Fluor Corp (FLR) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Fluor Corporation's fourth 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. 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 11:00 a.m. Pacific time today, accessible on Fluor's Web site at www.fluor.com. A telephone replay will also be available running through 5:00 p.m. Pacific time on Friday, February 7th at the following number. That's 888-203-1112. The access code of 726134 will be required.

At this time for opening remarks I would like to turn the call over to Ms. Lila Churney, Vice President of Investor Relations. Please go ahead, Ms. Churney.

Thank you, and welcome to Fluor's fourth quarter and fiscal year 2002 conference call. Our earnings announcement was released yesterday after the market closed. Before getting started, I would like to read our "Safe Harbor" statement.

In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlook, 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 10K filed March 21st, 2002, which is available online 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. The company undertakes no obligations to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now I'll turn it over to Alan Boekmann, Fluor's Chairman and Chief Executive Officer.

Thank you, Lila. Good morning and thanks to all of you for joining us today. This morning we will review our fourth quarter and full year 2002 results which ended December 31st, along with our current outlook.

Earnings from continuing operations for the fourth quarter were $44.7 million, arrest 56 cents per share, an increase of 32 cents compared with $31.4 million or 39 cents per share in 2001. Revenues from continuing operations in the fourth quarter were $2.5 billion compared to $2.6 billion a year ago.

Turning to our full year results, earnings from continuing operations increased 33% to $170 million, or $2.13 per share, which is compared with $127.8 million or $1.61 per share last year. Full year results for the year-ago period included stock price driven compensation expense of $15.2 million after tax or the equivalent of 19 cents per share. Revenues in 2002 increased 11% to $10 billion, and this is compared to $9 billion in the prior year.

New project awards for the quarter were $1.5 billion as compared to $2.8 million last year. As we had previously announced, fourth quarter new awards were impacted by the unanticipated suspension in November of the Tengizchevroil project, a major oil and gas development program in Kazakhstan that we expected to book.

As recently announced by our client Consortium Partners, their funding issues have been recently resolved, which should allow the project to move forward.

New awards for the full year were 8.6 billion, down from 10.8 billion last year which included a record $3.6 billion last year in power projects. Our new awards for nonpower projects in 2002 increased 5% from 7.2 billion to 7.5 billion. Consolidated backlog at year end was $9.7 billion with gross margin of 583 million, or 6%. This compares to a backlog of 11.5 billion at the end of 2001, and that backlog had a gross margin of 764 million, or 6.6%. Ending backlog for 2002 included an adjustment of approximately 390 million for the cancellation of the remaining portion of the three power projects for Duke Energy and a reduced scope for the Legacy Parkway Transportation project in Utah.

Consolidated operating profit increased 17% to $414 million as compared to $353 million last year. At the same time, our operating margin increased to 4.2%, up from 3.9% a year ago. Fluor's operating performance in 2002 demonstrated that we can deliver overall growth despite ups and downs across our market. We believe that our business management strategy allows us to continue to achieve this result over the long term.

As I step back to review the year in a whole, Fluor's performance in 2002 was marked by a number of important strategic and operational achievements. Despite a challenging environment, we delivered solid earnings growth while maintaining an exceptionally strong financial condition and largely completing the disposition of our discontinued operations.

More importantly, with restructuring issues behind us, we have focused entirely on the future and have begun to implement our business management strategy, capitalizing on our market diversity and achieving our goal of consistent long-terms earning growth.

Let me add that we remain fully committed to the increased selectivity and the financial discipline that have been the key to improving our growth. And as I look ahead to 2003, we continue to be optimistic about our business prospects, despite the uncertain outcome of geo political issues that could impact investment spending in our markets and the coinciding downturn in power.

As a result we are focused where the near-term opportunities are the greatest, including federal services, life sciences, and transportation. We are particularly excited about our recent acquisition of DEL-JEN. DEL-JEN is a leading provider of outsourcing services to the U.S. government and we are confident that working together we'll achieve objectives to broaden participation in this large, relatively stable government services market.

Our niche acquisition program remains a key element of our long-term growth strategy, and as we've indicated before, areas of interest continue to be federal services, transportation, and operations and maintenance. In life sciences where we had also previously indicated interest, we have gauged our success in recruiting high-quality talent in this area and we are now primarily focused on investment with respect to organic growth.

We are also continuing to position the company for longer term growth prospects as well. While the precise timing remains difficult to predict, our clients continue to indicate their long-term commitment to investment in a number of major upstream oil and gas projects for which Fluor is exceptionally well positioned. We continue to expect that Fluor will perform in line with or better than the overall global economy, which is expected to modestly improve this year. Uncertainty regarding the timing for the TCO project is currently in the process of being clarified and we are optimistic that the project will move forward in the very near term.

As a result of these factors, our earnings guidance at this early stage of 2003 remains essentially unchanged. We are expecting to deliver performance in the range of being level to 2002, up to 10% growth, and this translates into $2.13 to $2.35 per share.

With that let me turn it over to Mike Steuert, Fluor's CFO, to review in more detail our financial information.

Thank you, Alan, and good morning to everyone. Let me begin with a review of our operating performance by business segment.

Starting with energy and chemicals, operating profit for the quarter was $40.5 million, bringing the full year to 131 million, an increase of 20% over the 109 million a year ago. Revenues for the quarter were $1 billion. For the year revenues grew 44% to 3.6 billion as a number of projects moved into full EPC execution stage. The operating margin for the year was 3.6%, down from 4.4% last year. This was due to a greater proportion of projects in full EPC execution during 2002.

New awards for energy and chemicals were $354 million for the quarter and $2 billion for the year, down from 2.6 billion last year. As Alan has already discussed, the decline was attributable to the delayed release of the TCO project in Kazakhstan. As a result, backlog also declined to 2.4 billion, from 3.8 billion a year ago.

Energy and chemical awards during the quarter included procurement-related services for the Sakhalin Island, LNG project in Siberia, additional scope for an upgrader expansion project in Canada, and three smaller clean fuel-related projects in the U.S. The recent events in Venezuela are having a significant impact on our progress on the $1 billion heavy oil upgrader project. In accordance with the contract, Fluor is entitled to costs and scheduled relief for the impact of the ongoing national strike and is also continuing to pursue dispute resolution on a number of other issues with the client.

Turning to the industrial infrastructure segment, the segment posted an operating profit of $26.2 million for the quarter, a significant improvement of the Quarterly run rate throughout 2002.

Operating profit for the year was 52.6 million compared with $97.3 million in 2001. Current year results include dispute resolution provisions of approximately 26 million for additional project costs and reduction in expected claim recoveries for Legacy issues which were booked in the second quarter of the year. Also contributing to the decline in operating profit was reduced activity during the year in economically sensitive markets, particularly mining and microelectronics compared to the previous year. Additionally, prior year performance benefited from an incentive award associated with a major transportation project.

As we periodically point out, performance in individual business segments, particularly on a quarterly basis, can be variable due to mix, timing of project completions and the recognition of incentives and may not always be reflective of the underlying business trends. This is certainly one example.

Revenues for the year in the segment grew 6% to 2.2 billion, reflecting increased new awards and backlog for the segment. Industrial infrastructure was the strongest contributor to fourth quarter new awards at $882 million.

Awards included in the quarter were quite diverse, including an aluminum smelter in Australia, a transportation project in Minnesota, and several pharmaceutical jobs. Life sciences was an extremely strong contributor to overall new awards for the segment in 2002.

Also included in the fourth quarter new awards was additional scope on a communications project for the London underground and multiple assignments for an alliance client in the food industry. New awards for 2002 grew a strong 33% to 3.4 billion. This drove an increase in backlog to 4.1 billion, up 40% from a year ago.

Moving to power, as we expect that operating profit of $19.6 million in the quarter moderated from the strong pace in the second and third quarters which was driven by the concentration of project completions during those periods. For the year, power posted record earnings of $106.9 million, an increase of 46% compared to the 73.5 million a year ago. That improvement is due to profit recognition on a successful completion of a record number of projects during the year, a large number of which were completed ahead of schedule.

Revenues and power are also trailing off on a quarterly basis as backlog is being worked off. Revenues for the year were 2.2 billion, down 13%, from $2.5 billion last year. As has been fully expected and communicated, new power project awards fell dramatically in 2002 to $1.1 billion from their peak level of $3.6 billion last year.

Consistent with the project workoff and significant awards, our backlog for power declined to $841 million from 3.2 billion at the end of 2001. Also reflected in backlog was an adjustment for the cancellation of the remaining portion in backlog of three power projects for Duke, although efforts continue to sell these projects to other producers that could ultimately utilize the capacity in the future.

Operating profit for the global services segment in the fourth quarter was 22.9 million, bringing the full year to $93.4 million, up significantly compared with last year. As we indicated throughout the year, the improvement was principally due to restructuring of our procurement services which included substantial development expense in 2001. Also contributing to the improvement was a return to normal operating margins in profit levels in our operations and maintenance services business. In addition, our refocused temporary staffing business posted significantly increased earnings performance, further contributing to the profit improvement in the segment. An improvement to operating profit margin to 9.7% from 4.9% last year more than offset a 6% decline in revenues.

New awards for backlog: New awards and backlog for global services essentially reflect our own end business since other activities in this segment do not generate backlog that is measured in this manner. New awards for the year were one billion, down moderately from the 1.2 billion a year ago, primarily reflecting increased selectivity in our marketing activities in order to improve margins. Backlog declined from 1.6 billion from $1.9 billion last year.

Moving to our last segment, Fluor's government segment reported operating profit in the quarter of $6.8 million and $29.7 million for the full year. This was a $33% increase when compared with 22.4 million last year. Good performance on the company's Fernald project led to a rebasing of the project which favorably impacted operating profit in the second half of the year. The most significant impact being in the third quarter. Also contributing top improved performance was Fluor's work on the mid-course missile defense test facilities in Alaska and increased international logistical support activities. Revenues increased 17% to $952 million. New awards grew 35% to 1.1 billion, and backlog increased to 795 million, up 31%.

Turning to corporate G&A items. Corporate G&A for the quarter was $51.8 million, $5 million above last year's fourth quarter. Similar to 2001, corporate G&A increased in the second half of the year. A number of discrete events contributed to this increase.

In the fourth quarter, the company provided additional funding for the Fluor Foundation to support future charitable programs. In addition, Fluor's stock price increased 15% in the fourth quarter which impacted the variable accounting expense for a portion of the company's long-term incentive program. This is in contrast to the first half of the year and the third quarter when the stock price declined and reduced corporate G&A.

Also in the quarter, Jim Rollans, a member of the senior management team and the board of directors, announced his retirement.

As a result of our strong cash position, net interest income in the year totaled a positive $6.5 million compared to an expense of $900,000 in 2001. The tax rate for continuing operations in the quarter was 32.5%, consistent with our forecast for this year and next. For the full year the tax rate was 34.8%, somewhat higher than our normalized rate of 32.5%. This is due to the nondeductibility of some of the dispute resolution provisions that is we recorded in the second quarter and the impairment charge that was recorded in the third quarter.

Now let me shift to the balance sheet and a few other aspects of our financial position. Cash and securities at the end of the year were $753 million, down 80 million from the end of the third quarter. Approximately 13 million of cash was used to reduce funded debt in the quarter, leaving only $18 million in funded debt on our balance sheet at year end. The remaining use of cash during the quarter was to fund negative free cash flow at $67 million. The primary use of cash in the quarter was to fund the company's pension and retirement plans.

During the quarter, the company contributed approximately $100 million to its various domestic and international pension plans, most of which are now fully funded. For the year, the company generated approximately 219 million of free cash flow, 38 million of which was used to reduce debt and the remaining 181 million increased cash and security balances.

Capital expenditures for the quarter were $15 million, bringing the full year capital spending to 79 million which included 16 million for discontinued operations. Depreciation for the quarter totaled $20 million, and $78 million for the year. The outlook for capital spending for 2003 is approximately level and $80 million with depreciation also expected to be approximately $80 million for the year.

At the end of the first quarter, the company is currently planning on adopting a new accounting interpretation on consolidating variable interest entities. Under this interpretation, Fluor will consolidate for accounting purposes several of its engineering and administrative facilities that are currently leased under very favorable synthetic leases. This consolidation will add approximately $125 million of assets and an equivalent amount of debt to a company's balance sheet.

Turning to discontinued operations, by the end of 2002, the company had completed the sale or liquidation of four of its five discontinued equipment dealerships and is actively pursuing the disposition of the one remaining operation. Additionally, we have completed our exit from the discontinued portions of the TRS staffing business. Results for the discontinued operations of the year were a loss of $6.4 million, or 8 cents per share compared to the loss of $108.4 million, or $1.36 per share in 2001. Including discontinued operations, Fluor's reported net earnings for the year were $163.6 million, or $2.05 per share compared with $19.4 million, or 25% per share a year ago.

Overall, 2002 was a very good year for Fluor. Our strong cash generation is a reflection of the high quality of earnings in 2002 and provides financial resources to support future growth.

With that, Al and I would be happy to answer a few questions after Alan makes a couple of concluding remarks.

Let's go ahead and open it up for Q&A.

Thank you. At this time if you do have a question, please press the star key followed by the digit 1 on your telephone.

We'll go first to John McGinty with CS First Boston.

Good morning.

Morning, John.

Just a couple of questions. In the 1.5 billion in orders, were there -- I mean, you mentioned a couple of them, with you were there any really -- anything meaningful in there, in the $200 million range? I mean, you talked about pieces but I mean, were any of these, like, really meaningful, in the $200 million range?

John, we -- it was quite diverse in this quarter. The largest order was around $300, $350 million.

And which area would that have been in?

That was in the industrial area.

And that -- okay. And that was --

I can't be specific on the project, but it was in the infrastructure and industrial area.

Okay. And just kind of a couple of follow-up questions. With regard to the infrastructure, industrial and infrastructure, you've got a bunch of -- you had a number of large highway or infrastructure type jobs over the course of the year. Could you give us a flavor of the orders that you booked in industrial and infrastructure, the order of magnitude of that that was related to infrastructure specifically in the year?

I don't have that information handy, but it was significant, John. You know, of course we booked the SH-130 toll road project in Texas during the year.

Right.

And this quarter did include another toll road project.

In Minnesota?

In Minnesota. So that area is becoming a significant area for us, although even as you add it up today, it's still a -- it's a growing part of our backlog. We hope to make it bigger, and I think we're headed in that direction.

I guess the concern is the extent to which we have, you know, state issues, state funding highway programs are being cut back everywhere. To what extent are any of your existing orders at risk because the states have to pull the plug, delay them, defer them and whatever because even though it's 90% fed, they don't have the state matching?

Well, the -- obviously that's an issue across the United States in particular, but interesting to note that our projects that we have been focused on in this arena generally, although not totally inclusive but generally involve public/private partnership approaches that don't rely on state funding budgets. And in fact, T-21 has not really been a driver of our transportation business. We've been able to go in and work with state DOTs and come up with privatized approaches to most of our projects.

Final question, and then I'll get back in queue. When we look at the energy and chemicals business being down as significantly as it was down for the year, yeah, okay, the ten gas project would have brought it up but the point is that it was still about half of where it was. Is that a -- I mean, I would have thought given what's going on in the refinery, clean air act and everything else that it would have been much higher than that.

Could you kind of talk to why the weakness in the business, energy and chemicals on a full year basis?

Well, I guess I could sum it up by saying that really we've talked about the fact that we're in a transition during '02, in the latter part of '02 and '03. Between really heavy influence of the power industry and transitioning into some of the large mega prospects that are in oil and gas. Those have been very difficult to predict the timing.

On the other hand, as I look forward, I still am very, very optimistic of what we're seeing. We're tracking probably 12 to 15 major projects, the majority of which we expect to have some level of activity on those projects during this year, mostly front end, and the fact is that these projects range in size all the way from a quarter of a billion dollars up to $6 million. And as you know, John, some of these will go forward and some will not, but those who go forward will book some on a services basis, some on a full EPC basis and in some cases we may not be awarded those projects, but it does represent a significant backlog and earnings potential for Fluor.

I'll get back in queue. Thank you.

Okay. John, one comment I might make, though. Really clean fuels, this was never figured to be a big year of booking for clean fuels. That was primarily done during the last Q4 of last year and Q1 of this year. That timing was pretty much mandated by the fact of having to be completed for the '04 requirements.

I haven't seen the booking side of the diesel.

And the diesel doesn't come until?

Probably early '04.

For '06 completion? Thank you.

One more comment on industrial infrastructure backlog. As Alan mentioned, we had a great year in that segment and that the bookings were rather diverse. Transportation is an important part of it, but it's less than 20% or 25% of total bookings in that segment.

But what was it the year ago? In other words, I know it's less than 20% or 25% but if I look at some of the quarters, like the third quarter where it was a huge part of it, wasn't it a substantial portion of the increase?

John, at the risk of driving my own agenda on the topic here, let me make a comment that I think may put it in perspective.

While we certainly are extremely interested and focused on these mega projects in oil and gas, one of the things that I think we're in danger of not seeing, stepping back and seeing is that if you take out the oil and gas chemical and power [INAUDIBLE] for Fluor in '02 and just focus on the industrial infrastructure, government and global services, we booked almost $6.5 billion in those three areas this year, up from 5.4 last year. So that's almost a 20% growth in those three sectors and those areas where we are continuing to focus on growth and expect to see continued improvement. So that number of 6.5 billion torques my recollection, is larger than almost any -- well, I think it is larger than any other publicly traded company that's doing construction.

I agree with you fully. My question is, wasn't most of that 20% increase the transportation, though?

No, it was not. It was shared across transportation, shared across government.

Life sciences.

Life sciences, a fairly broad spectrum.

Telecom.

Thank you.

You bet.

We'll go next to John Rogers with D.A. Davidson.

Good morning.

Good morning, John.

I'm just curious on the backlog margins that you provide the estimated margins in there came down a little bit further as of the end of the year to 6% and the new award margins at 7% are coming up a little. What's going on there? Is that just, is that the power business coming out that those margins keep coming down?

John, it's a mix that's hard to predict. Typically in the fair amount of the industrial and infrastructure work, we're doing construction management, which tends to be a bit lower margin but a very high return on assets because of the leverage that we get through the assets that we deploy.

So that's the primary driver. But again I think we're looking to stay and keep focusing on both margin and return on assets as we are selective in these markets.

But is it an area of concern at all that, you know, the value, the margin value -- and I realize what's in backlog and what actually flows through the income statement have been very different especially with timing, but we've seen a pretty substantial drop-off in the margin value of the backlog even though the backlog itself.

I think if you look over the last two quarters, the drop-off in margin, it's recognition of some of the profit take-up on these completed projects.

Okay.

And, you know, again our take-up model for profit really does accelerate as we get towards the end of the projects, and for the most part, the only completed projects we had this year were the power side.

Okay.

And as we go through -- and there's really very few projects that look to complete in '03. We're in that cycle where we've just started up on a lot of projects in late '02, and I think, so that really does drive the dynamics of our take-up.

Okay. And the other question I had was just on cash. Mike mentioned the depreciation Cap Ex being equal in 2003 but given what you're looking at in terms of projects right now that you are working into your schedule, what's your expectation for cash requirements or cash deposits coming in from those projects?

We're looking at -- in terms of the working capital requirements.

Right.

For 2003, to be pretty flat.

Okay.

Excluding the power segment, at year end when you see our balance sheet that will come out with the Q -- or with the K on our annual report, will show a significant prop in 2002 of advances from DFD of about 270 million but we still have between 250 and 300 million on our balance sheet. We'll see a decline in those advances again in 2003 but aside from that, we think our working capital requirements will be flat for the year.

Okay. So about -- so then, Mike, does that mean $250 million, assuming everything else is equal, comes out of cash?

No, those advances will decline but not by the full amount. We'll still have some on our balance sheet with work that will proceed in the 2004. In addition, the decline in advances will be funded from other sources, reduction of receivables, reduction in whip. Cash will just come from our pocket. Plus we'll have good cash flow generation in 2003 from our normal operations.

Right. Okay. And the timing much TCO, will that have a big impact on that in 2003, or not?

On our cash position, no, it will not.

Okay. Okay. Great. Thank you.

[AUDIO CUT OUT] -- with Lehman Brothers has our next question.

Good morning, thanks. Just a few quick questions for you, could you -- I was curious of your answer earlier on the transportation issue. So I was just curious following on that as to what was behind the Utah scope reduction?

That project, questions to that project are simply to environmental challenge within the state of Utah. So certain parts of the project are going forward right now, certain parts have been delayed for an unforeseen period of time. We are continuing to work on those where we do have environmental clearances. The state is being challenged and the State is working those issues. We're hopeful that at some point in the future, the rest of the project will come back on stream if our environmental challenges are met but we can't define that right now. So being conservative, we portion that portion out of the backlog.

Okay.

You are saying comment. I might add, we listed the $390 million that was taken out of backlog. I would add the same comment that Mike did with respect to the power projects. Those power plants are out there, not completed. We do believe somebody, if not Duke, will transact those plants and work to completeness.

So there is a good chance that some or all of that for those plants may come back into backlog as well. We've just taken a conservative position with respect to all of this work.

Okay. With respect to TCO, you feel pretty -- you know, it sounds as though you feel pretty confident that it's done, if you will, but what needs to happen, or do you have an idea of the time line of what needs to happen for that to be brought in?

I'm going to have to be careful here and not get ahead of our client, but I'm extremely confident that we're going to be moving forward on this very quickly. In fact, a lot of -- lot of wheels are already in motion there. But the fact is we've had a three-month delay on that project and so we will have to remobilize in some areas and so it's going to be probably a little bit more than a three-month delay in the overall effect on the project and the effect on our revenue and take-up.

Okay.

But we are going to be moving forward and I think you'll be hopefully hearing something very soon on that.

Okay. And just following on that, I mean, from what I saw in the press reports, it seemed as though there was a change in economics among the parties involved. I mean, is that something that worries you, or is that something that should be a question until it gets formally, you know, I guess until it gets formally booked by you as to whether there's a change in the economics for you?

No, that's not a concern at all. I think the fact is the partners have agreed on the path forward and they are committed to going forward. It doesn't have an impact at all on our contractional or financial terms.

Okay, great. And then quickly last, Mike, in terms of the G&A guidance for '03, you noted the stock compensation as a driver for the uptick in 4Q but we're still comfortable with the guidance that was provided for '03 G&A?

Yes, we are.

Okay. Great. Thanks very much.

Moving on to Leon Young with Salomon Smith Barney.

Good morning. Just a couple of questions. Could you perhaps help us out a little bit more with Hamaca and the problems you are experiencing there? Do you feel comfortable that that's encompassed in your renewed guidance basically?

Yes. First of all, good morning, Leon. Yes, I do. Two issues really on Hamaca.

First of all, the project itself, the execution on the project has been going extremely well up to the point of the strike. The national strike did, in fact, have a significant affect on progress in the project. Two issues that I'm referring to, run with -- one are -- the issues of dispute with our client are on scope. In fact, not on exclusion or anything with respectablilty in the project. We're in dispute resolution on that. We're very, very confident of our position and I think are financially in the right position there with respect to our guidance.

The last issue, of course, is the strike, and the contractual arrangement that we have with our client on that allows us to be compensated fully for both the effects of time, scheduling, and cost. So yeah, I am comfortable. It's certainly something that we're looking at and keeping an eye on. Obviously our concern is also with the total cost to our client because these are good, long-term clients that we're working with on this project.

And this may be trying to fine-tune or parse this a little bit too much, but given that the TCO contract really does look like it's moving forward and yet you retained the same sort of wide range that you had before, is that just caution on your part or does it indicate maybe greater concern about geopolitical risks?

No, I think, Leon, it's just us looking at the year and putting some boundaries on you the it. We'll be able to be specific as we go through the first quarter and the second quarter with respect to bookings. It's really a stretch issue on bookings that we've just, you know, you win some, you lose some and you either win or more lose them and I don't mean to be facetious on that but, you know, we factor those and once the decision is made, the factor comes off and we have a better look at what's going to be.

Understood. I was just looking if it was something that's specific.

It's not a concern on geopolitical. In fact, I would say the current geopolitical issue has really not had an effect on us in terms of projects going forward. Other than, I think it's really speeded up strategically some of the former Soviet Union work. The 12 to 15 projects that I referred to on, earlier to John McGinty's question, if I look at the total Fluor scope on those, almost half of that is in the former Soviet Union.

Great.

So that -- you know, that's strategic alternate for oil and gas is really something that we're well positioned for.

Great. Thank you.

We'll hear next from Michael Dudas with Bear Stearns.

Good morning, everyone.

Morning, Mike.

Morning, Mike.

Alan, could you give aus sense of, in your travels in discussing with clients throughout the globe and some of your end markets, you know, once you get through some of the uncertainty that obviously we're all concerned about geopolitically, is that what you think is going to help, or are we seeing just the sluggishness of the global economy that's still just not there to generate people's excitement about the ramping up of capital?

Mike, if I take your question to mean specifically around the very large oil and gas projects, the issue there in my opinion is not geopolitical concerns, it's not current fluctuations or prices of oil. It's really the complexity of the deals. These projects almost entirely are a consortium of multiple clients, their consortium is the local government or indigenous oil companies and these deals are just very, very complex and so our support in that, we get a good view of how they are developing and that's what makes the timing of them difficult to predict.

But I guess the good news is that we -- because of our position in the market, we get the chance to work on those projects and developing them in all of our clients. So we get a good view to them, understanding their predictability and timing.

And one follow-up. When you look at your five major businesses, where do you think in 2003 you have the most promise or excitement, maybe from either new business or growth standpoint or also maybe to offset, you know, the big -- the positive profit we've seen out of power the last couple of years?

I would point to a few, several areas, Mike. I think we're very excited about our opportunity with the federal government. The acquisition of DEL-JEN really positions us well in that particular market where we have not been a player before. I think our focus on the Department of Defense is beginning to pay dividends. So the federal government area is an area where we're going to, I think do well as we go forward.

The transportation -- in fact, I would point almost the entire slate of businesses in industrial and infrastructure all are very well positioned. The one that we are extremely well positioned in that is still sluggish and I think may show some signs of coming out in '03 is the microelectronics area.

So with the -- you know, with all the other areas there that we're doing well that one does come out, we could really do well in industrial and infrastructure. I think what also holds promise for us during the year, a number of acquisitions that we're focused on are in that particular arena.

Did you have anything further, Mr. Dudas?

Yes, thank you.

We'll now take a follow-up question from John McGinty with CS First Boston.

Let me just follow up on a couple of things. On Hamaca, when you talk about scope, does that include the soil issues? Because in the queue that was the big issue that you were fighting.

And then the second question is, are you totally covered, or are you not accruing some of those things that are in dispute? Are you not accruing profits on some of those things where you may end up, if you lose the dispute resolution, is it a charge or are you just not accruing everything right now?

I'll answer the first half of that and let Mike take the last half. On the scope, it's -- there are probably three or four issues in there, John. The soils is the largest one.

Okay.

And we outlined our position in our 10Q on that.

Right.

And I wouldn't want to go any further than that into it. But I do believe that we're well positioned financially with respect to the risk and the arbitration.

Well, then with regard to what Mike's going to answer, are you accruing profit on it, or are you reserving in case you lose, or are you taking some kind of middle ground position?

John, we are accruing profit on our base contract, on the base amount of work that we do. We are not accruing profit on any of these significant change orders that are being disputed. The costs of those change orders is being reflected in some cases on our balance sheet. We're putting them on our balance sheet as a receivable, and we do expect, if we proceed through arbitration, to recover those amounts from our client.

But there is a risk if you lose, that you won't fully?

That's correct, and that's part of our disclosure in the 10Q.

Okay.

We are confident that we will get our costs recovered for those disputed matters.

In fact, I think we also put in the 10Q, John, that on the largest of those issues client has already granted that we have the rights to claim on that. The only issue is the amount.

Okay. Fine. No problem there.

Let me ask a very specific question and let me just make sure that I'm asking the question so we're all looking at the right number because I think there was kind of a misstatement on the call last time. The power business earned $107 million for the year. I mean, we all agree on that.

Yes.

Okay. Can we earn -- in '03 can we earn half that or more, or just -- I think you need to help us some kind of an order of magnitude there because some stuff we can make -- you know, we can make guestimates at, but here you got something that's rolling off and there's just no way that we can make a legitimate estimate without some guidance from you guys.

John, we're not going to forecast our individual segments. We did complete 17 projects in 2002. In 2003 we're expected to complete six. Now, 17 completed in 2002 were Legacy challenge project.

So, you know, you've got an idea of our backlog and you've got an idea of what we're going to complete in 2003. I guess that's about as far as we can go in helping you.

Well, let me ask it one other way. Is there a base -- I mean, you got some orders. There's some stuff in there, I assume 140, 120 and then 30 million in the last three quarters. Is that, I assume, the equivalent of -- I'm sure it's not, O&M work? Was that ongoing maintenance type stuff in the power business or were those changes in scope on these 17 projects or six projects that you have yet to finish?

Well, our power business, you know, has several components to it. It certainly has the component that's the construction of new facilities, but it also has an O&M component as well. We provide O&M support to a number of power companies.

We don't break that out and won't break that out but there is a continuing base of business there in addition to the construction activity.

Okay, Mike. Let me ask it slightly differently. You didn't provide these five year -- these five breakdowns five years ago, okay? And you -- give us five years going back, I don't think, going back '95, '96 when the power project, power business was much smaller because no one was building new IPPs back there. What was the level of earnings back in '95, '96, in the power segment?

John, we're not going to be able to get back and give you that kind of information that far back, but I would say if you can look, you've got the backlog numbers for that area and the booking numbers, and I think you just, you'll have to extrapolate from that.

Okay. No problem there.

On the GNA, just to make sure, the GNA is now, you are now saying flat next year because you had said 160. You reaffirmed, just making sure that is the number that you reaffirmed, right?

That's correct.

Okay. And the tax rate will be the --

32.5% is our current forecast based on current tax laws and if there is a change in 2003, it could, you know, could go up if the fifth is totally eliminated.

Right. If you bring the 120 million back on balance sheet, is that all of your off-balance sheet debt?

No, it's not. We have some operating leases for some other facilities which are not covered by the new financial accounting standards interpretation number 45. That, if you at present value all those other operating leases, that would be about another 150 to 175 million that you would put on the balance sheet for everything total.

150, 175 million plus the 120?

Right. We're saying a total to present value, the equivalent of all of our operating leases around the world for all of our facilities is 275 to 300 million. That's the most conservative view you can take on that, John.

Right. And then are there any asset sales left that are going to -- in other words, when we're doing a funds-full for '03, are the proceeds from any of the asset sales going to be meaningful?

We have one remaining --

Dealership.

-- dealership. The net assets on our books for that is approximately $30 million at year end and that's probably ballpark what we expect to receive during 2003.

Okay. You have made the comment -- you made the comment when you had 800 million in cash that I think that about -- and -- let's say this. Given your current level of cash, what portion of that do you consider to be yours?

Two thirds.

Two thirds of the --

Of the $750.

Right. And then final question. The TCO, whatever assumptions you are making on TCO, those are -- it's a single point assumption and, from what I heard you say, the 213 and the 235 is everything else, but when TCO comes in and what you recognize off of that is a single point number with the variability coming from the rest of the business. It's not a function of when TCO comes in.

Well, John, not quite. Everything we do in our predictions for earnings, we have what we know of in backlog and we have a lot of things in front of us that are not as predictable in terms of prospects. You know, we would have to put some factor on TCO in our going forward as a prospect today rather than a booking. So -- but it's a fairly high ratio. So, you know, there is some accounting for TCO in that guidance already in terms of some factored amount of it being in the earnings. So, you know, everything all put together is probably going to make a very small difference in that as it gets booked.

And then finally in New York, you outlined the elephants, the gas-to-liquid projects, the ethylene, the Sakhalin Islands, the Saudi gas, [INAUDIBLE],Kuwait, you went through the whole list of them. Have any of those disappeared? Any of those elephants died since November?

No, I think all are still in pretty good shape. I think those are among the 12 to 15 that I mentioned, John. I would say of the 12 to 15, two projects that I really have not put in there simply because there's not a lot of activity on them right now would be, you know, a rejuvenation of the Saudi Gas Initiative or the Alaskan Gas Pipeline.

Okay. And are you expecting to book a couple of billion -- forget the TCO. I mean, beyond TCO, are you expected to book a couple, in other words, $2 billion-plus in '03?

My anticipation is in addition to TCO, we will continue to have ongoing activities on these projects.

On the front end stuff, yeah.

On the front end stuff and maybe even in the actual engineering in some cases, but probably not book a mega project during the year, looking to probably closely to the first quarter of '04.

So you can still do 213 to 235 without booking anything other than TCO in terms of a mega project?

We've taken all of the issues of our marketplace into account into that guidance.

Thank you.

Back to John Rogers with D.A. Davidson.

Hi. Just one quick follow-up, Alan. On DEL-JEN, I think you indicated current revenues are about $140 million.

Right.

With your existing business, what's government outsourcing, especially related to DOD work now as a proportion of Fluor?

Well, if you look at our government business, you can actually say that our two major contracts in Hanford and Fernald are a type of outsourcing that we're doing on the closure activities of those plants.

Right attention, but I'm thinking more support to the defense part, more like the missile work.

We really have no -- nothing to mention in that area right now, John. In fact, DEL-JEN really puts us into that market.

Right.

And that was the reason for the acquisition. We think it's an extremely powerful combination of our size, our global reach and DEL-JEN's position in that market.

But I assume that you think this can become a fairly significant business for Fluor?

That's our intention.

Yes, the government outsourcing marketplace is huge.

Right.

In the tens of billions of dollars, and it's very complimentary to our commercial operations and maintenance business.

Okay. And do you need more acquisitions to grow it, or do you have the base here to grow it internally?

I wouldn't rule out any additional acquisitions, John, but I think this does give us the business and in fact, in terms of integrating DEL-JEN into Fluor, I would say for this particular market we're maybe going to be doing reverse. We're going to be putting support into DEL-JEN but use their market position and reputation combined with our strengths to be able to really leverage this marketplace.

Okay. Great. Thank you.

And Mr. Beckman, we do have five minutes remaining in today's conference and we'll now go back to John McGinty.

Just on the acquisitions you had mentioned in New York that you were looking at three to four. You have made one. How rapidly do we make the next, the remaining two or three?

John, one of the things that we've been very constant in the fact that acquisitions are going to play a role in our growth strategy of diversifying our business and we named the areas in which we're focusing, that has not changed other than the comment I made earlier today that we really probably aren't going to pursue acquisitions in the life sciences arena because we've been very successful there in investing in internal organic growth.

We will still concentrate in the government services, the O&M and the infrastructure arena. We probably are looking at another three or four that we have been some active level of discussion. I can't predict whether they would go forward or not. Obviously there's a lot of due diligence and negotiation still to go but I think it's an area we're going to continue to focus on and continue to use to leverage ourselves in position for growth.

But we are going to be very disciplined in our process. So it is very difficult to predict the timing.

Would there be another one in government outsourcing, in other words, or does this in effect get you where you want to be there?

I wouldn't -- again, John, I wouldn't rule it out but I think clearly we're focusing across those three market areas. It would be hard to predict where the next one would come in terms of timing.

Thank you.

Operator, I think that we should go ahead and wrap up, to live up to our commitment of finishing on time here.

Maybe let me make a statement that if you look at our '02 performance as a management team at Fluor, I would say that we are reasonably satisfied with the progress that we made in 2002. And we remain committed to continuing growth and to improving our returns for shareholders as we go into the coming years. I think our strategy is sound and our implementation program is on target.

The transition that I mentioned earlier from dominating power market to the extremely large upstream oil and gas prospects is underway and we've coupled this with the outstanding growth opportunities in a number of other markets where we continue to differentiate ourselves from the competition. You can expect us to leverage our global position, our financial strength, to focus on our client base and to maintain the disciplines that we have established over these last few years. I believe, I strongly believe that the result will be a great reason for investors to share in our future.

I want to thank you for participating in our conference call today. We look forward to talking to you again. Have a good day.

Thank you. That does conclude today's conference. Thank you everyone for joining.