Fluor Corp (FLR) 2002 Q2 法說會逐字稿

Good day and welcome to Fluor Corporation's second quarter conference call. Today's call is being recorded by Fluor Corporation and is copyrighted material. It may not be recorded or rebroadcast without Fluor Corporation's expressed permission. Your participation in our taping, implies consent. Please disconnect if you do not agree with these terms. There will be a replay of today's conference call at 10:00 A.M. pacific time today, accessible on Fluor's website at www.fluor.com. A telephone replay will also be available running through 5:00 P.M. Pacific time on Tuesday, August 6th at the following number: 888-203-1112. The access code of 743958, will be required. At this time for opening remarks, I would like to turn the call over to Miss Lila Churney, Vice President of Investor Relations. Please go ahead.

Thank you. Welcome to Fluor's second quarter 2002 investor conference call. Our earnings announcement was released yesterday after the market close.

Before getting started, I'd like to read our safe harbor statement. In discussing certain subjects we will be making forward-looking statements regarding projected earnings, market outlooks, new awards, margins and the effect of strategic initiatives. These forward-looking statements reflect our current analysis of existing trends and information, and there is an inherent risk that actual results and experience could differ materially. These differences could arise from any number of factors. Information concerning factors that could cause actual results to differ materially from the information that we will give you, is available in our form 10-K, filed March, 21, 2002, which is available on line or upon request. The information in this conference call related to projections or other forward-looking statements, may be relied upon, subject to the previous safe harbor statement, as of the date of this call, and may be continued to be used while this call remains in the active portion of the Company's website. Now I'd like to turn it over to Alan Boeckman, Fluor's Chairman and Chief Executive Officer.

Thank you, Lila. First of all, good morning ladies and gentlemen. Thank you for joining us today. This morning we will review results for our second quarter of 2002, which ended June 30th, and also share with you our current outlook. Earnings from continued operations for the second quarter, increased 23% to $43 million, or 54 cents per share. This compares with $35.1 million or 44 cents per share in the second quarter of last year. Revenues from continued operations for this first quarter -- or for the quarter, also increased 14% to $2.5 billion, compared with $2.2 billion a year ago.

Second quarter performance was modestly above our expectations, and we remain positive regarding our outlook for the balance of the year, based on our strong operating performance. Looking just at operations, our power segment delivered exceptionally strong performance in the second quarter, with the completion of ten projects. This was partially offset by increased dispute resolution provisions in the Industrial and Infrastructure segment on matters that are nearing completion. Also corporate G&A expense for the second quarter was somewhat below our normal run rate of $35 to $40 million, and included the impact of certain one-time items as well as cost reductions. As is typical in our industry, we are involved in several arbitration proceedings and based on developments during the quarter, we've reevaluated our exposures and made adjustments accordingly.

New project awards in this first quarter -- in the second quarter, sorry, were $2 billion, compared with $2.5 billion in the second quarter of last year. We are encouraged the second quarter awards were solidly within our guidance, and with good margins, despite the unexpected -- or the expected decline I should say, in the new power awards, following a strong first quarter. We believe this underscores the benefits from our continued focus on selectivity and profitable growth across a broad range of industries and geographic areas.

Backlog was 10.9 billion compared with 10.6 a year ago and 11.6 billion in the first quarter of this year. Gross margin in backlog was 669 million or 6.1%. This compares with 723 million, or 6.8% a year ago, and 770 million or 6.6% in the first quarter of 2002. Mike Steuert, Fluor's CFO, is going to provide business segment operating results and other financial information for you. However, let me first add some color that I think goes beyond just the numbers.

In terms of the current business climate, and where we think Fluor is in this business cycle. Overall, we believe we are continuing to make good progress toward achieving our goal of delivering sustainable long-terms earnings growth, and executing our strategic plan to capitalize on the growing opportunities within our core engineering, procurement, construction and maintenance markets. Despite the increased uncertainty in some of the financial markets, we have seen no discernible change in our overall market outlook. We continue to track a number of large, complex projects in diverse and geographically challenged locations, for which we have completed front end engineering. This positions us well for when these projects move forward.

In addition, we are encouraged about our new award prospects for this year, and particularly the progress toward achieving our objective of expanding in the transportation, life sciences and federal service markets. Before asking Mike to review the individual segments, let me comment on the operating performance at the consolidated level.

Operating profit for the company in the second quarter increased 7% to 96.7 million compared with 90.2 million last year. This translates into an operating margin of 3.8% compared with 4.1% in the second quarter of a year ago. Excluding the impact of dispute resolution provisions, margin performance in the quarter was exceptional.

Let me make a few comments about our financial disclosure. Beginning last year, we increased our segment disclosure to five operating businesses, that reflect our strategic business focus. As we have indicated at that time, we believe that this increased disclosure will help you better understand our business, as well as highlight the quarter to quarter variations that are inherent in a project-driven operation. Our quarterly performance in individual segments can often be uneven, and may not be reflective in the trends in the business. This is due to the nature of how revenue and profit are recognized on project, including the timing of incentives. As a result, when evaluating our performance in projecting future trends, I encourage you to focus on consolidated results, recognizing that we do employ a portfolio management strategy within the EPCM market, in order to optimize growth, diversify risk and minimize cyclicality. With that let me turn it over now to Mike.

Thank you, Alan. Starting with our first operating segment, Energy and Chemicals, recorded an operating profit of 29.1 million in the quarter, down from 40.5 million a year ago. Revenues increased 40% to 891 million from the second quarter last year. Operating profit in the second quarter last year was unusually strong, the strongest in several years and included significant performance incentives on project completions. Lower margins also reflect the continuing shift this year toward an increasing proportion of projects that are in the early stages of execution. This is in contrast to a large percentage of projects that were nearing completion last year, which drove the recognition of incentives and higher margins in the second quarter of last year. This is a continuation of the mix change that we've been talking about for the past few quarters.

We had a number of running studies and preliminary engineering work last year. These types of projects are all services with no pass throughs, and as a result yield particularly strong margins. A number of these projects are now moving into full EPC projects, which result in somewhat lower margins but higher volume and ultimately, higher operating profits.

New Energy and Chemical awards in the quarter, increased 38% to 753 million. Backlog for the group was 3.3 billion, essentially level with the 3.3 billion a year ago. New Energy and Chemical awards in the quarter, included a significant scope addition for a major Canadian oil sales project and several clean fuels and other refinery-related projects. Also included in the quarter was a fire rebuild project for an oil and gas gathering center in Kuwait. We continue to believe that we are well-positioned from the expected rotation toward increasing activity in the oil and gas sector, that will drive strong backlog growth for the Energy and Chemical segment over the next several years.

The Industrial and Infrastructure segment posted a operating loss of $6 million compared to a operating profit of 18.6 million in last year's second quarter. This loss is due to provisions totalling 26 million, related to recent dispute resolution development, and consisted of additional project costs and reductions in expected claims recoveries. Excluding the dispute resolution provisions, operating profits for the Industrial and Infrastructure segment, increased 8% to $20 million. The major portion of provision relates to an unfavorable arbitration ruling, received during the quarter, for the Verde Gold project in Chile, which is now under appeal. The Verde Gold adjustment, consists of a provision for $20 million and an estimated insurance recovery of 6 million, resulting in a pretax charge of 14 million in the quarter.

Revenues for the Industrial and Infrastructure segment increased 6% to 559 million in the quarter. New awards in the second quarter for the segment were 742 million, up a strong 38% from last year, primarily due to the continuing strength of the Life Sciences business. Industrial and Infrastructure backlog increased 26% to $3.4 billion, compared with 2.7 billion in the second quarter of last year.

Moving to Fluor's Power segment, operating profit more than tripled to $44.2 million compared with $12.3 million in the second quarter of last year. Revenues increased 24% to 592 million. The resulting operating margin for Power improved significantly as well to 7.5% from 2.6% a year ago. Consistent with our guidance in the first quarter we experienced a significant profit improvement in the Power group, as we increasingly execute more recent projects that were awarded under more favorable conditions. The significant profit improvement in the quarter is due to a very successful completion of ten projects, which were completed on average 28 days early.

The quarter -- the second quarter tends to be a very strong quarter for power project completions, that are certainly scheduled to come on line in the spring, to meet peak summer demand. It is likely that this quarter's earnings in Power, will be a peak quarter for this year, and probably for the current business cycle in this market. Operating profit for Power also included additional provisions on three legacy power projects. As fully expected, new power project awards declined significantly to 124 million from $892 million in the second quarter last year, and 791 million in the first quarter of 2002. As a consequence of the project workoffs and reduced new awards, power backlogs decreased 23% to 1.9 billion from $2.4 billion a year ago. As we have previously indicated, our current power backlog continues to be quite firm and we've experienced no cancellations.

Moving to Global Services, operating profit increased significantly to 23.5 million from $13 million in the second quarter of 2001. An improvement that's principally due to Fluor's restructure procurement services activity, which incurred substantial developmental expenses in the prior period. Revenues decreased 27% in the quarter, to 243 million from a year ago. The decline in revenues is principally in the Company's operations and maintenance activities, primarily concentrated in the manufacturing sector. New awards and backlogs from Global Services principally reflect O&M, since activities in this segment do not generate business that is measured this way. New awards declined significantly to $220 million reflecting the slower than expected recovery, compared to 416 million in the second quarter of last year. Global Services backlog was 1.9 billion, down slightly from a year ago.

Moving to our last segment, Government Services increased its operating profit by 3%, to 5.9 million from 5.8 million in the second quarter last year, essentially in line with the 2% growth in revenues. New awards for Government Services were $165 million, up significantly from $11 million in the second quarter last year. Government Services new awards are typically concentrated in the third quarter, from the two major sites, [INAUDIBLE] receive their annual funding of approximately $800 million. The increase in new awards in the second quarter reflects the initial booking for a recent award to provide construction services for U.S. ground based mis course missile defense test facilities. The three-year contract has potential value of up to $325 million. This contract from the U.S. Army Corps of Engineers, represents a significant success in broadening our participation in the federal services marketplace. The Government Services backlog increased 67% to 393 million, up from the second quarter of last year.

Moving on to corporate items. Corporate G&A expense for the quarter was $31.6 million, down from $35.1 million a year ago. G&A in the quarter included three unusual one-time items. These were two charges and a one-time gain. The expense items included a charge for $12 million to reflect the requisition of the guaranteed obligation for pollution control bonds, related to our zinc operations, which were sold in 1987. This provision was recorded at this time due to the obligor's recent inability to meet its current obligations on the bond, without assistance from Fluor.

Additionally the Company recognized charges totalling $12.6 million, related to our recent reevaluation of the future scope of our enterprise management system implementation. Largely off setting these charges, were a one-time gain of approximately $12.8 million, related to the demutualization of insurance company, and additional overhead cost reductions. The Company generated an interest income of 1.8 million in the quarter, compared with interest expense of $4 million a year ago. Primarily due to Fluor's strong cash position, with essentially no debt. The tax rate for continuing earnings for the quarter was 35.8%, higher than our normal tax rate of 32.5%, due to the impact of the deep resolution provisions, some of which were recorded during the quarter without any tax benefit. After these unusual items, our continuing tax rate for the year remains unchanged at 32.5%.

Now let me shift to the balance sheet and a few other aspects of our financial performance. Free cash flow for the quarter totalled approximately $160 million, and I believe, strongly reflects an improving quality of earnings for the Company. Our capital expenditures for the quarter, were $20 million, including discontinued operations, with deappreciation amortization also at $20 million. The outlook for capital spending for 2002 is approximately $100 million, with deappreciation and amortization of $80 million expected for the year. Total debt decreased 25 million from year end 2001.

The continued strong cash flow increased our cash and marketable securities by approximately $160 million, and ended the quarter with $836 million in cash and securities. As a result, financial position and our capital structure continues to be extremely strong, with debt to total capital 3.5% and return in equity remaining at 20%.

Before turning it back to Alan, let me make two additional comments. We continue to make progress in exiting the businesses that we discontinued last year. During the quarter we completed a sale of our temporary staffing business in Australia, for a modest amount. We continue to expect to complete all the remaining transactions by year end, within the parameters of the financial provision established in the third quarter of last year. It is interesting to note that since the third quarter of last year, our efforts in this area have generated over $100 million in cash. Now I'd like to turn it back to Alan to review our current earnings outlook and for closing remarks.

Let me address the outlook for operating results in 2002. We remain convinced that we are particularly well-positioned, with growing opportunities globally in the strengthening oil and gas and life sciences markets. We are optimistic about our business prospects for the balance of the year and looking beyond. Our current earnings guidance for 2002 remains consistent with our previous guidance of approximately $2.10 per share, in line with analysts current consensus estimates. Now let's open it up for questions. Ladies and gentlemen, the floor is yours.

Thank you. The question and answer session will be conducted electronically today. If you do have a question, please press star one on your touch tone telephone. We will proceed in the order that you signal and we will take as many questions as time permits. Once again, that's star one to ask a question. Our first question will come from Mike Dudas with Bear Stearns.

Good morning everyone .

Morning, Mike.

Good morning.

Two thoughts. First, could you share with us a little of the flavor of the order intake from Industrial and Infrastructure, and secondly, Alan, a lot of legacy issues here. 1987, the Gold project in 1996 or '97 that was completed, the issues in power, was this something that's done routinely, was it a special to look through the Company and scrub things out, and could you comment on that and maybe outlook for what's left with regard to the project expectations and things on the balance sheet going forward?

The -- Mike, certainly, let me take those in order. We had our, you know in I&I, Industrial and Infrastructure, our order intake for Q2 was pretty consistent with what we saw in Q1. In fact it was just around $740 million. It was really accentuated again by strong orders in the Life Sciences arena, but I would say also we had encouraging signs in our commercial and institutional area and we had some small activity in both telecoms and some preliminary information on positioning on some small awards in transportation. So strategically I was very pleased with the results in I&I, and I think it continues to show a strong position and some evolution going forward in that marketplace.

To your second question, I think it probably would behoove me to take a step back and give you my perspective on the full quarter's performance. Because, as I said in the past, this is a lumpy business. And with our increased disclosure, you're getting a real look at the dynamics that naturally occur across five operating segments. And this quarter was a particularly complex one with a number of issues coming to conclusion, or coming nearly enough to conclusion that we can make a reasoned update of our final commitment. Mike, if you look at the quarter, I have to acknowledge a significantly strong performance by all of our units. but especially the Power segment. driven by the successful completion of ten projects by Duke/Fluor Daniel. And while this isn't repeatable in terms of the numbers from quarter to quarter, it nonetheless shows the progress we've made in commercial negotiations and project execution in this joint venture. But the net result is, that without the additional provisions for these dispute resolutions, our EBIT from continued operations would have been just over $100 million. And this is a tremendous achievement, and even though it is unique in its timing, it does reflect a measurable improvement in our execution, our risk and overhead management, and I believe, in our overall earnings potential.

To your -- specifically to your point, we have also in the recent period seen a significant number of claims being resolved. The most significant of which was the arbitration ruling on Verde Gold. While we strongly believe that this judgement was grossly overreaching, and we are appealing it, we nonetheless must reflect the current result in our accounting. All of the other issues were the result of developments or resolutions that led us to either adjust our reserve or reduce expected claim recoveries. We continue to use our best and informed judgment on these matters, and our culture leads us to error on the conservative side here. We also think this is appropriate given the obvious industry concern around corporate governance and disclosure.

I should also point out that these charges in corporate G&A and Industrial and Infrastructure, are all for projects or transactions, that as you say, are historic in nature. And none of them relate to ongoing projects. More importantly, Mike, while we cannot be absolutely certain, it is our judgment that there are no other material issues from outstanding claims, that would drive charges in the remainder of the year. We will give a full accounting of claims in our upcoming 10-Q statement, and I think that you will see that it represents minimal potential impact to forward earnings. So, I think again, stepping back, you have to take the whole performance in its total. And I think it has some extremely strong issues, or strong performance that bodes well for the future. And we have, in fact, addressed a lot of the historic claims issues out there and are nearing completion.

I agree with your comment on the earnings power situation, with everything lined up it would have been tremendous and I appreciate your candor.

We'll hear from Don Zwyer with Lehman Brothers.

Good morning. The margin in your new awards has gone up for the third consecutive quarter, up significantly, but the margin in your backlog went down after being flagged a quarter before. Should we expect to see margin in that backlog start turning higher based on the new awards trend?

Excellent question. As we indicated in our conference call last quarter, we forecast for all of you we thought this would be a quarter that was lower than our normal. Based on, just specifically, the timing and releases on new awards. And what you are seeing as a result is, even though we had strong percentage of gross margin in this recent quarter, the $2 billion of revenue, did result in a decline in our -- both our revenue backlog and our absolute dollars of gross margin in backlog. I believe that's a one-quarter issue that we saw coming. I think you're going to see that now go up over the upcoming quarters.

Don, to help you on that, also, in the second quarter we did burn some pretty high margin business in the Power segment.

Right.

With a very strong quarter. And going forward, it may be a little lumpy. Some of these, the larger projects that we've talked about in the oil and gas environment, will have lower margins than the current work, and it could be a little spotty going forward in terms of the trend.

Now on Power, you had correctly predicted that you'd have a big drop-off in bookings. Going forward do you think it gets worse, or does it start to level off at about this last quarter's experience.

Well, this last quarter, I think -- by my numbers here we were right around 180 million I think, in bookings for this quarter. 120, I'm sorry. I think that's going to be as low as it's going to get, Don. We're going to continue to see bookings in this area, but they clearly won't be like they were over the last year and in the first quarter of this year. Again, you know, you can talk to a lot of people in the industry, both our clients and our competitors, and I think everybody is pretty well predicting that we won't be seeing a new resurgence of orders in any way, shape or form like we have, until some time in the '04 time frame.

And just one other question, I'll give someone else a chance. Considering that you worked off so many power projects, I was pleasantly surprised to see your cash go up as much as it did, because you have commented that a lot of that cash was progress payments that would be used going forward. Of the cash you have right now, about how much of that would you say relates to progress payments and how much is really yours to keep?

Don, a substantial amount relates to progress payments. We're always going to have some progress payments. But I -- we still feel about half the cash is ours to keep long-term. You were right in your assessment. During the quarter we had very strong cash flow. We had strong cash from the first quarter, continue to have strong cash for this quarter. The advances from our Duke/Fluor Daniel joint venture, actually went down in the quarter. And the strong cash flow really shows that the balance of diversification we have across our business unit and it came from operations elsewhere, other than Duke, Duke/Fluor Daniel.

Okay. Thanks a lot.

We'll now hear from John McGinty with CS First Boston.

Good morning. And Alan and Michael, let me complement you on the disclosure. I know it makes your job tougher because you've got to explain all this stuff, but it really does highlight what's going on. Having said that, I do find a couple of statements a little scary and I just wondered if I could get a clarification on them. One, buried in the power comment was additional provisions on three legacy power projects. I guess, could you give us an idea of the amount of that and how much potential there are still -- I thought they were all done, I thought they were all reserved for, I thought we'd got that all last quarter with all the problem jobs.

John, let me give you some flavor to that. Again we are really continuing in our efforts to have a complete disclosure. The net result of the power issue was very, very positive. And the issues we talked about in there, we thought we should make a comment. Because with the number of projects we have in Duke/Fluor Daniel, on a lump sum, they are not all going to be significantly profitable. When you do lump sum jobs and have that many, you're going to have some projects that, you know, you wish you'd done a little better on. But I wouldn't say that anything there gives me any cause for concern. In fact, it was an extremely strong performance supporter and I think we're going to continue to see strong profit performance out of Duke/Fluor Daniel based on their overall execution.

Are there -- presumably there are not that many projects left to be completed. Are there any jobs that still represent problems or are all of the remainders either reserved for or profitable?

We believe that where we are right now, your latter statement is absolutely correct. They are either profitable or reserved for, and in fact we expect to see continued strong earnings from Duke/Fluor Daniel on through next year. Now again, quarter to quarter, it will vary based on project completions, et cetera. But, I do come back to your statement John, is that we do see DFD continue to be a very profitable, contributing part of our corporation.

Then on the dispute resolution, $26 million, 14 million of it net was the Verde Gold, that's fine. What's the other $12 million?

Well, we're not going to -- we don't want to be specific.

No, No, I'm not --

-- individuals. But it is basically we are in arbitrations that have gone through -- they're, you know, pretty close to completion. And based on the, you know, the disclosures, the discoveries, the evaluation of costs, we thought it prudent based on these things coming close to closure to make an adjustment to those reserves, or adjust our expectation of recoveries.

But, does this mean that you always have a figure of things that are in arbitration, that there are always this -- the potential for this. I mean $14 million is a one issue, I understand that, and no one is asking you to disclose propriety information on the other 12. What I'm trying to decide is, do we run the risk every quarter of having another 10 or 12 million, if the res -- if the arbitrations go against you, or was this an unusual, or getting back to Michael's comment, that you just kind of clean it up? Or why did this 12 happen this quarter? I can't remember ever mentioned in the past. There may have been one, but I can't remember another mention in the past of an arbitration -- set of arbitration disclosures -- you know, issues like this going against you.

The -- again if we look back at all the arbitrations we have ongoing, we probably have, I would say in a round number, five or six that I think are ones that I keep a constant update on. And those -- several of those basically came at or near closure in this particular quarter. And my statement, again, looking at what we will be giving a full disclosure of our claims in our 10-Q. I believe that there is really a timing issue here that a lot of these came to a head in this recent quarter.

Just kind of random.

Yeah. And as we go forward, I don't believe we have that same issue. And I can't guarantee that John. Obviously, an arbitration ruling, like we had at Verde Gold, was not expected, but it's not a quarter thing. It's, you know -- we manage this thing, again, on a total basis, and it's just a timing issue as to when they come to resolution. And I don't expect this will have any measurable impact on our forward earnings.

No. You know, we believe that we've reflected all of the recent developments in our estimates here on these arbitrations. John, we do expect these to come to resolution within the next 6 to 12 months completely.

Right.

O.K. And then the final question I have, I'm totally confused. First of all -- it's all in G&A. On the zinc, the pollution bond, did you in essence pay it off, or do you stand to -- if whoever is unable to do it, was the 12 million a full charge for the pollution bond or do you stand to have to put more into it? What's your maximum liability there?

John, that's our maximum liability. We have not paid it off.

It's just a charge for the maximum liability if it happens.

If it happens. We had to provide financial assistance to the obligor of [INAUDIBLE] statement, to keep these bonds outstanding and allow them to, in the future be able to repay these bonds. With prudent accounting and given their accounting position, we reserved for the full amount as if that would eventually become our liability.

And the ERP scope, could you explain what that means?

Yeah, John, let me address that. As you know, we've been in the implementation of our [INAUDIBLE] system. These things do take some time. I wish they could be done faster. The answer, though, is that we are well into it and have implemented this across all our U.S. operations. And we've become pretty adept now at using this to drive advantage both in our G&A and in our financial reporting. But we found there are some areas that we implemented that we have pulled back on. The net writedown on these, is less than 10% of our total capitalized amount on the overall implementation. So, honestly I think we've done an extremely good job with the implementation, and I think it's very prudent in terms of performance and cost.

If I just assume the charge in the demutualization, wash, because one is 12.6 and one is 12.8, then you reported 31.6 versus 12 of 35 after a charge of 12 for the zinc, which means it was only 19 versus 35.

That's correct.

Why and what's the run rate going forward? How does it get that low in one quarter, is that the new run rate?

Okay, let me help you on that, John. There were some other one-time cost reductions in the quarter that were, you know, beyond global radar scope that we really want to detail. We had a $1.5 million gain on the land sale in Canada. We had lower than expected insurance costs. We had lower than expected medical costs. Some of our benefit and compensation costs are kind of back end loaded and didn't hit us this quarter. We had some contributions, donations, charitable contributions that occur in the second half of the yea. This was just an unusually low quarter for G&A for us. We do think our run rate is much more in the 35 or perhaps a little higher rate for the -- on a quarterly basis going forward. We think that's pretty appropriate for this company.

Okay. I will get back in queue. Thank you.

Thanks, John.

We'll now take a question from Fritz von Carp with Merrill Lynch.

Good morning, gentleman. A couple of quick questions. One, you talked about power gen earnings, how, you know, there was an unusually large number of projects finished in the quarter, and that this may be the peak for earnings, could you just help us with some order of magnitude of how you see -- I mean if it -- you're telling us that the amount of dollars of profit in power generation to go down sequentially, new orders of magnitude about how that might play out? 44 is obviously a big number.

Rather than try and forecast operating profits, we did complete ten projects in the second quarter. And given the lump, the nature of the project and the way that the -- the risk that's involved with the commission of the projects in the end, we recognized a fair amount of profitability upon substantial completion. Going forward, Fritz, we are scheduled to complete about five projects in the third quarter, one in the fourth quarter of 2002. What's in the current backlog -- backlog right now, we'll complete about ten next year and that may be evenly split to the second and third quarter. And then, of course, we'll have -- we have some completions in 2004 as well. That is just to give you a flavor, that the second quarter is usually -- should be on a normal basis, our strongest due to the higher concentration of completions. Third quarter is a little stronger. The normal profit tick up, as we make progress on these projects in the first and fourth quarter, may be lower than the second, third, where we have that completion incentive or recognition of profit and reduction of risk in those quarters.

But, back to my earlier statement, Fritz, we expect the joint venture of Duke/Fluor Daniel to be a profit contributor -- significant profit contributor on in through '03 and into the first parts of '04.

Right.

Okay. So along the same lines, the -- if you could help us understand how the cash flows are going to work. I mean I think, you know, you're saying that some of those -- I mean it seems to everybody that those prepayments have to flow out at some point and that seems sort of inevitable. Could you help us understand, you know, the timing of that?

On the power side, they have already started to flow out from Mike's earlier comment.

Very modest outflow in the second quarter. We do expect that to accelerate, Fritz, in the third and fourth quarter this year. Our current expectation is about maybe 300, maybe 350 million of cash outflow in the second half of this year on the power related projects.

350 million -- 300 to 350 million cash outflow just in that one piece, just the prepayments, not the cash from operations in total.

Right, that's just the prepayments. Of course, we've had strong cash from operations elsewhere in the Company and that's been very strong this year.

Okay, so if we -- now if we were to sort of net the rest of the business with power in the second half, would that mean that you would have, you know, bottom line cash from operations would turn negative in the second half?

With that kind of outflow, that would more than offset the cash from operations coming in from our other parts of the business, yes.

Incrementally, third quarter will probably be negative.

Right.

O.K.

But I think to get back to Mike's earlier comment, you know, just rule of thumb and obviously a lot of calculation goes into this, but we generally look at that and say that about half of that current cash is long-term our cash to use.

Right, right. Just trying to figure out when the other half flows out.

Fritz, of all of the numbers we try to estimate, we give values about, managing internal accounts is probably the hardest.

Yeah, well I believe you on that. I've tried to forecast them, too. The losses in the infrastructure segment, could you just -- I mean, are there issues on, you know, managerial controls or the structure of the organization around those losses? I mean we've gone through this in power.

Fritz, quite the contrary. Again, let me just reiterate. The issues that drove the adjustments in Industrial and Infrastructure, are all historic. In fact, without those, the operating performance for this quarter would have been extremely strong.

Okay.

So, I think the actual underlying base of business, the market positioning that we have and the performance we have, really give me an extremely good encouragement around the progress we are making in adding that as a significant part of our portfolio.

Good. O.K., and one last question, the -- your outlook for the large upstream hydrocarbon projects overseas. Can you give us any further -- you know, is that becoming more visible to you guys? Any further detail on that?

It is but it really hasn't changed. They still are all -- ever one of these projects are large and they're complex as I said. And I continue to forecast that we will start seeing those show up in our backlog toward the end of this year and then on in through the next couple of years.

Okay. Thank you very much.

Next question will come from John Rogers with D.A. Davidson Broker.

Good morning.

Morning John.

Alan, most my questions have been answered, but could you talk a little bit about bidding activity and give us a little bit more detail in terms of what you see out there? Obviously it's hard to say what you're going to win. But, new awards have dropped off sequentially over the last couple of quarters and just trying to get a sense when you see that bottoming out or when we might see that improving?

John, the -- obviously the --

And I know the government work in the third quarter will help.

Well, yes, the government work will help. And then as we are able to start booking the oil and gas projects. But, I think we saw this quarter coming as one which was going to be as I put it earlier, below our normal run rate, and that, in fact, did occur. I was encouraged though, if you do look at this quarter, the largest award we had in this quarter was $225 million. So it was made up of a very strong performance in a lot of different areas. In life sciences, in clean fuels, in the balance of energy and chemicals, in commercial and institutional, in government. So I think despite the fact that it was down a bit, and it was a strong showing that shows a strong base of growing opportunities in these other businesses. So we continue to see a tremendous amount of activity, John, to your question in life sciences, and we believe we are extremely well positioned there. Clean fuels continues to be an ongoing opportunity where we have captured the largest share in that market and expect to continue to do so. And the commercial and institutional and other industrial and infrastructure areas, particularly around transportation, are showing very promising signs and activity. We also have the full booking of the SH 130 project yet to come, and for the transportation Texas quarter, transportation. So, you know, again, I think the overall activity is encouraging and I think despite the lower than normal run rate for this quarter, I remain encouraged about our market outlook.

Okay. Great. Thank you.

We'll now hear from Jeff Burg with Matador Capital.

Good morning. Most all of my questions have been answered. I guess the only question I'd have on this point is if you can provide any color, Alan, on Venezuela, given all the moving issues down there, can you provide a little bit more on that project?

Jeff, I will try to restrain myself from getting into any political commentary in Venezuela. Clearly the political situation there, it's been one that's been volatile. I will say it has had very little impact on us. Our project is in the eastern province, pretty far away from the -- a lot of the political goings ons. We -- it's a project that is well into construction. We have had extremely strong performance there, and, in fact, had a lot of precautions around security and labor relations. But the project continues to go at a good pace.

Okay. And then the only other question I have, you know, Duke finally, formally lowered their capital expenditure outlook for '03. And despite the, you know, outstanding performance you guys have had and what looks like it's going to be good performance in '03, I guess I'm wondering with them formally lowering their capital expenditures, does that give you a little bit more concern about a, you know, a hole out there somewhere for you guys in '04 or beyond? Did it kind of -- I know that's out there but did it take away a little bit of the visibility as to when that business starts to tick back up for you guys?

No, John or Jeff, in fact it really gave -- it still confirmed my forecast that I won't say just mine, It's one that I see as pretty much a consensus across the industry. The Country, the U.S. in particular, is going to need additional power generation in the '06 time frame. And that really, I think, is why I base my prediction on new order inflow starting to pick back up in '04. And if you do the math from our backlog, when we take these projects in, it's pretty much a two-year cycle to commercial operation, and Mike gave you the numbers of projects completed in '03. That does denote that we will have a lower number in '04. But I clearly think that's going to be offset by a number of the other markets that we see increasing. Particularly the area around oil and gas.

Okay, thanks.

And our forecast, by the way, on that Jeff, has always included Duke's capital program.

Great. Thank you Alan.

We'll now hear from Leon Young with Salomon Smith Barney.

Hi. Good Morning. Most of my questions have been answered as well. Just somewhat of a trivial one. Mike, you said proceeds from sales in the quarter were minimal. Just wondering if you still feel you're on track for a full amount of what, roughly $80 million I believe?

Right, we've realized most of that already. But we do expect to generate some additional proceeds in the second half of the year. We have two dealerships to go. One of which we are liquidating and one of which we are in the process of trying to sell. And then we have our U.S. and our UK-based temporary staffing businesses which we are moving through the sales process. We are still on track for the total numbers for the year. The second quarter was only about 5 million of proceeds, it was very, very mild.

Okay. And just a clarification. I believe you characterized the gross margin and the backlog going down as largely a function of the burnoff of very high profit margin power award that's no longer then in the backlog?

And also the level of awards in the second quarter Leone, that $2 billion, it was a quarter that we expected to be lower than most. So it was a combination of those two.

And also back to Mike, I know it's the most difficult thing to forecast, but at your end, for year-end cash, I was hearing for you guys, about 675, it sounds like with what you are saying from power outflows, does that look a little high?

Yes, it looks a little bit high. We can -- my best guess right now and it truly is a guess because we are just starting our signing profits for the remainder of this year and next, is that we may end up year about where we started in cash.

Thanks a lot.

Once again if you do have a question please press star one. We will now hear from Derrick Cribs with Glenview Capital.

Hi Lila, how are you doing?

Pretty good Derrick, how are you?

Good. I just had a couple of questions. First of all, with all the turmoil in the power sector, could you comment on your exposure to some of the power guys that are in distress? And if you do have exposure there, for those of us new to the industry, could you maybe explain what happens in the event of bankruptcies?

Yeah, Derrick, let me address that. Our position in this market has been such that all of the awards that we've had over the last couple of years have been sole source negotiated. It's been what I would call kind of a natural selection process between ourself and our clients. We are very conservative in not only with who we work with but also in how we book these awards. We don't book an award in our backlog until it has been funded. The permits are in place and we get a notice to complete -- to proceed. As a result, we've had no cancellations out of our backlog. And in fact, when you go back and look at the projects we've completed, we did finish one project for Calpine and we're in the -- we just finished one for AES and we're getting ready to do another for AES now. Those are fully funded, not subject to being canceled, and I don't believe we have any exposure to anybody that would experience a bankruptcy or have the project canceled as a result.

Okay. Thank you. Another question, I've spoken to Lila a little bit about this but I wanted to hear your comment as well, Alan. It has to do with everything that's going on with Haliburton in terms of their accounting for project overruns. Could you maybe comment on that and how Fluor accounts for project overruns?

Well, I don't really know the ins and outs of how Haliburton accounts, we don't obviously have any view to their business in that respect. But I think the entire industry follows generally accepted accounting procedures for estimating the projects and the percent completion against those. That very naturally and necessarily includes estimates for recoveries on claims and on exposure to liabilities. And we update those on a quarterly basis based on our best judgment and that's a pretty general accepted practice within the industry.

Okay, thanks. And my last question has to do with the cash. With the amount of cash that's building up on the balance sheet, I guess you will have had, it seems like $500 million on the books for a year. Are you going to be more aggressive with dividend payments and stock buybacks going forward?

We followed a fairly disciplined program of looking at how we are going to use that cash. We think our dividend is appropriate given our level of earnings that generates a payout in the range we think is reasonable for this Company. But right now we don't really see any change in dividend policy. In terms of share repurchases, we look at that as an investment alternative to acquisitions and other use of funds, and again are very disciplined about that. While we do think share repurchases are appropriate [INAUDIBLE] solution, caused by stock option exercises, we think it's prudent in today's environment to maintain a strong equity base, to maintain a very strong financial position. We think it gives us a significant competitive advantage to have a strong balance sheet in the industry. This is an issue that we review internally, that we discuss with the rating agencies, and we watch it very carefully. We have not had significant share repurchases this year, primarily because our overall of the last few weeks in the market, our stock has performed fairly well this year, but it is something that we continue to monitor closely.

Okay, thank you very much.

And Mr. Boeckman, we have reached our 55 minute mark, and we do have one additional question in the queue and that is a follow-up question from Michael Dudas.

Good news, Derek addressed it with regard to the dividends and share buy backs.

Great, that was easy. Let's go ahead and wrap up then, with time remaining. I guess I would have to repeat that I have been extremely encouraged by our continued performance on operations and on overhead management. Particularly around our continuing program of disciplined review of our prospects and our selection in our marketing side of our business. And then as we continue to gain ground in the strategic areas that we've outlined, I think we have a great opportunity as we go forward. I'd like to thank you for your questions this morning. And certainly around these issues of disclosure, we are going to endeavor to continue to be as open as we possibly can and to be able to answer all of your questions. And again, as I would encourage you to ask those questions, also ask you to look at our total performance and I think you'll see a number of dynamics that are pointing in the right direction here. Thank you very much for your time and also your interest and confidence in Fluor Corporation. Have a good day.

That does conclude today's conference.