Fluor Corp (FLR) 2002 Q3 法說會逐字稿

Good day and welcome to Fluor Corporation's third 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 express permission. Please disconnect if you do not agree with these terms. There will be a replay of today's conference call at 11:00 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 Thursday, November 6, at the following number: 888-203-1112. The access code of 596327 will be required. At this time, for opening remarks, I'd like to turn the call over to Lila Churney, Vice President of Investor Relations. Please go ahead Ms. Churney.

Thank you, and welcome to Fluor's Third Quarter 2003 conference call. Our earnings announcement was released yesterday after the market closed. Before getting start this morning I'd like to read our Safe Harbor statement. In discussing certain subjects we will be making foward-looking statements regarding projected earnings market outlook, new awards, margins and the effect of strategic initiative. 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. They can arise from any number of factors. Information concerning factors that could cause 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 online or upon request. The information in this conference call related to projections are other foward-looking statements may be relied upon, subject to the previous Safe Harbor statements, as of the date of this call; and may continue 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 Boeckmann, Fluor's Chairman and Chief Executive Officer.

Thank you Lila. Good morning, ladies and gentlemen, and thank you for joining us today. This morning we will review results for our third quarter of 2002 which ended September 30 and share with your our current outlook. Earnings from our continuing operations for this third quarter increased 3% to 46.1 million or 58 cents per share. This compares with 44.8 million or 56 cents per share in the third quarter of last year. Revenues from continuing operations for the third quarter increased 12% to 2.5 billion which is compared with 2.2 billion one year ago. Third quarter results were driven by excellent operating performance by our project teams as well as a strong cost focus by our management. Our global market diversity and our strategic focus on industry clients and the increased discipline that we have around bidding and our commercial terms are all contributing to positive current results and a strong future outlook. Despite uncertainty in the global economic environment, we remain optimistic about our new business prospects.

While the engineering and construction industry is experiencing an expected market rotation away from electric power generation projects in the United States, our portfolio management strategy takes advantage of our broad geographic and industry diversity. We participate in more than a dozen industries, and we're currently focused on markets where our near term opportunities are the greatest. These include transportation, life sciences and federal services, which were our three largest segments of new awards in this last quarter. We also continue to track a number of large, complex oil and gas projects in diverse and georgraphically challenging markets, and although precise timing of these contract awards are difficult to predict, we seem them coming in the next year to two years. We have completed front end engineering for several of these projects, and we are well positioned for when they move forward. We remain on track to achieve our previously announced earnings goal from continuing operations this year of $2.10 per share. Looking ahead to 2003, the general consensus for the global business climate is for modest improvement. Assuming this business scenario, we would expect to perform in-line with or better than the overall market. And, as a result,, our 2003 earnings outlook is in the range of $2.20 to $2.35 per share. As business conditions improve we would expect our growth to improve as well. More importantly, over the next several years, there is an anticipated need for significant capacity expansion in a number of the markets that we serve. We are confident that our industry position, our excellent financial strength and market diversity will enable us to capitalize on an increasing number of these world class opportunities.

Mike Steuert, Fluor's CFO, is going to he review our operating results and other financial information; however, let me first add some color for you beyond just the numbers in terms of the current business climate and our strategic focus over the near-term as well as the longer term. Overall, we believe we are making excellent progress toward achieving our goal to deliver sustainable long-term earnings growth and executing our strategic plan to capitalize on the diverse opportunities within our core EPC&M markets. Before turning it over to Mike let me comment on our operating performanc at the consolidated level. Our operating profit for the company in the third quarter increased a strong 36% to $114.9 million compared with 84.8 million last year. This translates into an operating margin of 4.7% compared with 3.9% in the third quarter a year ago. The principal segment contributors to the profit and margin improvement were global services and power. We are, of course, pleased with the strong operating margin performance in this quarter; however, as we have pointed out this can be a lumpy business, not only in new awards but also in quarterly operating performance. This is due to the continually changing mix of work as well as the timing for project completions and a recognition of performance incentives. As a result, our quarterly performance in individual significant meant can often be uneven and may not be reflective of the underlying trends in the business.

With these variables it is difficult to predict quarterly operating margins with any great precision; however, our goal is to improve on our average operating margin through the first three-quarters of this year which is around 4%. We believe our increased segment disclosure continues to help you better understand our business as well as highlight those quarter-to-quarter things that are inherent in a project driven operation. It is for this reason, as I've said in the past, when evaluating our performance and projecting future trends, I encourage you to focus on the consolidated results, recognizing that we employ a portfolio management strategy within the EPC&M market to optimize our growth, to diversify our risk and to minimize cyclicality. One other comment that I would like to make is that we have continued to make excellent progress during the quarter in reaching dispute resolutions on a number of legacy projects. And with that I'll turn it over to Mike Steuert.

Thank you, Alan; and good morning. Let me start with new awards and backlog. Total new project awards in the quarter were 2.55 billion compared with 2.9 billion in the third quarter of last year. As expected, new awards for power projects declined significantly to 30 million compared to 1 billion in the third quarter of last year. New awards excluding power projects increased 29%. Consolidated backlog was 10.9 billion, level with the second quarter of this year and down slightly from 11 billion a year ago. Gross margin and backlog was 660 million or 6.1%. This compares with 669 million or 6.1% in the second quarter of 2002, and with 774 million or 6.8% in the third quarter of last year. The decline in backlog gross margin from a year ago is primarily attributable to the significant number of power project completions that were included in the earnings in the second and third quarter of this year.

Starting with our first operating segment, energy and chemicals reported operating profit of $30 million in the quarter consistent with the prior two quarters of this year and a significant increase when compared with $17.1 million a year ago. Earnings performance in the year-ago period is a good example of the quarterly variability that Alan just mentioned. Third-quarter earnings for energy and chemicals last year was well below the quarterly average for that segment in 2001. Revenues increased 38% to 918 million from 668 million in the third quarter of last year. New energy and chemical awards increased 71% to 439 million for the quarter compared to 257 million last year. Backlog for the group was 2.9 billion, down slightly from 3 billion a year ago. New awards for EMC in the quarter included additional scope in two major Canadian oil-stands project and a gas booster station in Kuwait, which is the second part of a fire rebuild project that was booked last quarter. The industrial and infrastructure segment boasted an operating profit of 17.4 million, down 30% from a very strong 24.9 million a year ago. The third quarter of last year included significant performance incentive awards associated with the completion of a major transportation project. Again, another example of the variability in quarterly performance within an individual segment due to timing issues.

Also, reduced earnings contribution compared with the third quarter of last year from projects in economically sensitive markets, particularly mining and microelectronics, impacted the quarter. Revenues for industrial infra structure increased 14% in the quarter, or 558 million from 490 million a year ago. New awards for the segments increased 74% in the third quarter to a very strong 1.1 billion from 627 million last year, primarily due to the continuing strength in life sciences and transportation. Included in new awards for the quarter was the SH-130 transportation project in Austin, Texas. Also included in new awards for the segment was a project to renovate a facility in San Palo, Brazil into a fully functioning U.S. Counsel General. This is an example of our strategic efforts to more fully cross-sell our capabilities into the federal services marketplace. As a result of the strong quarterly bookings, industrial infrastructure backlog increased 62% to 4 billion compared to 2.4 billion in the third quarter last year.

Moving to our power segment, operating profit for the segment continued to benefit from additional project completions in the quarter increasing 24% to 30.2 million compared with a strong performance in Third Quarter last year of 24.3 million. Successful early completion of two projects contributed to the project and profit improvement. As we indicated in the past, planned completion dates for power projects frequently occur in the second and third quarters to meet peak summer demand. Following a strong second and third quarter this year, the seasonal pattern will result in lower operating profit for the power segment in the fourth quarter. Revenues decreased 16% to 498 million and 592 million a year ago. Operating margin for the power segment was a strong 6.1% in the quarter. This was driven not only by the completion of three projects, but these projects were booked later in the cycle that were awarded under more favorable conditions. As fully expected, new power awards declined significantly to just $3 million from 1 billion in the third quarter of last year. As a consequence of a project work-off and reduced new awards the power backlog decreased 50% to 1.4 billion from its peak of 2.7 billion a year ago.

Moving to global services, operating profit increased significantly to 25.5 million from 13.2 million in the third quarter of last year. Improvement is principally due to our restructured procurement services activities, which included substantial development expenses in the prior period. Also contributing to an improvement was a return to normal operating margins in Fluor's operations and maintenance services compared to the third quarter a year ago. Revenues decreased 14% in the quarter to 203 million from 237 million 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 in backlog for both those services principally reflect operations and maintenance since other activities in this segment do not generate business that is measured in this way. New awards declined to 83 million compared to 250 million in the third quarter of last year. Global services backlog declined 16% to 1.6 billion to 1.9 billion a year ago.

Moving to our last segment, government services more than doubled its operating profit to 11.8 million from 5.3 million in the third quarter of last year. Good performance on the company's Bernald, Ohio contract led to a rebase lining of the project which favorably impacted operating profit in the quarter. In addition, activity in the mid-course missile defense test bed facilities in Alaska and increased logistical support activities in the Middle East contributed to improved performance. Revenues increased 33% to 274 million compared with 206 million a year ago. New awards in the third quarter for government services were a strong 846 million, reflecting the annual funding for our two major DOE or Department of Energy projects. This was up 10% compared with last year. It also included the annual installment for these two same projects. Government services backlog increased 22% to 973 million up from 796 million in the third quarter of last year.

Moving to corporate items, corporate G&A expense for the quarter was 43.2 million compared with 22.2 million in the third quarter last year. That was well below our quarterly average for 2001. Included in the current quarter was an impairment charge of 9.4 million related to an investment made in 1994 in the Beacon Group Energy Investment Fund which was invested in energy related projects. Excluding that impairment charge, corporate G&A expense in the third quarter was modestly below our forecasted run-rate of 35 to $40 million per quarter. The company generated net interest income of 2 million in the quarter compared it with 3.4 million a year ago. The higher interest income last year was due to interest received from a note receivable relating to a 1985 sale of a facility. This note was fully collected in the fourth quarter of 2001,so there was no interest income on this item during 2002. The tax rate for continuing earnings for the quarter increased to 37.5%, higher than our normalized rate of 32.5% primarily due to the nondetectability of our impairment cost. It remains unchanged at 32.5%.

Now let me shift to the balance sheet and certain other aspects of our financial performance. Our financial condition remains quite strong. Cash and securities at the end of the third quarter were 833 million, with minimal debt. This compares with 836 million in cash and securities at the end of the second quarter. While advances on power projects declined in the third quarter, we're continuing to work off of the backlog. Cash flow from operations declined, and advances from new awards on nonpower projects largely offset this decline. We continued to anticipate, however, that our cash balance will decline modestly by year end with the continuing work off of power projects. Free cash flow for the quarter totaled approximately negative $3 million. Capital expenditures for the quarter were 17 million including 3 million for discontinued operations while depreciation was 19 million. The outlook for capital spending in 2002 is approximately 80 to $90 million with depreciation of 80 million expected to the year. Total debt at the end of the third quarter was 31 million. The company also has about 300 million of leased debt equivalent associated with some of our engineering facilities.

Turning to discontinued operations, we continue to make progress in disposing of the remaining businesses and anticipate completion by year end. Results for discontinued operations in the third quarter included the impact of the recently completed sale of the company's U.S.-based staffing business. Based on the results of this sale, and the outlook for the disposition of the last dealership and the one remainin U.S.-based staffing business, we recorded a impairment charge of 15.6 million in the quarter. In total, discontinued operations in the third-quarter recorded a loss of 14.8 million or 19 cents per share compared with a loss of 99.3 million or $1.24 per share a year ago when we took a charge for the discontinuance of these businesses. With that Alan and I would be happy to answer any questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your telephone. Also, if you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal, and then we'll take as many questions as time permits. Again, that is star one on your telephone to ask a question. We'll move first to Raymond King with Lehman Brothers.

Good morning.

Good morning, Raymond.

A question regarding global services segment. You're saying here that, like, the ONM services margin is returning to a normal level, but when I look at this quarter margin is about like 12.6%. Are you saying here that the segment margin should be sustainable going forward?

Raymond, our goal in this particular market has been to grow our own inservice, a goal that we stated over two years ago. In that progress we hit a bit of a downturn a year ago when we had the aftermath of September 11th. I will tell you that our focus in this area on growth has been first to really look at improving our margins, and we had a very selective approach to our projects and our prospects in doing that. And I think that's what's been reflected in the downturn in revenue, but we are achieving the improved margin performance that we have been looking for. So I think our goal, as we go forward, is to continue to focus on the higher margin opportunities and grow the backlog in this business that reflects the kind of margin that we're getting now; so it's a long winded answer, kind of relaying our strategy and also telling you that we're on track with that strategy; and the ONM business is one we're going to continue to look at for continued earnings growth.

Okay. So it's fair to say the margin should be able to stay in lower teens level?

Again, I think, as per Mike's comment, it's quarter to quarter. There will be some variations in it, but we're very pleased with this quarter's margin.

Looking at the backlog, comparing the new bookings and the work performed, it looks like there's some negative adjustment of about 170 million in the global services segments. Can you elaborate on that what that is?

Maybe we can talk offline. I'm not aware of an adjustment in that segment.

Not at all.

Okay.

Raymond, that's not the case. We'll not made any adjustment in global services.

Okay. Let me move to another question. Can you give us more details about the impairment charge in the Beacon Group Energy LP? Are there any other similar investments in the energy sector that are included in the investments and approximately how much is that?

The Beacon Group Energy Investment Fund was by far the largest investment the company has in any energy related investments. Every quarter we reevaluate the valuation for those investments. And we think we've taken look at those and have brought them down to fair value. That was approximately $30 million and we reduced to about $20 million investment, a $9.4 million adjustment. We don't believe there's any other risk beyond this investment in this fund.

Okay.

It represents the vast majority of the risk of that nature.

All right.

Raymond, let me come back to your first question.

Sure.

And again I apologize for not having the details, but there was was a number of actions that took place in the global services arena. There was one site that was sold by one of our clients. And so that resulted in a correction. And the correction was close to the number that you talked about.

Gotcha.

So there was a number of puts and takes in there but that action was taken, apologize for not answering it directly.

Okay. Great. Thanks. Last question, I'll give it to other people. For the cash flow number, how much of a free cash flow was related to your operating cash flow and how much is related to nonoperations including the sales of the IT Starling (ph)business, and do you expect, with the deferrals, a couple of power projects you're going to see payments usage come down the remainder of the year to, like, below what you guided us before about that 300 to $350 million?

During the quarter we had approximately 30 to $35 million of proceeds from discontinued operations. We had a negative 3 million total. Other than that, the cash flow was really from pretty solid operating performance. We saw the advances drop during the quarter, as they have throughout the year, from our joint venture; however, our operating cash flow from our other businesses along with additional clients advances from the new awards that we've been booking this year. The increase in new awards we've seen from nonpower activity has largely offset that. We had earlier said that we -- our view of the -- perhaps half the cash that has been on our balance sheet throughout the year would be ours for the long-term. Given the solid cash performance that we've seen in the third quarter and actually throughout this year, we think that we're changing that guidance. We think that fully two-thirds or maybe even 75% of the cash that's on our balance sheet is going to be available for the company for a longer term.

Okay. Great. Thanks very much, guys.

We will hear from Michael Dudas of Bear Stearns.

Can you hear me okay?

Yes, Mike, we can.

Thank you. First question is, Alan, at the end of September, how much of 2003 planned revenue burn is in the backlog currently? Like, what's your stretch, I guess, is the question.

Mike, of course, when we put our plan together it's a five-quarter stretch.

Okay that's fine.

So we're able to bring that down. But we enter most years with somewhere around a 40% stretch as we get into the actual fiscal year. That's what we believe is a good aggressive target to go after, so it's higher than that at this point, and we'll close in on that in this fourth quarter coming up.

Terrific. My second question is, Alan, you and the board, I'm sure, have discussed opportunities with regard to looking at the cash that you have in the balance sheet that you're able to allocate and the very strong free cash that the company has been generating this year, what are your thoughts?

Mike, our plans haven't changed in that regard. And I think we stay in close contact with this strategy with our board. We, first of all, think it's extremely important to maintain a strong cash position and a strong balance sheet. We see that as a competitive advantage in our marketplace. With that, we also want to use this cash to not just be competitive in the marketplace but to [INAUDIBLE] shareholders. We have during this last [INAUDIBLE] continued to do buy back of shares when we were able to do so. We're looking at and continue to look at potential acquisition opportunities and investments to really [INAUDIBLE] markets we're looking at for growth. That remains our strategy, and I think we're tracking on that with a fair amount of discipline. We're also managing our cash tightly as you can see by the ability to retain the cash balance. We will be looking at numerous acquisitions [INAUDIBLE]. But I think we got something [INAUDIBLE].

My final question is yesterday it appears Exxon-Mobil came out and mentioned a pretty staggering number that they plan to spend, over $100 billion, over the next ten years in upstream opportunities globally. Is this evidence of what you've been seeing internally of what -- and you've been working with your major clients and can you refresh on how well positioned you may or may not be to take advantage of those opportunities?

Yes, I can, Mike. In fact, you're referring to the comments that Harry Longwell made yesterday at the Global Energy Conference in New York.

That's correct.

With Exxon-Mobil. That number was not a surprise to us. You know, Exxon-Mobil is one of our largest clients and, in fact, we have done a significant number, and continue to work on, fronts end projects with Exxon-Mobil. In fact, one of our awards this quarter was a front end [INAUDIBLE]. That is not surprising. They quoted that they intend to spend $1 million in this current decade on upstream projects, and I believe that's a very real number, and that's just reflective of what some the other upstream oil and gas plants are doing. The challenge, as we've, I know, continued to talk to you about this market that we see in front of us, is that these projects and programs are very complex. They most often are involved in joint ventures, there are political as well as economic complexities to them, and so they take some time to come to fruition, and they're difficult to predict the exact date for which they'll happen. We really strongly believe that given the location, and you can see where they're targeting in this announcement, we're extremely well positioned in a number of respects: first, georgraphically; secondly, from a technology standpoint; and thirdly, with the relationships that we with these is oil and gas companies. We really feel strongly about this market. But it's one that's going to start playing out in terms of true real-capital spending not really reaching a peak until sometime in 2006, but we'll start to see the effects of it particularly in the mid and latter part of '04 and '05.

Thanks for your thoughts.

We'll now move to John McGinty with First Boston.

Good morning.

Good morning, John.

A couple of odds and ends if I can. The power business is about 87 million for the nine months, and, I guess, clearly the second and third quarter are where the biggest orders have disappeared. Are we talking about a fourth quarter, for example, in power, that's anywhere even near what we did a year ago, and I'm just wondering in the guidance that you're giving us, just the order of magnitude of the power fall-off in '03 if we do half of what we do, we do an about million in power for the year if we did half of what we did in the fourth quarter, are we talking about 50 million next year, 30, how far down does it fall?

I think we all agree, John, that it is falling off based on the market. We still have a good backlog, though, for '04. Our '03 -- I mean our Quarter 4 that's coming up will be substantially lower than Q2 and Q3 just simply by virtue --.

Where will it be versus Q4 a year ago.

I think it will be slightly better than Q4 a year ago, but, again, it's difficult to predict at this point in time, but it should be, directionaly, a little bit more than last year.

When we look at '03 are we talk talking about that market falling by half? Obviously your orders, it's your billing them out. I'm trying to figure out what the head winds you have?

That's not a bad number. I think your triangulation is pretty good. Go ahead.

Okay. The Federal Government Services sorry -- keep -- the names keep changing to protect the innocent. We're going five million, six million and then, if I'm doing this right, 12 million. How much of that is -- what is the rebase lining mean, does that mean that we're now running at a 12 million rate, or is that a one-time catch up? What is the rebase lining mean?

I'm sorry. Mike and I think we'll take a pass at that. First of all, the rebase lining is the rebase lining of the closure schedule for our Fernol(ph) project in which we're committing to a '06 closure on that property. That -- the rebase lines the take up of both revenues and earnings during that time. I would say -- and I'm going to give you rough numbers -- about half of that differential is an increased run-rate in our -- on our current backlog within government. Of cours, our goal in the government arena is to continue to address that market with a focus that will continue to drive that up.

You're talking about a quarterly run-rate of 8 to $9 million next year per quarter?

On a current backlog basis, that's correct.

Okay. The G&A, one thing I guess you could do is stop forecasting it, but do you want to take a swing at it for next year, Mike?

We're looking at about a 150 number for this year.

For this year, right.

For this year. For next year, we're targeting about 160. That's a reflection of some cost increases that we're seeing in some of our pension cost and some of our medical cost trends, some of our insurance premiums. Those cost increases are substantially higher than the $10 million G&A. They would be, certainly a good extent, offset by cost reductions elsewhere.

Could you just -- I mean, what's the nonrecurring in the 150? It was 10 million in this quarter, but help me going back?

We've had an awful lot of pluses and minuses this year of going one way or another in terms of nonrecurring. Added up totally, it's fairly modest nonrecurring that the net number.

Okay.

The 5 to 10 million range.

Okay. The fact that you've got a basically a 10 cent charge or whatever it is, 10, 11 cents because that's nontax deductible, you didn't change the guidance; so did you know that was going to be there or you kind of absorbed that and got better results somewhere else?

We have had strong underlying operating results throughout the year that certainly a allowed us to absorb it this quarter.

If this hadn't happened -- the nonrecurring factor hadn't happened -- your results would have been higher by that amount because of the stronger operations?

That's correct.

Okay. Now the real question I had, Alan, is the elephants. I feel that we're at the zoo -- at the circus with the elephant walk. This is the first time you haven't talked about getting one or two in the fourth quarter and it sure sounded like you were pushing it out into, you went 12 to 18 months or a year to two years and that's kind of a bit certainly different than what I had been hearing before or at least what I thought I'd been hearing before. Are we less optimistic? I mean, how real is it?

John, let me address a couple of your questions there. First of all, we will be booking one of those elephants in our fourth quarter.

The Texaco.

No, It's not Texaco. It's the project in Kazakhstan. We had hoped to book that in the third quarter. It's moving over the line on the boundary, so it's imminent.

And it's an order of magnitude.

It will be $1 billion plus --.

Okay.

-- Of our bookings.

Okay.

But it's the first. The problem is that these things, again, are extremely bumpy. We had hoped six months ago to look at the core venture projects in Saudi Arabia, to be looking at those as an '03 booking; and those have now gone into another form which I think have to be studied preliminarily. I'm just as bullish as ever on the fact that these projects are out there and, in fact, even with the increased positioning that we're able to do in that arena. But I think they're going to be spotty in '03 in terms of an actual very large awards coming down.

So you're not really looking for much in '03?

It's hard to predict because these things are so complex, and I hate to give you some certain dates and not be able to follow through on them. But I think it's possible we could get some in '0;, but, again, it's -- that's so far away. And with the political and other issues around that, it's just going to be a matter of timing that's very difficult to predict at this stage.

And you can't give us any kind of help as to the amount of front end because you mentioned you did more front end work, as to the amount of the dummying up the front end work on -- in other words, you do the front end work that were total projects of X billion or something like that.

We are a currently involved in the front end on significat projects on probably five or six major programs today.

Each in the billion plus range.

I would say they were each in that category, yes.

And then final question, do you need, obviously you need to book the billion dollars in the fourth quarter, do you need to book any other elephants to hit the guidance in '03?

No.

You do not.

Do not.

Great. Thank you.

Our next question will come from John Rogers with D.A. Davidson.

Morning.

Morning.

Just a couple of quick follow-ups. I guess for Mike, what were net receivables at the end of the quarter?

John, hold on one second; we've got that here, we need to get to our reference information.

It was approximately 430 million.

Of net receivables.

Right.

Okay. And then the other just housekeeping, SG&A expenses, you'd indicated, were running in that $36 million range but will go up to, I guess, about $40 million in the quarter. Or next year per quarter.

Right.

And I guess what I was curious about it sounds like based on the number, the $150 million for the year, that you're implying, unless I'm doing the my math wrong, somewhere around $42 million in the fourth quarter. Is there anything unusual in the fourth quarter?

Not unusual. Seasonally, we usually have a higher G&A in the fourth quarter. A lot of expenses just kind of fall into the last quarter of the years as we make some final accruals and we catch up on our spending.

Okay. And then just one other question, I guess for Alan, in terms of your -- what you've said about your estimated margins, both in the backlog and the new workbookings, they haven't changed a lot but they have ticked down a little bit. Is that just a mix issue or --

It is, John.

Because of the power plants.

This is a timing issue. We had, again, the completion of power projects in Second and Third quarter which resulted in the ability to bring gross margin down to the bottom line. And then also with the bookings in these two quarters. So, again, quarter-to-quarter it's, you know, we have these variations, but I still am looking at driving that up over the longer term.

Great. Nice quarter, thanks.

Our next question will come from Alena Salura with Salomon Smith Barney.

Good morning. I had a couple questions. I'm just curious if any of the current projects that you have have been delayed or pulled back or cancelled in the Middle East just due to, you know, the current, you know, Iraqi tension and Middle East tension.

No, to be honest with you not at all. We have seen virtually no impact from the Middle East crisis and issues over Iraq. In fact, some of our awards in this quarter were in Kuwait where we have a strong presence, so, even saying that, right now our current backlog in the Middle East stands at 7%. And so it's just not a significant issue today. It's hard to say if a conflict breaks out what would occur there, but I really don't see it having a significant impact on us because I think it would drive priority spending of capital in other geographic areas where we're all well positioned.

Also you mentioned the tax rate's going to drop back down to like 32 1/2% in the fourth quarter should we expect that to kind of roll into '03.

We are forecasting a modest increase to '03 tax rate to a 34% level. That's reflection of assumptions we're making that the Foreign Sales Corporation goes away next year, and that will have a modest impact on our tax rate next year.

Okay. Also, I think, Alan, you mentioned that margins were going to be roughly, or you were expecting them to be, about 4% a quarter. I mean, is that something we can project out into '03 as well.

I hesitate to do it by quarter.

Overall.

What I quoted was that our margin through the first nine months of this year. We're happy with that. We continue to look at overheads and to continue to stress commercial terms that drive our margins up, and so we're going to continue to put pressure upwards on that number and hope to match it or do better.

Okay. In '03. So match or better for next year then?

Correct.

Okay. Thank you.

We'll move next to from Fritz von Carp with Merrill Lynch.

Good morning gentlemen, Lila; I hope you're all well. I'm having some trouble making the numbers work, let's say, for the fourth quarter. If what falls off in Q4 segment operating profit vis-a-vis Q3, that brings EPS to about 210 for the year. If it were flat sequentially and everything, literally, would be a little above that.

It's power. Power comes off dramatically in Q4 because of the fact there are no power project completions in that quarter.

I thought you had said that it would be up a little bit versus last year.

Up versus Q4 of last year but it will fall off from our Q3 of this year.

Even if I have, so if I have it flat with Q4 last year at 227, profit, still I'm getting -- I'm still getting like 107 million in segment profit which --

No, our fourth quarter last year was significantly below 22, I think it was around 11 somewhere.

Maybe I'm adjusting something. Now the margin discussion I didn't quite follow that. You said 4%.

That's our margin through the first nine months.

So you were not applying that to next year necessarily.

My comment was we hope to be able to do that or better next year.

Thank you.

We'll move next to Jeff Bird with Matador Capital.

Good morning. Couple of follow-ups on power. I'm also a little confused on the power operating profit. I'm looking at the segment review, and it does show 22 million in last year's fourth quarter. Is there something we need to be backing out of that number?

That's the right number for last year.

Okay. As we look to '04, which I know is out there, but nonetheless, can you speak to project awards on a power side that you would need to get to keep the EBIT contribution from power in '04 even flat with '03; and how much of that visibility really rests upon the part of the portfolio that Duke itself might be driving with some of their projects?

The power market, and particularly our business model to power, is a very predictable two year cycle from booking to project completion. So those bookings would have to be occurring right now to give us a significant contribution in '04. So, as we have said before, we're in a market transition that is taking us from the power market into some of the other arenas. And so we're not counting on much in the way of the kind of performance we've had in '02 or will have in '03 as we move into the '04 cycle.

Okay. And then one last question on the follow up to a question earlier about the sustainable operating margin in government services, how much of a bump are you guys getting from any work you are doing in Kuwait with the military? I would imagine that's pretty good margin business?

It's good margin. But it's fairly modest in terms of relative size to our other business. So it's not having a major impact on the overall segment margin.

Very good. Thanks.

There's follow-up question from John McGinty.

Yeah, can we just -- we kind of glossed over the new awards. But it's pretty astonishing to go up to 1 billion 88 in industrial and infrastructure. How big was is the Austin, -- what were the big changes of that?

There were two major markets that we saw awards in, John. And it was pretty evenly split between the two. Life sciences and transportation. Transportation was made up of two major awards for highway projects.

One of those was the SR-1 -- whatever it was.

S H-130 in Austin, Texas; that's correct.

And the other one.

The other one was in southern California.

And how big was -- were either of those disclosed as to size?

I don't believe they were. The Austin project was disclosed in its total size in round numbers of I think over $1 billion.

But that's not yours.

That's not our portion, thereof. We're a 45% participant in that joint venture. The life sciences awards were a fair number of projects that we were awarded during the quarter.

Any as big as 100 million.

There were several of them that were over 100 million, yes.

Were the two highway -- was the southern California one project or just a host of things?

It was one project in which we're, again, a participant in a joint venture.

But I mean, are those two projects $400 million together?

The sum.

The southern California and the Austin job.

The sum total of those was just under $500 million.

Okay. Okay. And what's on the drawing board? In other words, infrastructure projects are also somewhat elephantine. Are there another couple of those that you're after right now or is that kind of a bit of a lump there?

No that's a market that we really like our position in, particularly with our business model of doing project development around privatized roads and highways. So we're looking at that to continue on in -- I think we'll have awards in this quarter. And I think we are looking for additional success in '03.

And then one final question, if I get back to Mike on the 160 guidance for G&A next year, how much of that is what I assume increased pension fund costs, increased medical costs. Is there any increased contribution to the pension fund in there. Is there a lack of pension fund, change in pension fund earnings assumption or anything like that in that number?

Let me give you a little more background on that.

Thanks.

Looking at our pension funds, we are going to put some more conservative assumptions around them. We're dropping our rate of return assumption. In the U.S., we've had a rate of return assumption of about 9 1/2, going forward we're going to drop that to 8%. That will increase our pension expense. We also have some assumption changes we're making in our pension plans in Europe that will be more conservative in terms of rate of return assumptions. In addition, given the market's performance this year, we are, or will be, funding. As we approach year end, we try and keep our pension plans as close to fully funded as possible.

Okay.

And we'll be doing that again this year. Again recognizing the fact that our pension, our defined benefit pension plan are not a huge issue for this corporation. Their assets are in the several hundred million dollar range but the bottom line of all this, John, is the increase that we're seeing in G&A next year we're seeing an estimated increase in pension plan expense of about 10 to $20 million.

Does that include the medical?

Medical is on top of that. We'll see an increase in medical costs, and we'll see increase in insurance premiums. Now to a large extent we're going to offset those cost increases with cost reductions next year, but the net effect is $10 million increase in our G&A net year.

What portion, if it's 160? if you hit your targets? Those are two ifs, but we're specifying, what portion of that 160 is incentive compensation.

It's a very small amount. I mean, it's -- it's single-digit percent.

Okay. So I mean, the most of it really is down then to corporate type expenses.

That's correct.

Okay. All right. Thank you very much.

Operator before we go to the next question let me come back and address the question that Fritz originally asked on power. When I quoted that it was 11, the 11 was the number I was looking at for this quarter, for this fourth quarter; so we will be down from last quarter on power; and it's a timing issue with respect to completion of projects and other activities during that time so I hope that answers your question, Fritz.

It is star one to ask a question or make a comments. We'll move next to David Snyder with Hoover Investment Management.

I'm I've got a couple questions, I was wondering if you have exposure to potential kind of rebuilding of the wastewater infrastructure in the United States.

That's not a market that we have played in in the past and are not focusing on at this point in time.

Okay. Also, the DOE project that kicked up your new orders in the government services segment, could you describe that, and is that the project that kind of sunsets in fiscal '06?

We have two projects that were primary drivers in this quarter. One was the one that you mentioned, that's the Fernol, Ohio closure project which is a project that will, we will take to total remediation in '06. The other project is one an at Hanford, Washington where we're the managing contractor there for the remediation of that site. And that has a longer term to it.

Okay.

These are annual bookings that we make based on those projects as they are funded year-to-year. We book them on an annual basis.

If the power project gets cancelled, as has happened a little bit in the past, the advances that you had received for those projects, if they had gone to fruition, you would have spent that money. But when a project gets cancelled you have to give the money back, right?

That's usually the way it works, yes.

Just wants to make sure.

Well, there are demobilization costs and other commercial agreements within the project but basically that's the way it works.

Right, and we have seen our advances on power projects decline this year by about 130, 140 million and in spite of that we've had very strong cash flow from our operations, so our position remains healthy.

And I might add also that we don't expect any additional cancellations in our base. We are within basically six to eight months of completing the majority of the projects in our backlog, so they are well down the road. The incremental value of cancellation to a client, today, would make it not worth doing or considering.

That's it. Thanks.

At this point we have two minutes remaining in the conference. And we have one person in the queue for the questions.

Make this our last question then. Thank you, operator.

And it's a follow-up from Fritz von Carp.

Yeah, thanks. On -- just a quick question. I'm sorry if you said this and I missed it, on the share count. It seems you bought back some shares in the quarter maybe.

We did. We bought back some shares. We bought back about 450,000 year-to-date.

And in the quarter?

Close to 400,000.

And so what should we expect for the average -- weighted average diluted shares in Q4, and if you want to talk about next year?

I would use the same number that we're looking at in Q3.

The 798?

Right. The full diluted shares are also being impacted by our stock price, and that's due to the calculation of the dilution created by opening that, are in the money are not in the money, and to our current stock price level. There are not quite as many dilulted shares added because of stock options.

Okay. Okay. I guess that's some dilution you wouldn't mind seeing down the road.

That's correct.

You bought back shares during the quarter the weighted average was still --

The weighted average on a waiting basis from where we are in the year is going to be fairly modest.

Use 798 for the fourth quarter and something close to that for next year is a reasonable guess is that what you're saying?

Right, but as you said, we hope it goes up next year as the stock price continues improve.

Okay. Great. Great. Thank you very much.

Operator, let me go ahead and close. I want to thank everybody, for their participation today and their questions. We appreciate your interest in our company and your continued confidence as shareholders. We believe that we're on the right track that we established in 1998 with selectivity and discipline and leveraging our global base along with our technical advantages, so as we continue to make progress against those goals and our strategic actions we'll continue to update you on those. Thank you for being with us.