 shares of its outstanding common stock for $23.0 million during 2000, compared with no purchases during 1999. Cash utilized by financing activities totaled $98.0 million in 1998. During that year, the company utilized short-term borrowings of $341.8 million primarily to fund its 1997/1998 share repurchase program. Under this program, the company repurchased 8.3 million shares of its common stock for a total of $379.0 million. Cash dividends increased in 2000 to $76.0 million ($1.00 per share) from $60.7 million ($0.80 per share) in 1999 and $63.5 million ($0.80 per share) in 1998. The 1999 decline was a consequence of the reduced number of shares outstanding that resulted from the company's share repurchasing program. The total debt to capitalization ratio at October 31, 2000 was 14.4 percent compared with 26.3 percent at October 31, 1999. On a pro forma basis at October 31, 2000, assuming that the spin-off distribution had occurred on that date, the total debt to capitalization ratio would have been 36.7 percent. The company has on hand and access to sufficient sources of funds to meet its anticipated operating needs. Significant short-term and long-term lines of credit are maintained with banks which, along with cash on hand, provided adequate operating liquidity. Liquidity is also provided by the company's commercial paper program. In December 1998, the company expanded both its revolving credit facility and its commercial paper program from $400 million to $600 million and has subsequently increased its revolving credit facility to $690 million during 2000. In connection with the spin-off transaction, committed lines of credit was reduced to $490 million, effective November 30, 2000. Although the company is affected by inflation and the cyclical nature of the industry, its engineering and construction operations are generally protected by the ability to fix costs at the time of bidding or to recover cost increases in most contracts. Although the company has taken actions to reduce its dependence on external economic conditions, management is unable to predict with certainty the amount and mix of future business. Financial Instruments In connection with its 1997/1998 share repurchase program, the company entered into a forward purchase contract for 1,850,000 shares of its common stock at a price of $49 per share. The contract was settled on November 30, 2000, resulting in the repurchase and retirement of the shares for a cash payment of $101.2 million ($54.72 per share). As of October 31, 2000, the contract settlement cost per share exceeded the current market price per share by $19.35. The company's investment securities and substantially all of its debt instruments carry fixed rates of interest over their respective maturity terms. The company does not currently use derivatives, such as swaps, to alter the interest characteristics of its investment securities or its debt instruments. The company's exposure to interest rate risk on its $17.6 million municipal bonds, due in 2019, is not material given the company's strong balance sheet and creditworthiness which provides the ability to refinance. The company utilizes forward exchange contracts to hedge foreign currency transactions entered into in the ordinary course of business and not to engage in currency speculation. At October 31, 2000 and 1999, the company had forward foreign exchange contracts of less than eighteen months duration, to exchange principally Euros, Australian dollars, British pounds, Canadian dollars, Czech koronas, Dutch guilders, German marks and Spanish pesetas for U.S. dollars. The total gross notional amount of these contracts at October 31, 2000 and 1999 was $71 million and $124 million, respectively. Forward contracts to purchase foreign currency represented $66 million and $122 million, and forward contracts to sell foreign currency represented $5 million and $2 million, at october 31, 2000 and 1999, respectively. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial statements. This statement, as amended, will be adopted by the company on November 1, 2000 and will not have a significant impact on the results of operations, financial position or cash of the company. PAGE 28 FLOUR CORPORATION 2000 ANNUAL REPORT Consolidated Statement of Earnings
Year ended October 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) Total Revenues $ 9,970,154 $ 11,334,355 $ 12,377,476 Total Cost of Revenues 9,765,807 11,083,041 12,138,279 Other (Income) and Expenses Special provision (17,919) 117,200 -- Corporate administrative and general expense 65,349 55,350 22,598 Interest expense 26,315 18,972 13,120 Interest income (11,619) (16,789) (19,269) ------------------------------------------------------------------------------------------------------------------ Total cost and expenses 9,827,933 11,257,774 12,154,728 ------------------------------------------------------------------------------------------------------------------ Earnings from Continuing Operations Before Taxes 142,221 76,581 222,748 Income Tax Expense 42,375 49,898 86,834 ------------------------------------------------------------------------------------------------------------------ Earnings from Continuing Operations 99,846 26,683 135,914 Earnings from Discontinued Operations, Net of Taxes 49,103 77,504 99,430 Loss on Disposal, Net of Taxes (25,000) -- -- ------------------------------------------------------------------------------------------------------------------ Net Earnings $ 123,949 $ 104,187 $ 235,344 ============================================== Basic Earnings Per Share Continuing operations $ 1.33 $ 0.35 $ 1.73 Discontinued operations 0.32 1.03 1.26 ------------------------------------------------------------------------------------------------------------------ Net earnings $ 1.65 $ 1.38 $ 2.99 ============================================== Diluted Earnings Per Share Continuing operations $ 1.31 $ 0.35 $ 1.72 Discontinued operations 0.31 1.02 1.25 ------------------------------------------------------------------------------------------------------------------ Net earnings $ 1.62 $ 1.37 $ 2.97 ============================================== Shares Used to Calculate Earnings Per Share Basic 75,256 75,228 78,801 Diluted 76,365 75,929 79,135 ==============================================
See Notes to Consolidated Financial Statements. PAGE 29 FLUOR CORPORATION 2000 ANNUAL REPORT Consolidated Balance Sheet
At October 31, 2000 1999 ------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) Assets Current Assets Cash and cash equivalents $ 69,426 $ 209,614 Accounts and notes receivable 665,117 850,557 Contract work in progress 439,208 416,285 Inventories 106,711 248,118 Deferred taxes 112,156 105,502 Other current assets 55,175 80,095 ------------------------------------------------------------------------------------------------------------ Total current assets 1,447,793 1,910,171 ------------------------------------------------------------------------------------------------------------ Net assets of discontinued operations 866,199 -- Property, Plant and Equipment Land 61,035 71,664 Buildings and improvements 319,114 352,883 Machinery and equipment 718,011 2,103,663 Mining properties and mineral rights -- 858,965 Construction in progress 100,023 81,422 ------------------------------------------------------------------------------------------------------------ 1,198,183 3,468,597 Less accumulated depreciation, depletion and amortization 441,418 1,245,644 ------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 756,765 2,222,953 ------------------------------------------------------------------------------------------------------------ Other Assets Goodwill, net of accumulated amortization of $42,591 and $32,458, respectively 97,531 116,045 Investments 92,872 167,891 Deferred taxes 86,056 -- Other 305,518 469,057 ------------------------------------------------------------------------------------------------------------ Total other assets 581,977 752,993 ------------------------------------------------------------------------------------------------------------ $ 3,652,734 $ 4,886,117 ========================== Liabilities and Shareholders' Equity Current Liabilities Trade accounts payable $ 530,332 $ 793,465 Short-term debt 253,512 247,911 Advance billings on contracts 395,872 565,373 Accrued salaries, wages and benefit plan liabilities 242,311 321,148 Other accrued liabilities 198,348 276,413 ------------------------------------------------------------------------------------------------------------ Total current liabilities 1,620,375 2,204,310 ------------------------------------------------------------------------------------------------------------ Long-Term Debt Due After One Year 17,573 317,555 Noncurrent Liabilities Deferred taxes -- 162,210 Other 405,529 620,670 ------------------------------------------------------------------------------------------------------------ Total noncurrent liabilities 405,529 782,880 ------------------------------------------------------------------------------------------------------------ Contingencies and Commitments Shareholders' Equity Capital stock Preferred - authorized 20,000,000 shares without par value, none issued Common - authorized 150,000,000 shares of $0.625 par value; issued and outstanding in 2000 - 75,743,345 shares and in 1999 - 76,034,296 shares 47,339 47,521 Additional capital 212,107 217,844 Unamortized executive stock plan expense (27,093) (21,579) Accumulated other comprehensive income (46,400) (37,752) Retained earnings 1,423,304 1,375,338 ------------------------------------------------------------------------------------------------------------ Total shareholders' equity 1,609,257 1,581,372 ------------------------------------------------------------------------------------------------------------ $ 3,652,734 $ 4,886,117 ===========================
See Notes to Consolidated Financial Statements PAGE 30 FLUOR CORPORATION 2000 ANNUAL REPORT Consolidated Statement of Cash Flows
Year ended October 31, 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows From Operating Activities Net earnings $ 123,949 $ 104,187 $ 235,344 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization 311,688 318,204 288,870 Deferred taxes (2,651) 29,268 28,780 Special provision, net of cash payments (36,619) 85,410 -- Provisions for impairment/abandonment of joint ventures and investments 42,793 -- -- Provision for spin-off transaction expenses, net of cash payments 21,762 -- -- Changes in operating assets and liabilities, excluding effects of business acquisitions/dispositions (339,514) (22,551) 168,576 Equity in (earnings) losses of investees 14,800 (44,651) (12,035) Other, net 5,592 (4,991) (7,016) ---------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 141,800 464,876 702,519 ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Capital expenditures - continuing operations (284,079) (277,033) (304,533) Capital expenditures and acquisitions - Coal segment (211,487) (227,301) (308,404) Proceeds from sales and maturities of marketable securities -- -- 10,089 Investments, net 28,384 (4,688) (20,745) Proceeds from sale of property, plant and equipment 92,966 105,154 125,493 Contributions to deferred compensation trusts -- (8,160) (21,365) Net assets held for sale, including cash -- 36,300 (26,375) Other, net (12,681) 549 (17,477) ---------------------------------------------------------------------------------------------------------------------------- Cash utilized by investing activities (386,897) (375,179) (563,317) ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Cash dividends paid (75,983) (60,692) (63,497) Increase (decrease) in short-term borrowings, net 150,116 (299,212) 341,809 Proceeds from issuance of note payable to affiliate 51,433 113,379 -- Proceeds from (payments on) long-term debt, net -- 16,951 (285) Stock options exercised 5,829 10,760 9,935 Purchases of common stock (23,003) -- (378,979) Other, net (3,483) (1,813) (6,965) ---------------------------------------------------------------------------------------------------------------------------- Cash provided (utilized) by financing activities 104,909 (220,627) (97,982) ---------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (140,188) (130,930) 41,220 Cash and cash equivalents at beginning of year 209,614 340,544 299,324 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 69,426 $ 209,614 $ 340,544 ==========================================
See Notes to Consolidated Financial Statements. PAGE 31 FLUOR CORPORATION 2000 ANNUAL REPORT Consolidated Statement of Shareholders' Equity
Unamortized Accumulated Executive Other Common Stock Additional Stock Plan Comprehensive Retained (in thousands, except share and per share amounts) Shares Amount Capital Expense Income Earnings Total ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 1997 83,748 $52,343 $ 569,356 $ (33,441) $ (7,204) $1,159,996 $1,741,050 ------------------------------------------------------------------------------- Comprehensive income Net earnings -- -- -- -- -- 235,344 235,344 Foreign currency translation adjustment (net of deferred taxes of $14,439) -- -- -- -- (22,707) -- (22,707) --------- Comprehensive income 212,637 Cash dividends ($0.80 per share) -- -- -- -- -- (63,497) (63,497) Exercise of stock options, net 268 167 9,768 -- -- -- 9,935 Stock option tax benefit -- -- 2,425 -- -- -- 2,425 Amortization of executive stock plan expense -- -- -- 7,343 -- -- 7,343 Issuance of restricted stock, net (144) (90) (8,680) 3,465 -- -- (5,305) Purchases of common stock (8,299) (5,187) (373,792) -- -- -- (378,979) ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 1998 75,573 47,233 199,077 (22,633) (29,911) 1,331,843 1,525,609 ------------------------------------------------------------------------------- Comprehensive income Net earnings -- -- -- -- -- 104,187 104,187 Foreign currency translation adjustment (net of deferred taxes of $4,910) -- -- -- -- (7,841) -- (7,841) --------- Comprehensive income 96,346 Cash dividends ($0.80 per share) -- -- -- -- -- (60,692) (60,692) Exercise of stock options, net 304 190 10,570 -- -- -- 10,760 Stock option tax benefit -- -- 1,989 -- -- -- 1,989 Amortization of executive stock plan expense -- -- -- 7,517 -- -- 7,517 Issuance of restricted stock, net 157 98 6,208 (6,463) -- -- (157) ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 1999 76,034 47,521 217,844 (21,579) (37,752) 1,375,338 1,581,372 ------------------------------------------------------------------------------- Comprehensive income Net earnings -- -- -- -- -- 123,949 123,949 Foreign currency translation adjustment (net of deferred taxes of $5,931) -- -- -- -- (8,648) -- (8,648) --------- Comprehensive income 115,301 Cash dividends ($1.00 per share) -- -- -- -- -- (75,983) (75,983) Exercise of stock options, net 148 92 5,737 -- -- -- 5,829 Stock option tax benefit -- -- 334 -- -- -- 334 Amortization of executive stock plan expense -- -- -- 5,597 -- -- 5,597 Purchases of common stock (747) (467) (22,536) -- -- -- (23,003) Issuance of restricted stock, net 308 193 10,728 (11,111) -- -- (190) ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 2000 75,743 $47,339 $ 212,107 $ (27,093) $ (46,400) $1,423,304 $1,609,257 ===============================================================================
See Notes to Consolidated Financial Statements. PAGE 32 FLUOR CORPORATION 2000 ANNUAL REPORT Notes to Consolidated Financial Statements Major Accounting Policies Principles of Consolidation The financial statements include the accounts of the company and its subsidiaries. The equity method of accounting is used for investment ownership ranging from 20 percent to 50 percent. Investment ownership of less than 20 percent is accounted for on the cost method. As more fully described in the following Note, on November 30, 2000, shareholders approved a spin-off distribution that will separate the company into two publicly traded companies. As a result of this action, the company's Coal related business is presented as discontinued operations. All significant intercompany transactions of consolidated subsidiaries are eliminated. Certain 1999 and 1998 amounts have been reclassified to conform with the 2000 presentation. In connection with the spin-off, the company will change its fiscal year end from October 31 to December 31. As a requirement of this change, the company will report results for November and December 2000 as a separate transition period. Use of Estimates The preparation of the financial statements of the company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. Engineering and Construction Contracts The company recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor and equipment, and in certain cases subcontractor materials, labor and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenues recognized in excess of amounts billed are classified as current assets under contract work in progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under advance billings on contracts. The company anticipates that substantially all incurred costs associated with contract work in progress at October 31, 2000 will be billed and collected in 2001. Depreciation and Amortization Additions to property, plant and equipment are recorded at cost. Assets are depreciated principally using the straight-line method over the following estimated useful lives: buildings and improvements--three to 50 years and machinery and equipment--two to 30 years. Leasehold improvements are amortized over the lives of the respective leases. Goodwill is amortized on the straight- line method over periods not longer than 40 years. Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the company's financial statements or tax returns. Earnings Per Share Basic earnings per share (EPS) is calculated by dividing income from continuing operations, income from discontinued operations (including the loss on disposal) and net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities, consisting of employee stock options and restricted stock, and equity forward contracts. The impact of dilutive securities on the company's EPS calculation is as follows: Year ended October 31, 2000 1999 1998 ------------------------------------------------------------------------------- Employee stock options/ restricted stock 54,000 107,000 231,000 Equity forward contract 1,055,000 594,000 103,000 ------------------------------------------------------------------------------- 1,109,000 701,000 334,000 ========================================= Inventories Inventories are stated at the lower of cost or market using specific identification or the average cost method. Inventories comprise: At October 31, 2000 1999 ------------------------------------------------------------------------------- (in thousands) Equipment for sale/rental $ 80,785 $131,781 Coal -- 72,070 Supplies and other 25,926 44,267 ------------------------------------------------------------------------------- $106,711 $248,118 ======================= Internal Use Software The company capitalizes certain costs incurred in the development of internal- use software, including external direct material and service costs, employee payroll and payroll-related costs. PAGE 33 Foreign Currency The company uses forward exchange contracts to hedge certain foreign currency transactions entered into in the ordinary course of business. The company does not engage in currency speculation. The company's forward exchange contracts do not subject the company to significant risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on the assets, liabilities or transactions being hedged. Accordingly, the unrealized gains and losses are deferred and included in the measurement of the related foreign currency transaction. At October 31, 2000, the company had approximately $71 million of foreign exchange contracts outstanding relating to contract obligations. The forward exchange contracts generally require the company to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. If the counterparties to the exchange contracts (AA or A+ rated banks) do not fulfill their obligations to deliver the contracted currencies, the company could be at risk for any currency related fluctuations. The amount of any gain or loss on these contracts in 2000, 1999 and 1998 was immaterial. The contracts are of varying duration, none of which extend beyond January 2002. The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in U.S. dollars or other currencies corresponding to the currency in which costs are incurred. As a result, the company generally does not need to hedge foreign currency cash flows for contract work performed. The functional currency of all significant foreign operations is the local currency. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial statements. This statement, as amended, will be adopted by the company on November 1, 2000 and will not have a significant impact on the results of operations, financial position or cash flows of the company. Concentrations of Credit Risk The majority of accounts receivable and all contract work in progress are from engineering and construction clients in various industries and locations throughout the world. Most contracts require payments as the projects progress or in certain cases advance payments. The company generally does not require collateral, but in most cases can place liens against the property, plant or equipment constructed or terminate the contract if a material default occurs. The company maintains adequate reserves for potential credit losses and such losses have been minimal and within management's estimates. Stock Plans The company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights and performance equity units is recorded based on the quoted market price of the company's stock at the end of the period. Comprehensive Income Total comprehensive income represents the net change in shareholders' equity during a period from sources other than transactions with shareholders and as such, includes net earnings. For the company, the only other component of total comprehensive income is the change in the cumulative foreign currency translation adjustments recorded in shareholders' equity. Discontinued Operations On November 30, 2000, a spin-off distribution to shareholders was effected which separated Fluor Corporation (Fluor) into two publicly-traded companies - a "new" Fluor ("New Fluor" or the "company") and Massey Energy Company ("Massey"). The spin-off was accomplished through the distribution of 100% of the common stock of New Fluor to shareholders of existing Fluor. As a result, each existing Fluor shareholder received one share of New Fluor common stock for each share of existing Fluor common stock and retained their shares in existing Fluor, whose name was changed to Massey Energy Company. The company has received a ruling from the Internal Revenue Service that the spin-off will be tax-free to its shareholders. Because of the relative significance of the company's operations to Fluor, the company will be treated as the "accounting successor" for financial reporting purposes. Accordingly, Massey's results of operations for all periods presented and its net assets as of October 31, 2000 have been reclassified and are presented as discontinued operations. PAGE 34 FLUOR CORPORATION 2000 ANNUAL REPORT In connection with the spin-off, the company's 6.95% Senior Notes due March 1, 2007 will remain an obligation of Massey. In addition, Massey will issue $230 million of commercial paper (adjusted upward for funds advanced to Massey by Fluor or downward for funds advanced to Fluor by Massey from August 1, 2000 to the distribution date), the proceeds of which will be transferred to the company. As of October 31, 2000, the adjusted commercial paper commitment was $213 million. The net assets of Massey consisted of the following at October 31, 2000:
(in thousands) -------------------------------------------------------------------------------- Cash and cash equivalents $ 1,081 Accounts and notes receivable 218,591 Inventories 104,014 Other current assets 68,996 Net property, plant and equipment 1,552,270 Other assets 226,946 -------------------------------------------------------------------------------- Total assets 2,171,898 -------------------------------------------------------------------------------- Trade accounts payable 158,045 Short-term debt 214,170 Other current liabilities 142,568 Long-term debt due after one year 300,000 Noncurrent liabilities 490,916 -------------------------------------------------------------------------------- Total liabilities 1,305,699 -------------------------------------------------------------------------------- Net assets of Massey $ 866,199 ============
Accounts receivable from customers of Massey are primarily concentrated in the steel and utility industries. In October 2000 a provision for bad debts of $7.1 million was recognized due to the bankruptcy of a major steel industry customer. Summarized results of Massey are as follows:
Year ended October 31, 2000 1999 1998 -------------------------------------------------------------------------------- (in thousands) Revenues $1,085,833 $1,083,030 $1,127,297 -------------------------------------------------------------------------------- Operating costs Cost of sales 838,876 774,582 810,416 Depreciation, depletion and amortization 170,977 166,419 150,062 Selling, general and administrative 29,754 32,696 27,584 Other operating income, net (58,689) (37,524) (33,527) ------------------ ------------------------------------------------------------- Total operating costs 980,918 936,173 954,535 -------------------------------------------------------------------------------- Operating profit 104,915 146,857 172,762 Other expense, net (8,015) (7,479) (2,622) Interest expense (35,327) (31,946) (32,157) Interest income 7,470 1,640 1,895 -------------------------------------------------------------------------------- Earnings before taxes 69,043 109,072 139,878 Income tax expense 19,940 31,568 40,448 -------------------------------------------------------------------------------- Net earnings $ 49,103 $ 77,504 $ 99,430 =========== =========== ===========
Interest expense has been allocated to discontinued operations, representing actual interest expense for Massey obligations (including the 6.95% Senior Notes and up to $230 million of commercial paper). Consolidated Statement of Cash Flows Cash flows and changes in operating assets and liabilities include the effects from Massey, without separate identification and classification of discontinued operations. Securities with maturities of 90 days or less at the date of purchase are classified as cash equivalents. Securities with maturities beyond 90 days, when present, are classified as marketable securities and are carried at fair value. The changes in operating assets and liabilities as shown in the Consolidated Statement of Cash Flows comprise:
Year ended October 31, 2000 1999 1998 -------------------------------------------------------------------------------- (in thousands) (Increase) decrease in: Accounts and notes receivable $ (3,009) $ 25,972 $ (84,394) Contract work in progress (22,923) 180,698 73,575 Inventories 35,876 (49,473) (23,197) Other current assets (43,376) (16,054) (192) Increase (decrease) in: Accounts payable (108,616) (173,345) 127,229 Advance billings on contracts (169,501) 18,557 21,298 Accrued liabilities (27,965) (8,906) 54,257 -------------------------------------------------------------------------------- (Increase) decrease in operating assets and liabilities $(339,514) $ (22,551) $ 168,576 ========== ========== ========== Cash paid during the year for: Interest expense $ 60,455 $ 47,558 $ 44,057 Income tax payments, net $ 58,637 $ 52,025 $ 52,346 --------------------------------------------------------------------------------
Business Acquisitions From time to time, the company enters into investment arrangements, including joint ventures, that are related to its engineering and construction business. During 1998 through 2000, the majority of these expenditures related to ongoing investments in an equity fund that focuses on energy related projects and a number of smaller, diversified ventures. Business Dispositions During 2000, the company recorded a nonrecurring charge of $19.3 million relating to the write-off of certain assets and the loss on the sale of a European-based consulting business by the Fluor Global Services segment. On October 28, 1998, the company entered into an agreement to sell its ownership interest in Fluor Daniel GTI, Inc. (FD/GTI). Under terms of the agreement, the company sold its 4,400,000 shares in FD/GTI for $8.25 per share, or $36.3 million in cash, on December 3, 1998. The net assets of FD/GTI included $26.4 million in cash and cash equivalents. This transaction did not have a material impact on the company's results of operations or financial position. PAGE 35 FLUOR CORPORATION 2000 ANNUAL REPORT Special Provision and Cost Reduction Initiatives In March 1999, the company announced a new strategic direction, including a reorganization of the operating units and administrative functions of its engineering and construction segment. In connection with this reorganization, the company recorded in the second quarter of fiscal year 1999 a special provision of $136.5 million pre-tax to cover direct and other reorganization related costs, primarily for personnel, facilities and asset impairment adjustments. Under the reorganization plan, approximately 5,000 jobs were eliminated. The provision included amounts for personnel costs for certain affected employees that were entitled to receive severance benefits under established severance policies or by government regulations. Additionally, outplacement services were provided on a limited basis to some affected employees. The provision also included amounts for asset impairment, primarily for property, plant and equipment; intangible assets (goodwill); and certain investments. The asset impairments were recorded primarily because of the company's decision to exit certain non-strategic geographic locations and businesses. The carrying values of impaired assets were adjusted to their current market values based on estimated sale proceeds, using either discounted cash flows or contractual amounts. Lease termination costs were also included in the special provision. The company closed 15 non-strategic offices worldwide and consolidated and downsized other office locations. In October 1999, $19.3 million of the special provision was reversed into earnings as a result of lower than anticipated severance costs for personnel reductions in certain overseas offices. Both the actual number of employee terminations as well as the cost per employee termination were lower than originally estimated. In the second quarter of 2000, $17.9 million of the special provision was reversed into earnings as a result of the company's decision to retain ownership and remain in its current office location in Camberley, U.K. The following table summarizes the status of the company's reorganization plan as of October 31, 2000 and 1999:
Lease Personnel Asset Termination Costs Impairment Costs Other Total ------------------------------------------------------------------------------------------ (in thousands) Special provision $ 72,200 $ 48,800 $14,500 $1,000 $136,500 Cash expenditures (25,089) (1,094) (4,793) (814) (31,790) Non-cash activities (2,576) (24,360) -- -- (26,936) Provision reversal (19,300) -- -- -- (19,300) ------------------------------------------------------------------------------------------- Balance at October 31, 1999 25,235 23,346 9,707 186 58,474 Cash expenditures (11,763) -- (6,853) -- (18,616) Non-cash activities (3,732) (5,427) -- (186) (9,345) Provision reversal -- (17,919) -- -- (17,919) ------------------------------------------------------------------------------------------- Balance at October 31, 2000 $ 9,740 $ -- $ 2,854 $ -- $ 12,594 ================================================================
The special provision liability as of October 31, 2000 and 1999 is included in other accrued liabilities. The liability for personnel costs relates to non- U.S. operations and is expected to be substantially utilized by December 31, 2000. The liability associated with abandoned lease space is being amortized as an offset to lease expense over the remaining life of the respective leases starting on the dates of abandonment. Income Taxes The income tax expense (benefit) included in the Consolidated Statement of Earnings is as follows:
Year ended October 31, 2000 1999 1998 ------------------------------------------------------------------------------ (in thousands) Current: Federal $ 17,864 $ 5,931 $ 38,700 Foreign 42,736 43,012 52,021 State and local 4,366 3,255 7,781 ------------------------------------------------------------------------------ Total current 64,966 52,198 98,502 ------------------------------------------------------------------------------ Deferred: Federal (12,082) 26,872 43,369 Foreign 7,829 (2,641) (19,295) State and local 1,602 5,037 4,706 ------------------------------------------------------------------------------ Total deferred (2,651) 29,268 28,780 ------------------------------------------------------------------------------ Total income tax expense $ 62,315 $ 81,466 $127,282 =======================================
The income tax expense (benefit) applicable to continuing operations and discontinued operations is as follows:
Year ended October 31, 2000 1999 1998 ------------------------------------------------------------------------------------ (in thousands) Provision for continuing operations: Current $ 71,105 $ 63,926 $ 90,737 Deferred (28,730) (14,028) (3,903) ------------------------------------------------------------------------------------ Total provision for continuing operations 42,375 49,898 86,834 ------------------------------------------------------------------------------------ Provision for discontinued operations: Current (6,139) (11,728) 7,765 Deferred 26,079 43,296 32,683 ------------------------------------------------------------------------------------ Total provision for discontinued operations 19,940 31,568 40,448 ------------------------------------------------------------------------------------ Total income tax expense $ 62,315 $ 81,466 $127,282 ==================================
PAGE 36 FLUOR CORPORATION 2000 ANNUAL REPORT A reconciliation of U.S. statutory federal income tax expense to income tax expense on earnings from continuing operations is as follows: Year ended October 31, 2000 1999 1998 -------------------------------------------------------------------------------- (in thousands) U.S. statutory federal tax expense $49,777 $26,803 $77,962 Increase (decrease) in taxes resulting from: Items without tax effect, net 5,813 32,500 11,423 Effect of non-U.S. tax rates 969 (396) 3,433 State and local income taxes 920 2,603 4,532 Foreign Sales Corporation tax benefit (5,975) (6,342) (8,250) Utilization of prior year tax credits (4,657) (635) -- Favorable tax settlement (3,075) (2,269) (1,418) Other, net (1,397) (2,366) (848) -------------------------------------------------------------------------------- Total income tax expense-- continuing operations $42,375 $49,898 $86,834 ============================= Deferred taxes reflect the tax effects of differences between the amounts recorded as assets and liabilities for financial reporting purposes and the amounts recorded for income tax purposes. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows: At October 31, 2000 1999 -------------------------------------------------------------------------------- (in thousands) Deferred tax assets: Accrued liabilities not currently deductible $214,011 $206,028 Translation adjustments 29,886 23,955 Tax basis in partnership in excess of book 29,670 10,622 Net operating loss carryforwards of non-U.S. companies 17,044 19,664 Tax basis of building in excess of book basis 15,728 16,408 Tax credit carryforwards 12,228 10,673 Net operating loss carryforwards of acquired companies 4,461 6,503 Other 25,395 19,807 -------------------------------------------------------------------------------- Total deferred tax assets 348,423 313,660 Valuation allowance for deferred tax assets (74,747) (79,418) -------------------------------------------------------------------------------- Deferred tax assets, net 273,676 234,242 -------------------------------------------------------------------------------- Deferred tax liabilities: Book basis of property, equipment and other capital costs in excess of tax basis (26,765) (41,894) Tax on unremitted non-U.S. earnings (22,047) (16,361) Other (26,652) (15,298) -------------------------------------------------------------------------------- Total deferred tax liabilities (75,464) (73,553) -------------------------------------------------------------------------------- Net deferred tax assets $198,212 $160,689 ==================== Amounts reflected above exclude net deferred tax liabilities associated with the coal business operated by Massey of $243 million and $217 million at October 31, 2000 and 1999, respectively. The company has net operating loss carryforwards from non-U.S. operations of approximately $49 million which can be carried forward indefinitely until fully utilized. These losses primarily relate to the company's operations in Australia, Germany and the United Kingdom. Deferred tax assets established for these losses aggregate $17 million and $20 million at October 31, 2000 and 1999, respectively. In 1997, the company acquired the SMA Companies which had net operating loss carryforwards of approximately $47 million. The company has utilized approximately $11 million of the loss carryforwards, and made an election in its 1997 consolidated federal tax return to waive approximately $23 million of losses which otherwise would have expired without future tax benefit. The remaining loss carryforwards of approximately $13 million expire in the years 2003 through 2005. The utilization of such loss carryforwards is subject to stringent limitations under the Internal Revenue Code. Deferred tax assets established for these losses aggregate $4 million and $7 million for 2000 and 1999, respectively. The company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the deferred tax assets established for the special provision, net operating loss and tax credit carryforwards. In 2000, decreases in the valuation allowance are principally the result of the reversal of $17.9 million of the special provision which did not previously receive tax benefit. Any reductions in the allowance resulting from realization of the loss carryforwards of acquired companies will result in a reduction of goodwill. Residual income taxes of approximately $8 million have not been provided on approximately $20 million of undistributed earnings of certain foreign subsidiaries at October 31, 2000, because the company intends to keep those earnings reinvested indefinitely. United States and foreign earnings (loss) from continuing operations before taxes are as follows: Year ended October 31, 2000 1999 1998 -------------------------------------------------------------------------------- (in thousands) United States $(13,184) $65,875 $100,767 Foreign 155,405 10,706 121,981 -------------------------------------------------------------------------------- Total $142,221 $76,581 $222,748 ================================ Retirement Benefits The company sponsors contributory and non-contributory defined contribution retirement and defined benefit pension plans for eligible employees. Contributions to defined contribution retirement plans are based on a percentage of the employee's compensation. Expense recognized for these plans of approximately $46 million in 2000, $48 million in 1999, and $69 million in 1998, is primarily related to domestic engineering and construction operations. Effective January 1, 1999, the company replaced its domestic defined contribution retirement plan with a defined benefit cash balance plan. Contributions to defined PAGE 37 FLUOR CORPORATION 2000 ANNUAL REPORT benefit pension plans are generally at the minimum annual amount required by applicable regulations. Payments to retired employees under these plans are generally based upon length of service, age and/or a percentage of qualifying compensation. The defined benefit pension plans are primarily related to international engineering and construction operations, U.S. craft employees and coal operations. Net periodic pension expense (income) for continuing operations defined benefit pension plans includes the following components: Year ended October 31, 2000 1999 1998 ---------------------------------------------------------------------------- (in thousands) Service cost $ 35,168 $ 31,919 $ 12,420 Interest cost 18,612 16,101 15,751 Expected return on assets (33,603) (30,751) (30,439) Amortization of transition asset (1,917) (2,132) (2,196) Amortization of prior service cost 46 281 299 Recognized net actuarial loss (gain) (541) 922 (563) ---------------------------------------------------------------------------- Net periodic pension expense (income) $ 17,765 $ 16,340 $ (4,728) =============================== The ranges of assumptions indicated below cover defined benefit pension plans in Australia, Germany, the United Kingdom, The Netherlands and the United States. These assumptions are as of each respective fiscal year-end based on the then current economic environment in each host country. At October 31, 2000 1999 ---------------------------------------------------------------------------- Discount rates 6.0-7.75% 6.0-7.75% Rates of increase in compensation levels 3.5-3.75% 3.5-3.75% Expected long-term rates of return on assets 5.0-9.50% 5.0-9.50% ---------------------------------------------------------------------------- The following table sets forth the change in benefit obligation, plan assets and funded status of the company's defined benefit pension plans for continuing operations: At October 31, 2000 1999 ---------------------------------------------------------------------------- (in thousands) Change in pension benefit obligation Benefit obligation at beginning of year $307,891 $302,839 Service cost 35,168 31,919 Interest cost 18,612 16,101 Employee contributions 1,441 1,626 Currency translation (46,482) (19,068) Actuarial (gain) loss 23,992 (3,232) Benefits paid (24,830) (22,294) ---------------------------------------------------------------------------- Benefit obligation at end of year $315,792 $307,891 =================== Change in plan assets Fair value at beginning of year $417,587 $380,883 Actual return on plan assets 35,265 72,829 Company contributions 7,152 5,642 Employee contributions 1,441 1,626 Currency translation (54,780) (17,154) Benefits paid (24,830) (22,294) Plan amendments -- (3,945) ---------------------------------------------------------------------------- Fair value at end of year $381,835 $417,587 =================== At October 31, 2000 1999 ---------------------------------------------------------------------------- (in thousands) Funded status $66,043 $109,696 Unrecognized net actuarial (gain) loss 4,822 (17,544) Unrecognized prior service cost (183) (401) Unrecognized net asset (4,802) (8,002) ---------------------------------------------------------------------------- Pension assets $65,880 $83,749 ================== Amounts shown above at October 31, 2000 and 1999 exclude the projected benefit obligation of approximately $236.1 million and $224.6 million, respectively, and associated plan assets of $347.0 million and $322.0 million, respectively, relating to discontinued operations (including the Massey Coal segment). In addition to the company's defined benefit pension plans, the company and certain of its subsidiaries provide health care and life insurance benefits for certain retired employees. The health care and life insurance plans are generally contributory, with retiree contributions adjusted annually. Service costs are accrued currently. The accumulated postretirement benefit obligation at October 31, 2000 and 1999 was determined in accordance with the current terms of the company's health care plans, together with relevant actuarial assumptions and health care cost trend rates projected at annual rates ranging from 12 percent in 2001 down to 5 percent in 2005 and beyond. The effect of a one percent annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation and the aggregate of the annual service and interest costs by approximately $1.3 million and $0.1 million, respectively. The effect of a one percent annual decrease in these assumed cost trend rates would decrease the accumulated postretirement benefit obligation and the aggregate of the annual service and interest costs by approximately $1.2 million and $0.1 million, respectively. Net periodic postretirement benefit cost for continuing operations includes the following components: Year ended October 31, 2000 1999 1998 ---------------------------------------------------------------------------- (in thousands) Service cost $ -- $ -- $ -- Interest cost 1,865 1,632 1,765 Expected return on assets -- -- -- Amortization of prior service cost -- -- -- Recognized net actuarial gain (329) (458) (595) ---------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 1,536 $ 1,174 $ 1,170 ============================== The following table sets forth the change in benefit obligation of the company's postretirement benefit plans for continuing operations: PAGE 38 FLUOR CORPORATION 2000 ANNUAL REPORT
At October 31, 2000 1999 ------------------------------------------------------------------------------- (in thousands) Change in postretirement benefit obligation Benefit obligation at beginning of year $ 25,658 $ 25,554 Service cost -- -- Interest cost 1,865 1,632 Employee contributions 309 270 Actuarial loss 4,974 1,212 Benefits paid (3,490) (3,010) ------------------------------------------------------------------------------- Benefit obligation at end of year $ 29,316 $ 25,658 ====================== Funded status $(29,316) $(25,658) Unrecognized net actuarial gain (51) (5,354) ------------------------------------------------------------------------------- Accrued postretirement benefit obligation $(29,367) $(31,012) ======================
The discount rate used in determining the postretirement benefit obligation was 7.75 percent at both October 31, 2000 and 1999. Amounts shown above at October 31, 2000 and 1999 exclude the accrued benefit obligation of approximately $68.6 million and $62.7 million, respectively, relating to discontinued operations. The preceding information does not include amounts related to benefit plans applicable to employees associated with certain contracts with the U.S. Department of Energy because the company is not responsible for the current or future funded status of these plans. Fair Value of Financial Instruments The estimated fair value of the company's financial instruments are as follows:
2000 1999 Carrying Fair Carrying Fair Year ended October 31, Amount Value Amount Value ----------------------------------------------------------------------------------------------------------- (in thousands) Assets: Cash and cash equivalents $ 69,426 $ 69,426 $209,614 $209,614 Notes receivable including noncurrent portion 30,739 39,494 47,444 54,387 Long-term investments 57,481 64,809 60,609 72,667 Liabilities: Commercial paper, loan notes and notes payable 253,512 253,512 247,911 247,911 Long-term debt including current portion 17,573 16,504 317,555 312,580 Other noncurrent financial liabilities 11,921 11,921 9,789 9,789 Off-balance sheet financial instruments: Forward contract to purchase common stock -- (35,792) -- (21,170) Foreign currency contract obligations -- (363) -- (1,311) Letters of credit -- 973 -- 546 Lines of credit -- 705 -- 965
Fair values were determined as follows: The carrying amounts of cash and cash equivalents, short-term notes receivable, commercial paper, loan notes and notes payable approximate fair value because of the short-term maturity of these instruments. Long-term investments are based on quoted market prices for these or similar instruments. Long-term notes receivable are estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of long-term debt, including current portion, is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the company for debt of the same maturities. Other noncurrent financial liabilities consist primarily of deferred payments, for which cost approximates fair value. Forward contract to purchase common stock is based on the estimated cost to terminate or settle the obligation. Foreign currency contract obligations are estimated by obtaining quotes from brokers. Letters of credit and lines of credit amounts are based on fees currently charged for similar agreements or on the estimated cost to terminate or settle the obligations. Financing Arrangements The company has unsecured committed revolving short- and long-term lines of credit with banks from which it may borrow for general corporate purposes up to a maximum of $690 million. Commitment and facility fees are paid on these lines. In connection with the spin-off transaction, committed lines of credit were reduced to $490 million, effective November 30, 2000. In addition, the company has $630 million in short-term uncommitted lines of credit to support letters of credit and foreign currency contracts. Borrowings under both committed and uncommitted lines of credit bear interest at prime or rates based on the London Interbank Offered Rate ("LIBOR"), domestic certificates of deposit or other rates which are mutually acceptable to the banks and the company. At October 31, 2000, amounts outstanding under the committed lines of credit were $29 million. As of that date, $218 million of the short-term uncommitted lines of credit were used to support undrawn letters of credit and foreign currency contracts issued in the ordinary course of business. Short-term debt comprises:
At October 31, 2000 1999 ------------------------------------------------------------------------------- (in thousands) Note payable to affiliate $164,812 $113,379 Commercial paper 59,442 113,746 Bank borrowings 28,517 15,500 Trade notes payable 741 5,286 ------------------------------------------------------------------------------- $253,512 $247,911 ======== ========
PAGE 39 FLUOR CORPORATION 2000 ANNUAL REPORT The company's commercial paper was issued at a discount with a weighted- average effective interest rate of 6.7 percent at October 31, 2000 and 5.9 percent at October 31, 1999. The note payable to an affiliate is due on demand and bears interest at the rate of 6.1 percent as of October 31, 2000 and 5.41 percent as of October 31, 1999. Long-term debt comprises: At October 31, 2000 1999 ----------------------------------------------------------------------------- (in thousands) 6.95% Senior Notes due March 1, 2007 $ -- $300,000 5.625% municipal bonds 17,573 17,555 ----------------------------------------------------------------------------- 17,573 317,555 Less: Current portion -- -- ----------------------------------------------------------------------------- Long-term debt due after one year $17,573 $317,555 ================== In March 1997, the company issued $300 million of 6.95% Senior Notes (the Notes) due March 1, 2007 with interest payable semiannually on March 1 and September 1 of each year, commencing September 1, 1997. The Notes were sold at a discount for an aggregate price of $296.7 million. In connection with the spin- off, the Notes became an obligation of Massey and accordingly have been included in net assets of discontinued operations. The municipal bonds are due June 1, 2019 with interest payable semiannually on June 1 and December 1 of each year, commencing December 1, 1999. The bonds are redeemable, in whole or in part, at the option of the company at a redemption price ranging from 100 percent to 102 percent of the principal amount of the bonds on or after June 1, 2009. In addition, the bonds are subject to other redemption clauses, at the option of the holder, should certain events occur, as defined in the offering prospectus. Other Noncurrent Liabilities The company maintains appropriate levels of insurance for business risks. Insurance coverages contain various deductible amounts for which the company provides accruals based on the aggregate of the liability for reported claims and an actuarially determined estimated liability for claims incurred but not reported. Other noncurrent liabilities include $63 million and $61 million at October 31, 2000 and 1999, respectively, relating to these liabilities. Stock Plans The company's executive stock plans, approved by the shareholders, provide for grants of nonqualified or incentive stock options, restricted stock awards and stock appreciation rights ("SARS"). All executive stock plans are administered by the Organization and Compensation Committee of the Board of Directors ("Committee") comprised of outside directors, none of whom are eligible to participate in the plans. Option grant prices are determined by the Committee and are established at the fair value of the company's common stock at the date of grant. Options and SARS normally extend for 10 years and become exercisable over a vesting period determined by the Committee, which can include accelerated vesting for achievement of performance or stock price objectives. During 2000, the company issued 1,581,790 nonqualified stock options and 58,880 SARS that vest 100 percent at the end of four years, with accelerated vesting based upon the price of the company's stock, and also issued 52,660 stock options with annual vesting of 25%. During 1999, the company issued 1,021,810 nonqualified stock options and 122,900 SARS that vest over four years and 58,000 nonqualified stock options, with 25 percent vesting upon issuance and the remaining awards vesting in installments of 25 percent per year commencing one year from the date of grant. Restricted stock awards issued under the plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed or performance objectives have been attained as established by the Committee. Upon termination of employment, shares upon which restrictions have not lapsed must be returned to the company. Restricted stock issued under the plans totaled 351,630 shares, 197,257 shares and 4,500 shares in 2000, 1999 and 1998, respectively. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the company has elected to continue following the guidance of APB Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Recorded compensation cost for these plans totaled $3 million and $8 million in 2000 and 1999, respectively. During 1998, the company recognized a net credit of $9 million for performance-based stock plans. This amount includes $10 million of expenses accrued in prior years which were reversed in 1998 as a result of not achieving prescribed performance targets. Under APB Opinion No. 25, no compensation cost is recognized for the option plans where vesting provisions are based only on the passage of time. Had the company recorded compensation expense using the accounting method recommended by SFAS No. 123, net earnings and diluted earnings per share would have been reduced to the pro forma amounts as follows: PAGE 40 FLUOR CORPORATION 2000 ANNUAL REPORT Year ended October 31, 2000 1999 1998 -------------------------------------------------------------------------- (in thousands, except per share amounts) Net earnings As reported $123,949 $104,187 $235,344 Pro forma 115,098 95,297 218,958 Diluted net earnings per share As reported $ 1.62 $ 1.37 $ 2.97 Pro forma 1.51 1.26 2.77 ========================================================================== The fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for new grants: 2000 1999 1998 -------------------------------------------------------------------------- Expected option lives (years) 6 6 5 Risk-free interest rates 6.03% 4.51% 5.83% Expected dividend yield 1.74% 1.38% 1.19% Expected volatility 39.81% 33.76% 29.85% -------------------------------------------------------------------------- The weighted-average fair value of options granted during 2000, 1999 and 1998 was $18, $15 and $12, respectively. The following table summarizes stock option activity: Weighted Average Stock Exercise Price Options Per Share -------------------------------------------------------------------------- Outstanding at October 31, 1997 3,921,303 $51 -------------------------------------------------------------------------- Granted 1,898,420 36 Expired or canceled (844,664) 47 Exercised (267,602) 37 -------------------------------------------------------------------------- Outstanding at October 31, 1998 4,707,457 47 -------------------------------------------------------------------------- Granted 1,079,810 43 Expired or canceled (256,145) 47 Exercised (303,736) 35 -------------------------------------------------------------------------- Outstanding at October 31, 1999 5,227,386 47 -------------------------------------------------------------------------- Granted 1,634,450 44 Expired or canceled (617,624) 47 Exercised (147,751) 39 -------------------------------------------------------------------------- Outstanding at October 31, 2000 6,096,461 $46 ======================================= Exercisable at: October 31, 2000 3,352,234 October 31, 1999 3,407,398 October 31, 1998 3,210,580 At October 31, 2000, there are 3,269,199 shares available for future grant. Available for grant includes shares which may be granted as either stock options or restricted stock, as determined by the Committee under the company's various stock plans. At October 31, 2000, there are 6,096,461 options outstanding with exercise prices between $30 and $68, with a weighted-average exercise price of $46 and a weighted-average remaining contractual life of 5.8 years; 3,352,234 of these options are exercisable with a weighted-average exercise price of $49. Of the options outstanding, 4,533,611 have exercise prices between $30 and $45, with a weighted-average exercise price of $42 and a weighted-average remaining contractual life of 5.9 years; 1,873,871 of these options are exercisable with a weighted-average exercise price of $41. The remaining 1,562,850 outstanding options have exercise prices between $46 and $68, with a weighted-average exercise price of $59 and a weighted-average remaining contractual life of 5.7 years; 1,478,363 of these options are exercisable with a weighted-average exercise price of $60. In connection with the separation of Massey from Fluor, all outstanding options will be adjusted to preserve the value of such options on the date of the distribution, including the conversion of options held by Massey employees to options for shares of Massey. Lease Obligations Net rental expense for continuing operations amounted to approximately $80 million, $77 million and $84 million in 2000, 1999 and 1998, respectively. The company's lease obligations relate primarily to office facilities, equipment used in connection with long-term construction contracts and other personal property. During 1998, the company entered into a $100 million operating lease facility to fund the construction cost of its corporate headquarters and engineering center. The facility expires in 2004. Lease payments are calculated based on LIBOR plus approximately 0.35 percent. The lease contains an option to purchase these properties during the term of the lease and contains a residual value guarantee of $82 million. In addition, during 1999 the company entered into a similar transaction to fund construction of its Calgary office. The total commitment under this transaction is approximately $25 million. The company's obligations for minimum rentals under noncancelable leases are as follows: Year ended October 31, -------------------------------------------------------------------------------- (in thousands) 2001 $29,837 2002 27,451 2003 22,994 2004 14,999 2005 7,556 Thereafter 35,912 -------------------------------------------------------------------------------- PAGE 41 FLUOR CORPORATION 2000 ANNUAL REPORT Contingencies and Commitments The company and certain of its subsidiaries are involved in litigation in the ordinary course of business. The company and certain of its subsidiaries are contingently liable for commitments and performance guarantees arising in the ordinary course of business. Claims arising from engineering and construction contracts have been made against the company by clients, and the company has made certain claims against clients for costs incurred in excess of the current contract provisions. The company does not expect that the foregoing matters will have a material adverse effect on its consolidated financial position or results of operations. Disputes have arisen between a Fluor Daniel subsidiary and its client, Anaconda Nickel, which primarily relate to the process design of the Murrin Murrin Nickel Cobalt project located in Western Australia. Both parties have initiated the dispute resolution process under the contract. Results for the year ended October 31, 1999 for the Fluor Daniel segment include a provision totaling $84 million for the alleged process design problems. If and to the extent that these problems are ultimately determined to be the responsibility of the company, the company anticipates recovering a substantial portion of this amount from available insurance and, accordingly, has also recorded $64 million in expected insurance recoveries. The company vigorously disputes and denies Anaconda's allegations of inadequate process design. Financial guarantees, made in the ordinary course of business on behalf of clients and others 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. Most arrangements require the borrower to pledge collateral in the form of property, plant and equipment which is deemed adequate to recover amounts the company might be required to pay. As of October 31, 2000, the company had extended financial guarantees on behalf of certain clients and other unrelated third parties totaling approximately $26 million. In connection with its 1997/1998 share repurchase program, the company entered into a forward purchase contract for 1,850,000 shares of its common stock at a price of $49 per share. The contract was settled for cash of $101.2 million ($54.72 per share) on November 30, 2000. As of October 31, 2000, the contract settlement cost per share exceeded the current market price per share by $19.35. The company's operations are subject to and affected by federal, state and local laws and regulations regarding the protection of the environment. The company maintains reserves for potential future environmental costs where such obligations are either known or considered probable, and can be reasonably estimated. The company believes, based upon present information available to it, that its reserves with respect to future environmental costs are adequate and such future costs will not have a material effect on the company's consolidated financial position, results of operations or liquidity. However, the imposition of more stringent requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of such costs among potentially responsible parties, or a determination that the company is potentially responsible for the release of hazardous substances at sites other than those currently identified, could result in additional expenditures, or the provision of additional reserves in expectation of such expenditures. In connection with the Massey spin-off, Massey will retain all contingent liabilities related to its business, including environmental matters. Operations by Business Segment and Geographical Area The company provides services on a global basis in the fields of engineering, procurement, construction, maintenance, operations, project management and business services. These services are grouped into three operating segments: Fluor Daniel, Fluor Global Services and Fluor Signature Services. The Massey Coal business is now a separate public company as a result of the recent spin-off and is reported as discontinued operations in the Consolidated Statement of Earnings. Fluor Daniel consists of four business units: Energy & Chemicals; Manufacturing & Life Sciences; Mining; and Infrastructure. These units provide design, engineering, procurement and construction services on a worldwide basis to an extensive range of industrial, commercial, utility, natural resources and energy clients. The types of services provided by Fluor Daniel include: feasibility studies, conceptual design, detail engineering, procurement, project and construction management and construction. PAGE 42 FLUOR CORPORATION 2000 ANNUAL REPORT Fluor Global Services consists of five business units: American Equipment Company; TRS Staffing Solutions; Fluor Federal Services; Telecommunications; and Operations & Maintenance. These units provide a variety of services to clients in a wide range of industries. The types of services provided by Fluor Global Services include: equipment sales, leasing, services and outsourcing for construction and industrial needs; temporary technical and non-technical staffing specializing in technical, professional and administrative personnel; services to the United States government; repair, renovation, replacement, predictive and preventative services to commercial and industrial facilities; and productivity consulting services and maintenance management to the manufacturing and process industries. Fluor Signature Services is a single business unit established primarily to provide traditional business services and business infrastructure support to the company. Ultimately, such services may be marketed to external customers. Although operations for this segment did not start until November 1, 1999, historical total asset data has been presented for information purposes only. The reportable segments follow the same accounting policies as those described in the summary of major accounting policies. Management evaluates a segment's performance based upon operating profit and operating return on assets. Intersegment revenues are insignificant. The company incurs costs and expenses and holds certain assets at the corporate level which relate to its business as a whole. Certain of these amounts have been charged to the company's business segments by various methods, largely on the basis of usage. Engineering services for international projects are often performed within the United States or a country other than where the project is located. Revenues associated with these services have been classified within the geographic area where the work was performed. Operating Information by Segment
Fluor Fluor Subtotal Fluor Global Signature Continuing Massey Daniel Services Services Operations Coal Total -------------------------------------------------------------------------------------------------------------------------------- (in millions) 2000 External revenues $ 6,998 $ 2,953 $ 19 $ 9,970 $ 1,086 $11,056 Depreciation, depletion and amortization 3 99 39 141 171 312 Operating profit before special provision 128 77 1 206 105 311 Total assets (net assets for Massey Coal) 956 971 448 2,375 866 3,241 Capital expenditures $ - $ 166 $ 51 $ 217 $ 211 $ 428* 1999 External revenues $ 8,403 $ 2,931 - $11,334 $ 1,083 $12,417 Depreciation, depletion and amortization 61 90 - 151 167 318 Operating profit before special provision 160 92 - 252 147 399 Total assets 1,017 1,041 $ 454 2,512 1,956 4,468 Capital expenditures $ 25 $ 226 - $ 251 $ 227 $ 478* 1998 External revenues $ 9,736 $ 2,641 - $12,377 $ 1,127 $13,504 Depreciation, depletion and amortization 67 72 - 139 150 289 Operating profit 161 81 - 242 173 415 Total assets 1,270 968 $ 465 2,703 1,801 4,504 Capital expenditures $ 91 $ 214 - $ 305 $ 296 $ 601* --------------------------------------------------------------------------------------------------------------------------------
*Does not include Knowledge@Work expenditures of $68 million in 2000, $26 million in 1999 and none in 1998. PAGE 43 FLUOR CORPORATION 2000 ANNUAL REPORT Reconciliation of Segment Information to Consolidated Amounts
2000 1999 1998 ----------------------------------------------------------------------------------------------------------------- (in millions) Continuing Operations Total segment operating profit before special provision $ 206 $ 252 $ 242 Special provision 18 (117) -- Corporate administrative and general expense (65) (55) (23) Interest (expense) income, net (15) (2) 6 Other items, net (2) (1) (2) ----------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before taxes $ 142 $ 77 $ 223 ============================= Discontinued Operations Total segment operating profit before special provision $ 105 $ 147 $ 173 Interest expense, net (28) (30) (30) Other items, net (8) (8) (3) ----------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations before taxes $ 69 $ 109 $ 140 ============================= Total Assets Total assets for reportable segments $3,241 $4,468 $4,504 Cash, cash equivalents and marketable securities 69 210 341 Other items, net 343 208 174 ----------------------------------------------------------------------------------------------------------------- Total assets $3,653 $4,886 $5,019 =============================
Enterprise-Wide Disclosures Revenues from Continuing Operations Total Assets 2000 1999 1998 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------- (in millions) United States* $6,347 $ 6,643 $ 7,196 $1,984 $3,995 $4,082 Canada 1,421 855 315 151 141 97 Asia Pacific (includes Australia) 832 1,575 1,435 215 265 252 Europe 714 1,210 1,196 160 196 255 Central and South America 505 808 1,242 207 221 256 Middle East and Africa 151 243 993 70 68 77 Net assets of discontinued operations -- -- -- 866 -- -- ----------------------------------------------------------------------------------------------------------------- $9,970 $11,334 $12,377 $3,653 $4,886 $5,019 ===========================================================
*Includes export revenues to unaffiliated customers of $0.4 billion in 2000, $1.4 billion in 1999 and $1.3 billion in 1998. PAGE 44 FLUOR CORPORATION 2000 ANNUAL REPORT Management's and Independent Auditors' Reports Management The company is responsible for preparation of the accompanying consolidated balance sheet and the related consolidated statements of earnings, cash flows and shareholders' equity. These statements have been prepared in conformity with generally accepted accounting principles and management believes that they present fairly the company's consolidated financial position and results of operations. The integrity of the information presented in the financial statements, including estimates and judgments relating to matters not concluded by fiscal year end, is the responsibility of management. To fulfill this responsibility, an internal control structure designed to protect the company's assets and properly record transactions and events as they occur has been developed, placed in operation and maintained. The internal control structure is supported by an extensive program of internal audits and is tested and evaluated by the independent auditors in connection with their annual audit. The Board of Directors pursues its responsibility for financial information through an Audit Committee of Directors who are not employees. The internal auditors and the independent auditors have full and free access to the Committee. Periodically, the Committee meets with the independent auditors without management present to discuss the results of their audits, the adequacy of the internal control structure and the quality of financial reporting. /s/ Philip J. Carroll Jr /s/ Ralph F. Hake Philip J. Carroll, Jr. Ralph F. Hake Chairman of the Board and Executive Vice President Chief Executive Officer Chief Financial Officer Report of Independent Auditors Board of Directors and Shareholders Fluor Corporation We have audited the accompanying consolidated balance sheet of Fluor Corporation as of October 31, 2000 and 1999, and the related consolidated statements of earnings, cash flows, and shareholders' equity for each of the three years in the period ended October 31, 2000. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fluor Corporation at October 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Orange County, California November 30, 2000 PAGE 45 FLUOR CORPORATION 2000 ANNUAL REPORT Quarterly Financial Data The following is a summary of the quarterly results of operations:
First Quarter Second Quarter/(2)/ Third Quarter Fourth Quarter/(2)/ ---------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts)/(1)/ 2000 Revenues $ 2,738,387 $ 2,295,662 $ 2,627,544 $ 2,308,561 Cost of revenues 2,667,345 2,246,054 2,592,694 2,259,714 Special provision -- (17,919) -- -- Earnings from continuing operations before taxes 52,641 53,187 12,494 23,899 Earnings from continuing operations 37,071 36,726 9,168 16,881 Net earnings (loss) 52,252 51,042 33,338 (12,683) Basic earnings (loss) per share Continuing operations 0.49 0.49 0.12 0.22 Net earnings (loss) 0.69 0.68 0.44 (0.17) Diluted earnings (loss) per share Continuing operations 0.49 0.48 0.12 0.22 Net earnings (loss) $ 0.69 $ 0.66 $ 0.44 $ (0.17) ==================================================================== 1999 Revenues $ 3,109,434 $ 2,837,953 $ 2,803,174 $ 2,583,794 Cost of revenues 3,053,054 2,778,857 2,733,186 2,517,944 Special provision -- 136,500 -- (19,300) Earnings (loss) from continuing operations before taxes 46,055 (87,899) 49,860 68,565 Earnings (loss) from continuing operations 29,996 (89,727) 33,521 52,893 Net earnings (loss) 51,081 (72,895) 50,152 75,849 Basic earnings (loss) per share Continuing operations 0.40 (1.19) 0.45 0.70 Net earnings (loss) 0.68 (0.97) 0.67 1.00 Diluted earnings (loss) per share Continuing operations 0.40 (1.19) 0.44 0.70 Net earnings (loss) $ 0.68 $ (0.97) $ 0.66 $ 1.00 ====================================================================
/(1)/ All periods have been restated to present the Massey Coal business as a discontinued operation. /(2)/ In March 1999, Fluor announced a new strategic direction, including a reorganization of the operating units and administrative functions of its engineering and construction segment. In connection with this reorganization, Fluor recorded a pre-tax charge of $136.5 million to cover direct and other reorganization related costs. In October 1999 and April 2000, Fluor reversed into earnings $19.3 million and $17.9 million, respectively, due to changes in its reorganization plans. PAGE 46 Shareholders' Reference Common Stock Information At December 31, 2000, there were 74,609,050 shares outstanding and approximately 11,725 shareholders of record of Fluor's common stock. The following table sets forth for the periods indicated the cash dividends paid per share of common stock and the high and low sales prices of such common stock as reported in the Consolidated Transactions Reporting System. Common Stock and Dividend Information Dividends Price Range Per Share High Low ---------------------------------------------------- Fiscal 2000 First Quarter $0.25 48 1/2 37 1/4 Second Quarter 0.25 39 15/16 24 3/16 Third Quarter 0.25 36 9/16 29 11/16 Fourth Quarter 0.25 35 29 ===== $1.00 Fiscal 1999 First Quarter $0.20 45 1/16 37 11/16 Second Quarter $0.20 37 7/16 26 1/4 Third Quarter $0.20 42 7/8 35 1/4 Fourth Quarter $0.20 42 5/16 37 1/2 ===== $0.80 ---------------------------------------------------- Form 10-K A copy of the Form 10-K, which is filed with the Securities and Exchange Commission, is available upon request. Write to: Senior Vice President-Law Fluor Corporation One Enterprise Drive Aliso Viejo, California 92656 (949)349-2000 Registrar and Transfer Agent Mellon Investor Services LLC 4000 South Hope Street Fourth Floor Los Angeles, California 90071 and Mellon Investors Services LLC 85 Challenger Road Ridgefield Park, NJ 07660 For changes of address, lost dividends, or lost stock certificates, write or telephone: Mellon Investor Services LLC P.O. Box 3315 South Hackensack, NJ 07606-1915 Attn: Securityholder Relations (877) 870-2366 Request may also be submitted via e-mail by visiting their web site at www.chasemellon.com Independent Auditors Ernst & Young LLP 18111 Von Karman Avenue Irvine, California 92612 Annual Shareholders' Meeting Annual report and proxy statement are mailed about February 1. Fluor's annual meeting of shareholders will be held at 9.00 a.m. on March 14, 2001 at the Fluor Daniel Building, One Fluor Daniel Drive, Aliso Viejo, California 92656. Duplicate Mailings Shares owned by one person but held in different forms of the same result in duplicate mailing of shareholder information at added expense to the company. Such duplication can be eliminated only at the direction of the shareholder. Please notify Mellon Investor Services in order to eliminate duplication. PAGE 50