Fluor Corp (FLR) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to Fluor Corporation's third quarter conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. A question and answer session will follow management's presentation. There will be a replay of today's conference call at 11:00 a.m. Pacific time today, accessible at Fluor's website at www.Fluor.com. A telephone replay will also be available running through 5:00 p.m. Pacific time on Wednesday, November 5th at the following telephone number: (888) 203-1112. The access code of 771066 will be required. And now at this time for opening remarks and introductions, I would 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 started, I would like to read our cautionary note regarding forward-looking statements. In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlooks, new awards, margins, the effect of strategic initiatives and other statements regarding the intent, belief or expectations of Fluor and it's management. These forward-looking statements reflect our current analysis of existing trends and information and there is an inherent risk that actual results and experience could differ materially. These differences could arise from any number of factors. Information concerning factors that could cause actual results to differ materially from the information that we will give you is available in our form 10-K filed March 31, 2003 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 this cautionary note as of the date of this call. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason. Now I will turn over to Alan Boeckmann, our Chairman and CEO.

Thank you, Lila, and good morning, everybody. I would like to thank you for joining us today. This morning we will review 3rd quarter results that ended September 30th and then comment on our current business outlook. Fluor earnings from continued operations for this quarter were $44.1 million dollars or 55 cents per share, down slightly from a year ago, but in line with our performance objectives for the quarter.

Revenues from continued operations were $2.1 billion dollars. This compares with $2.5 billion a year ago and $2.2 billion in the 2nd quarter. We continue to benefit from a broad market diversity which has been a significant factor in positioning the company for growth while offsetting the expected decline in earnings from power as this strong cycle nears completion. New project awards in the quarter increased 10% to $2.7 billion dollars compared with $2.5 billion a year ago and up sequentially from $2.3 billion in the 2nd quarter. New awards were well diversified across all five of our business segments and included our annual renewal in our government segment for our two major Department of Energy jobs.

Ending backlog for the quarter was $10.3 billion dollars. This was down sequentially from $10.5 in the 2nd quarter, principally due to decisions not to proceed on three projects, which were taken out of the industrial and infrastructure backlog and we will talk more about that adjustment later. Estimated gross margin in the backlog was $610 million or 5.9%, slightly down sequentially from the 2nd quarter. Consolidated operating profit for the quarter was $97.5 million. Our operating margin was 4.6%, up from 4.3% in the 2nd quarter and down slightly from 4.7% in the 3rd quarter of last year. Let me now turn to a few comments on our current market outlook and discuss our earnings guidance for '03 and our preliminary guidance on 2004.

As most of you know, we have intensified our efforts in recent years to build a strong position across an array of diversified markets. This diversification strategy is aimed at positioning us for long-term growth and may get an inherent reciprocallity in certain of the markets that we serve. This strategy has been very successful in offsetting the significant decline that we expect and have seen in our power earnings this year. Growth in our industrial and infrastructure and government segments has been key to overcoming this earnings challenge.

As a result, our outlook for the current year remains unchanged at a range of $2.15 to $2.25 cents per share. The particular outlook in our life sciences business remains strong and we expect 2003 will mark another record year for us in life sciences bookings. We are seeing evidence of a pick up in general manufacturing as the economy continues to improve. We also continue to be very positive on our prospects for continued growth in our targeted niche in the infrastructure market. Our business model has tended to focus on privatized projects and we see a growing track record of success. We're currently working on road projects in Texas, California, Virginia, Minnesota and overseas in the Netherlands, where we are also doing a high-speed rail project.

Additionally, we are starting to see our efforts to focus on the chemicals market begin to pay off with a significant award this quarter for a major program in China. We are particularly pleased with the progress that we have been making on strategic objective to expand government business. We reported two embassy projects for the Department of State and with respect to Iraq, we have two logistical support contracts for the region and the recent task order related to repair of central Iraq's electrical infrastructure. While we are still awaiting a decision on the U.S. Corps of Engineer for the oil field repairs contract, we believe we are increasingly well-positioned in Iraq for both the short-term and long-term opportunity that is this market will represent.

As we look to 2004, we do expect to expand our revenues, new awards and backlog. More importantly, excluding the power segment, we expect to grow the company by 30% at the middle range of our outlook for 2004. This follows a similar 30% growth in the company, excluding our power business in 2003, which is substantially better performance than any comparable company in our industry.

This positive outlook is supported by expected increases in capital spending across a number of our markets as well as a gradual, but generally improving global economy. Along with our expectations for continuing strong growth in our government and infrastructure businesses, we continue to believe that we are in the early stages of a long-term capital investment cycle for major international oil and gas projects, a market where we are clearly a leader. Our confidence that these projects will go forward was reinforced earlier this year by the award of two major oil and gas programs. We continue to be involved in front-end activities for a number of additional oil and gas projects and there have been no decrease in the number of significant prospects that we are tracking.

We expect 2004 will be a year of transition from a cycle of power projects where reported margins are at their highest at completion to a new cycle in oil and gas where margin recognition is lower in the early stages of the projects. This anticipated cycle of investment in oil and gas is driving a number of large long-term projects which are moving forward in a slow, but deliberate manner. As we said before, the degree to which these projects begin contributing to future performance is dependent on the timing of the awards and jthe pace of execution. While precise timing is difficult to predict, we believe will see many of these projects move forward in 2004 and 2005.

The fundamental economic, political and strategic drivers for these major oil programs and gas programs remain unchanged. A significant number of these projects are for new development programs in diverse and geographically challenging locations, again a feature which plays to our strengths. We are also seeing a number of major projects that are focusing on the utilization of significant gas resources. These include large petro-chemical facilities, gas to liquids plants and L&G projects.

In addition to large oil and gas project opportunities, we are also starting to see the preliminary stages of work for diesel fuel programs. How quickly these projects ramp up is another variable in our 2004 outlook. Other factors that could materially influence performance include significant potential reconstruction activity in Iraq, as well as a variety of other government market opportunities being pursued. We also continue to focus on finding accretive niche acquisitions, particularly in the government arena to augment our long-term growth objectives. Given these potential variables, our initial earnings guidance for 2004 is wider than normal and is in the range of $2.00 to $2.40 a share.

We remain confident of our global diversification strategy. All of the long-term indicators of future performance -- growing revenues, backlog, successful completion of projects and strong client relationships support our view for long-term profitable growth. Our strategy is on course and we are focused on expansion within our targeted markets. Our financial strength, coupled with the quality of our services and our people along with the reliability of performance are well aligned with our client's needs. We continue to build a strong reputation and foundation for long-term growth and the creation of shareholder value. With that, let me turn it over to Mike Steuert, CFO to review operating performance in the quarter and other financial information.

Thank you, Alan and good morning. Rather than repeat our segment results which are covered in detail in our press release, I will focus on providing additional background and quarterly new awards and backlog in each of our business segments. Starting with oil and gas, new awards for the quarter were $398 million dollars. This is down from the very strong levels in the 1st and 2nd quarters, which included two major projects in Kazakstan and [INAUDIBLE]. Included in the quarterly new awards were significant procurement activities related to an L&G project, two clean fuel projects, one was for additional scope on an existing project and the other one of the final remaining projects still focused on gasoline.

We also booked additional consulting services scope-related to our contract to support the Kuwait oil company's capital expenditure program. Backlog for the oil and gas segment is now $3.3 billion, down slightly from the 2nd quarter, but up substantially from $2.8 billion dollars a year ago. For industrial infrastructure, new awards were $696 million dollars in line with our average quarterly rate so far this year. The largest award was for a major chemical plant in China where Fluor will serve as a managing partner of the project execution consortium.

Also included in the quarterly awards were three pharmaceutical projects in Puerto Rico, two manufacturing facilities, a film plant expansion and a consumer products project. We also booked additional scope on our infrastructure group related to our telecommunications project for the Lund Underground and for the high speed rail project in the Netherlands. As we discussed in our press release, we did remove three projects from our industrial backlog during the quarter that had been booked over the prior two years. One of the projects was a mining job that put on hold due to ongoing financing issues. The other two jobs were in the broad habitation or hospitality sector in the United States. As some of you may know, this has been an area that has generated significant discussion around potential toxic mold liabilities. As a result, increased insurance costs and the long-term liabilities associated with these projects led us to make a decision to back away from the United States portion of this market at this point in time.

Including these adjustments, the industrial infrastructure backlog declined to $3.5 billion dollars. Moving to power, new awards for the quarter were $210 million dollars, primarily related to the recently-announced 620 mega watt plant in Jacksborough, Texas for the Brathas Electric Power Cooperative. This is our first major power award since our announced intent to wind down the Duke [INAUDIBLE] venture and will be a 100% Fluor project. This award offset much of the backlog work off during the quarter, leaving the power backlog down slightly to $565 million dollars.

Global services new awards for the 3rd quarter were $267 million dollars, again in line with the quarterly run rate for this year. New awards for this segment reflect our operation and maintenance work and included new several site management and small capital project awards as well as work performed during the quarter by our recently acquired P2S unit. Backlog remained essentially unchanged for global services at $1.6 billion dollars. New awards for the government segment were $1.2 billion dollars in the quarter, including the annual renewal for the two large DOE environmental remediation projects at Fernault and Hanford. This compares with $846 million dollars in the 3rd quarter of last year, which also included the annual booking for the two projects.

Included in the quarter were multiple O&M projects for government facilities for the Belgian unit and additional task order related to one of our logistical support contracts for the military and scope-related to the Ford island project in Hawaii for the U.S. Navy. The award for the two embassy projects we announced were not included in the current quarter, but are expected to be booked in the next quarter. Government backlog increased significantly from the 2nd quarter as would be expected to $1.3 billion dollars..

Encouragingly, this represents a 36% increase in our government backlog when compared with a year ago and clearly demonstrates the progress we are making in expanding this part of our business. Corporate G&A expense for the quarter was $33.5 million dollars, in line with our quarterly run rate so far this year. This compares with $43.2 million dollars a year ago, which included an impairment of $9.4 million related to a 1994 investment in the Beacon Group Energy Investment Fund. Our current outlook for full year G&A is approximately $140 to $150 million dollars. We had modest net interest income during the quarter of $1.1 million and the tax rate for the quarter was 32.2%, consistent with our forecasted rate for the year. Let me now make a few comments on the balance sheet and cash flow. We ended with cash and securities of $579 million dollars, essentially unchanged from the 2nd quarter.

Our debt to total capital at the end of the quarter was a strong 12.5%. Maintaining Fluor's strong financial condition remains a top priority for the company and we believe continues to represent a valuable competitive advantage. Cash provided from operating activities for the quarter was $15 million dollars. Year-to-date capital expenditures for continuing operations was $48 million dollars and for the quarter it was $19 million dollars. Year-to-date depreciation for continuing operations was $60 million and for the quarter was again $19 million. We expect both capital spending and depreciation to total approximately $80 million dollars for the year. With those brief comments, Alan and I will be happy to respond to questions.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, simply press the star followed by the digit 1 on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, press star 1 at this time. We will first hear from Michael Dudas of Bear Stearns.

Good morning, gentlemen, Lila. Alan, what's the stretch with the backlog at September 30 relative to what the expectations for revenues are in 2004 and is that going to require -- is it a pace of work issue that will be the difference in the range or is it the timing of the award issue?

Mike, we don't quote our stress numbers, but suffice it to say that every year we enter the year with bookings yet to achieve.

Of course.

To be able to hit next year's targets.

Right.

Certainly there is some projects that we are anticipating booking that would add to next year's earnings and there is a pace issue again. When we get an award, sometimes it is difficult to forecast this far ahead. At what pace they are going to take off and burn through revenue. I would say it's a combination of those factors plus other general market issues.

And to follow-up, what are the plans internally relative to employee utilization and I'm not going to quote numbers, but has there cost cutting or layoffs or something to match the revenue rate relative to what the body count is? It looks like the run rates have been lower even of course if we add in these acquisitions. What's been that side of the equation for Fluor?

In our market, we're a cyclical business, particularly with respect to resources. The one thing that we have been able to do, though is we are able to move quickly with resources between our markets. Our people are highly skilled and really do operate well across boundaries, across market niches. We have been able to shift particularly out of the power market as it comes down and move those people into other market areas. We have however in the U.S. seen a small downturn in head count through a good portion of this year.

Thanks, Alan.

The next question comes from Sanjay Shrestha of First Albany.

Great. Thank you. First of all, guys, I certainly understand that there are a lot of moving parts in your business and the range is probably the reason behind that. I was hoping to understand, internally what are you guys sort of modeling in terms of the $2 a share versus $2.40 a share. What sort of a thing are you looking for for you to be at $2 versus the $2.40. Can you give us a little bit more color on that?

Yes, Sanjay. We certainly can. There a number of things. I mentioned in my comments, clearly there is the amount of new awards that will come about in each of these markets. There is the pace of take up on these and there is a number of markets in which there is just uncertainty in terms of the amount and for example if you look at Iraq as one particular case. What we have done is we have gone through in every case and put a range around each of those variables.

Okay.

We call them variables because that's what they are. When we put that range in and look at what our expectations are, we would rather be conservative and be able to put a range out that we believe is a viable range and one that we can achieve, but at the same time I will tell you we are pleased with our progress, particularly in our position in each of these markets. I think if you look at our company and how we are progressing without the power piece in it, I think we are doing extremely well.

I completely agree with that. Kind of like a follow-up on that. If we were sort of just to take a look at the oil and gas industry, obviously the timing remains the issue. We don't when exactly they come in. If we were to sort of highlight the offshore services perspective, you know, a little more on the oil sense perspective, Saudi gas field as well as the L&G and gas to liquid in [INAUDIBLE] Exxon Mobile, downstream clean diesel -- what's your expectation right now, like how really are you seeing some of this work sort of like unfold or what are you hearing from your clients? Can you talk more about that?

Well, Sanjay, you just covered the waterfront there. I think you hit just about every one of the component parts. But that's exactly right. We are seeing significant forward pressure on our clients, particularly around the gas programs.

Okay.

I would say L&G and the import of L&G into major civilization and industrial centers.

Okay.

We are seeing the continued development and opportunity in the former Soviet Union.

Okay.

We are seeing significant movement on the front end of clean diesel.

Okay.

We are getting awards literally on a quarterly basis now for the last two to three quarters doing the front end.

Okay.

You know, the timing of those kicking off is again a variable because they involve a tremendous amount of up-front study work before we actually jump into the EPC phase of those.

Fair enough.

I think we're continuing to see large capital programs being planned by our clients and they take a fairly broad range of everything from L&G and other gas utilization to new oil field development.

Fair enough. One last question in terms of the guidance, you know, the range for 2004. Are you expecting at all any sort of a rebound in the chemicals market besides one of the projects you talked about in China.

I think we are. While I don't think that that market is going to be in the really high part of this upward scope -- our upward trajectory, I do think we are continuing to see a recovery in that market, particularly in southeast Asia and the Middle East.

Okay, but for you to sort of be at the top of the range let's say, you don't need to see a major rebound in the chemicals market.

No, that's -- we see some increased activity for us there. I don't believe that will be a material part of our '04 numbers.

That's what I was getting at. Great. Thanks a lot, guys.

Our next question comes from Alex Rygiel of Freidman, Billings, Ramsey.

Thank you. Since you consider 2004 as a transition year, are you considering any type of management or business unit reorganizations?

Well, we look at our markets and we continually position ourselves to be in the front part of those markets with the resources. We have had what I would term a management shift in very recent weeks. This didn't require an external announcement, but it did take and move some accountability for our sales organization a little closer to the market front. In addition, we announced a senior executive to head up our Iraq effort to coordinate all of the efforts that are going on there and the opportunities. So yes, we have done some changes, but I would call them more tuning to the market and being prepared for what we see coming towards us.

With your guidance around corporate admin, general expenses in the 4th quarter, you are providing a fairly large range. Does that range potentially include what you might consider one time expenses associated with some of these recent shifts in management positions in the last couple of weeks?

Go ahead, Mike.

Those expenses will be modest. That's clearly included in our expectations for the 4th quarter. The range reflects some other discretionary decisions that we will make as we move through the 4th quarter.

With regards to Iraq, you can walk through several different opportunities you are seeing there in attempt to quantify them and draw a timeline on them for us?

Alan, I will be glad to give you if I can, maybe a little backdrop of what we are doing in Iraq and what we're seeing. I will qualify heavily with the fact that there a lot of, again, moving parts there and uncertainty, but also opportunity as well. We have to kind of look at it in that regard. We have a competitive position there that we have established with our partner, AMAC.

We have seperate from that, been engaged in logistical support activities through AFCAP and our AFCAP award and also CTAC, our contract with the army central command. With respect to that latter one, we did announce an award for the repair of Iraq's central electrical infrastructure in the area and zone around Baghdad. That was not only $100 billion dollars which is not in backlog yet, and will go in in the 4th quarter. We expect the decision, although it has been delayed on the oil field repairs rebid of the Halliburton work.

We believe that is imminent. It is in a bit of a delay right now, but we think that will be announced here shortly. These are all fast burn with, you know, acceptable margins that will mostly contribute to '04 performance. But again, [INAUDIBLE] potential there -- there is a factor of many different things that can influence that. We are prepared and we have the resources that can move in quickly. I have a direct report to me that is managing that entire effort.

And can you give us a quick update on the Florida high-speed rail project?

We have an opportunity to work with Florida Overland Express to do some front-end conceptual work for them. We are proceeding along with Bombardia to do that. It is very preliminary, very front-end in its nature.

Thank you very much.

Next we will hear from Allen McLenny of Copper Beach Captial .

Thank you. You can give us some color on the G&A line? Last quarter, you thought it would be about $150. Your guidance, I guess, this year is $140 to $150, which implies a pretty steep ramp-up in the 4th quarter. Can you remind us what's in that line and where your guidance is for next year's numbers for the $2 to $2.40 range.

Sure. We'll be glad to do that. In that number is all of our traditional corporate G&A expense for IT, for all our corporate functions, HR, finance. Also included in that is some of our long-term compensation accruals for the year, the cost of community services and Fluor Foundation activities and what have you. We typically have a higher level of expense in the second half of the year and then particularly in the 4th quarter. In the 4th quarter we also make some discretionary decisions on how we fund our pensions, how we fund the Fluor Foundation, how we manage some other expenses that we make. That tends to drive up 4th quarter G&A. We have been focused on maintaining a cost-efficient structure this year. I think that is reflected in the $140 to $150 million dollar G&A range as we move through the year. We have been successful in maintaining cost efficiency and we look to maintain that cost efficiency for next year as well. Our guidance for next year on G&A is pretty similar to this year. It's probably $150 million dollars, probably plus or minus $5 million would be the kind of conservative guidance that we're giving for 2004 in terms of G&A.

Do you expect also to keep the tax rate at 32% going forward? There was an article in the newspaper, at least in the New York Times the other day, talking about tax benefits for engineering construction companies and others. There is a -- Congress is taking up an issue. Can you give us some color on that and where you stand?

We really haven't factored it into our model yet. Looking to next year, with the FISC tax benefits disappearing, we are expecting a modest increase in tax rate, probably about 2 percentage points is what we are modeling internally.

And Alan, to follow-up on Alex's question, it seems, I mean, you have been at Fluor for a long time and seen many restructurings. To move back to, I guess you were this way years ago, back to an organization focused on end markets as opposed to geographies, can you just give us the thought process and whether you have to put sales teams for all of the different end markets in place?

Let me be more explicit there. We did not change our sales structure. We have had sales -- line sales in the P&L organizations now for quite a number of years. That was not a change. What we did was took a number of functions that are at corporate that in fact recorded the overall sales efforts of each of the business unit and moved them closer into the business units. We also did a reassignment of several individuals at the head positions of a couple of our major markets who are known to be very strong offensive players. It wasn't really a change in the structure at all. In fact, I'm a very strong believer of having sales accountable in the P&L organizations on a market basis, so that was not a change.

Okay. And lastly, can you tell me -- the balance sheet seems pretty solid still. You talked last quarter about finishing up power projects and the cash coming down from that as a result. The cash declined only about $5 million sequentially. What's your forecast for cash at the end of the year from the 579m you had now.

We expect cash to end the year closer to $500 million.

Still? Okay, so you expect to be cash flow negative in the fourt quarter?

The last two years, we funded our pension in the 4th quarter. Fully funded our U.S. pension plan. We've made some other funding decisions for the Fluor Foundation and things like that in the fourth quarter, which have an impact on cash and those decisions are going to be coming up again this year.

Is there also a big capital spending project that you're looking for in the 4th quarter if you're giving guidance for $80 million and you've only done $48 million year-to-date?

Nothing really large. We've got a couple of projects going on, one in Chile that will require some capital in the 4th quarter. It will probably be the $70 to $80 million range for the year.

And I'm sure others will ask it, but is there any update on the HAMACA project?

We are still in arbitration, particularly on the two first issues, which are the soils remediation and the labor agreement dispute in which we are expecting an arbitration decision within the next 4-6 weeks. We feel very good about the position there and we continue to divulge all of the details of that in our 10-Q.

Is that why the range is wide for the 4th quarter? If you win it it comes to the high end, if you lose it's the low end?

I really don't believe that's going to have a material effect on that range for the year. This project is not due to complete until some time next year and I think the arbitration will really be more of an effect in '04 in terms of earning.

Thank you.

Next we'll hear from Paul McCray of Wellington Management.

Good morning. Could you go back and repeat the comment, Alan, you made earlier and talk about the fact that I believe you said something to the effect that X-power, you would grow the business 30% in 2004. I am looking at my model and I'm just not quite clear exactly what you were saying.

If you take a look, Paul, and you just take the mid-range of our current guidance for '03 and if you take the mid-range of guidance for '04 and if you take the power earnings out of '02, out of '03 and out of '04, you will find that we will have grown the company, the balance of the company 30% in earnings between '02 and '03. An additional 30% between '03 and '04.

Okay. It was the versus '02 that I missed.

Yea, '02 to '03, 30%, '03 to '04 based on the mid-point of our ranges.

Secondly, I spent time with Project Rio recently in Iraq and the one thing that I heard other than the fact that it looks like the award will be delayed a little bit and it seems politically correct that some of that business would go to someone other than KBR, but the one comment that was coming out of Iraq was this business is going to be much, much larger than originally planned. It could well be twice as large as was thought of even a couple months ago. Is this kind of what you are hearing as well?

Paul, it is really hard to say. We get signals that they could be larger, but we also get signals that it could transition quickly from a Corps of Engineers program to one adminstered and awarded by the Iraqi oil ministry itself. So, again, a lot of variables there. I think there is significant opportunity, but it's not something we are counting on at this point in time.

Thank you.

Steven Penault of Ferian Capital.

Good morning. A quick question. I'm looking at your guidance and basically year over year. I guess I've got you modeled to make about $1.20 in the first two quarters and I'm modeling the $2.10 right now so it brings me to 45 cents for each of the last two quarters on a run rate basis.

That's pretty much $1.80 a run rate a year and if you grow by 15%, it brings to you $2.07. I'm looking for more of an '05 number. Can you help help me understand -- basically I guess I'm just looking for some more color on your quarterly guidance. Is it going to be a front end load kind of year, is it going to be a back end loaded. You can give us a little color on how it's going to go quarter to quarter?

I will let Mike respond to that.

As we look at 2004, we are looking at it to be a little more back end loaded as opposed to front end loaded. That's a reflection of the continuing decline in the power business as the power business winds down throughout the first half of 2004. And as our other businesses continue to pick up, oil and gas, government, industrial infrastructure and global services, they will ramp up throughout 2004.

So you're looking more towards like a 50 cent quarter for the first couple of quarters? Is that right?

It could be in that range. If you look at two to three years for the company, we have been back end loaded for the two or three years. The first quarter is traditionally our weakest quarter with a stronger 2nd and 3rd quarter and then a fairly solid 4th quarter as well.

Okay. Thank you. I'm looking at your award. Can you guys give us a breakout of your increase in awards and revenue by organic growth and then your acquisition growth?

It's overwhelmingly organic.

The acquisitions contributed just a nominal amount. Very modest.

Does your guidance for '04 assume acquisitions?

It does, but they're very modest. Again, our acquisition strategy, it think it bears repeating with that question and I appreciate the question. Our acquisition strategy is to make niche acquisitions that in and of themselves may not be very large, but basically add to our capability in strategic markets where we have the goal of market growth. I think [INAUDIBLE] P2S were examples of that. And while their particular earnings may not be significant, what they add to us in their ability to leverage that and then grow it from there is what we were looking for.

Right. The last question gets a little bit more into the logistical side of operating in Iraq. I have heard and haven't been able to confirm this, that KBR has lost about 10 or 11 employees there. I have been unable to confirm this, so maybe you guys have a better understanding of what's going on? I wanted to ask how do you deal with the logistical impact? I assume you carry significant insurance policies so that in the event of an employee loss, that there is no recourse to Fluor. How does that work?

I think you correctly captured the fact that there is a significant security issue in Iraq. We are just not going to put employees in positions that cause them any significant potential threat. We have an extreme security program that we are implementing around each of our employees. We are using a significant number of subcontractors in areas and we are just as mindful of their security. Everything is being done in a measured way even though the priorities are significant. We are hopeful we can go through this and absolutely through our diligence avoid any problems or injuries.

So is it safe to say you have a higher benchmark for securities than KBR?

Well, I wouldn't say that, because I am not an expert on KBR's procedures and I can't confirm the number that you quoted. I will tell you that every one of our employees has absolute instructions to not go and get outside of security envelope no matter what the urgency of the mission is.

Great. Thank you very much.

Richard Rossi of Morgan Joseph.

Good morning, everybody. You've covered most of the ground already, but I'm sure you are tired of hearing about it, but I want to go back to this range again. I'm wondering, is the $2 side a reflection of your not getting any of these large jobs early enough in the next, let's say six months to have an influence on the '04 number and the $2.40 side a reflection of getting all of potential jobs or some of them or just some of them and getting them early enough, obviously, to have the '04 impact?

Mike, why don't you give your comments and then I'll add to that.

There so many moving parts that just to focus on those large jobs, I mean, the range is also generated by the range of possible activity in Iraq. It's impacted to much more modest extent by our acquisition program and there a lot of variables impacting our performance in 2004, and it's not just these jobs.. There are a lot of things that could move us from the bottom of the range to the top and vice-versa.

Again, we appreciate the fact that it's a large range but it just highlights again the number of variables that are in next year. We have attempted to be diligent and give you a conservative range that does communicate those issues. We are going to continue to push forward to do our best to hit the high side of that range. But I think we have to stay with that range at this point in time.

I'm not arguing with the range by any means. It's think it's very legitimate to have a broad range. I'm just trying to get a little more color on it.

You have a good question.

Just a quick follow-up on that. Is it fair to say, though, that for the most part, bookings of large projects that occur within the next six months are probably going to have an influence on '04 and bookings of large projects after that point rapidly diminish their impact on '04?

Certainly a project booked later in the year has much less impact in the year. Also, the mix of projects is important because of -- particularly some of these the very, very large projects and programs can have a very slow start. Just because of the nature of them and the need to ramp up and to get the logistics in place. So, a fast track life sciences award can probably start generating margins faster than even a mega project that takes a while to ramp up.

Some of our Iraq work can be very fast book and burn.

Correct.

Right. I understand that. That would be much more immediate. Thank you.

You bet.

Next we will hear from Tom Ford of Lehman brothers.

Good morning, guys. Mike and Alan, just picking up on Mike's last comment. With the central power award, I kind of got conflicting ideas about how quickly that could be burned. Is that something where you have to comply and get it done by like April, May or is it only certain things associated with that that have to be done by April, May?

It is an award that has a significant priority to it. There will be substantial work going on in the next to four to five months. So really, the major part of that award will be played out by the end of the 1st quarter.

Okay. So in other words, it does sound like it's more so April, May is the target to shoot for.

That would be done before April or May.

Great. In terms of the low end of the range that you laid out, does that incorporate any assumed elephants in terms of '04?

I think again we said we would probably book one or two elephants in '03 and we have done two if you qualify them as that. I really think we are going to start seeing those in '04 and I don't see any that would be a Q1 event. We may, but again these things are difficult to predict, Tom. They can slide over one particular date to go into the next quarter. It's going to be hard to say, but I think certainly we will start to see them in Q2.

Great. One question I was curious about, Alan. I don't know if you had a chance to talk to anyone in terms of your customers, but I know publicly people have noted that it's a nonfactor. Just curious about what people might have said to you privately if you've had the chance, about what is going on in Russia.

I think it is a nonfactor. In fact, we in fact have no work with that particular client. Our major client in Russia is Luke Oil and we have seen no impact from it at all. I just don't think you want to run for politics in Russia.

I guess I would agree with that. One thing I was curious about. You talked about on the last call. The contested job in the state of Washington.

It's still in that process.

Okay. And then Mike, can you give more color on the awards this is quarter, the consistent annual awards with respect to the two large projects? Is that about $800?

In the $800 to $900 range, that's correct.

Are both projects cost plus?

Yes.

Okay. And with respect to Furnauld, it's cost plus, but do you have like incentive elements that is influence that in terms of how much profit is recognized?

We do, Tom, but those profit elements, those incentive elements are rear end loaded based on performance.

Okay. So in other words, it wouldn't be something that would be recognized any time soon?

We do try estimate what we can very conservatively feel that we're comfortable in booking. Some of the incentive we booked overtime, but some of it, as Alan said, is deferred to the end of the project.

It's a very marginal amount, Tom, based on the conservative approach to that take up.

Okay. Then one last question. With respect to Anaconda, is that -- I'm just trying to get a sense as to the phase two with respect to that in terms of timing. Is there anything here that's a potential issue? I think insurance potentially plays a role for you.

That is correct. Phase two we just don't see as a financial issue for Fluor at all. That arbitration is ongoing and we will get a decision on that in '04. We are fully insured for that and it's just not a financial issue for our company.

Am I wrong, because the numbers are quite a bit larger for phase two.

Actually, no. They were quite a bit smaller. The original claim by the client for phase 1 was over $1 billion dollars and settled at just a very nominal amount.

Okay and then I guess for two, if I'm not mistaken it's something like $300, right?

That's correct.

Thanks very much.

You bet.

Our next question comes from John Rogers with D.A. Davidson.

Good morning. Most of my questions have been answered, but one thing. I was wondering if you could comment on -- you look at the margins that you are estimating within your backlog. There is not significant declines, but they are continuing to trend lower. I realize the power business is significant, but that stabilized at least from a backlog point of view the last couple of quarters. Is it just a mix issue or are you seeing any change in the competitive environment or what you are estimating in terms of profitability on projects?

I would attribute it entirely it a mixed issue. What we are seeing is when we book some of the very large projects, they tend because of the revenue size, they tend to come with a somewhat smaller margin number. In addition, particularly in our industrial segment, we do a tremendous amount of construction management in that unit and life sciences and the like. When we do construction management, those actually come in at the margin number fairly lower than our average. The benefit is, though, that those are on the extremely high return on capital and return on assets and also return on human capital by virtue of how we leverage our resources against the total revenue. So, it's good work, it's good profitable work and with high returns, but the margins -- high returns on assets, but the margins look lower.

Based on your portfolio of potential projects over the next three or four quarters, would you expect any of these trends to change here?

No, I think my expectation -- John, again it will always be a mixed issue quarter to quarter, so they vary quarter to quarter. I would say we are probably going to stay right around the number we are at. Maybe from time to time be able to do a higher quarter.

Great. Thank you.

Next we will hear from Steven Goldsill with Imperial Capital.

I wanted to follow-up on the previous question with a little bit more granularity. You have done a wonderful job describing the opportunities that are available to the company and where growth may come from. I want to understand the flip side of that, the supply side of that and what you are seeing in context of a competitive landscape whether you are seeing any change in your win rate, what you're seeing on the pricing side. Whether you are an seeing entry or exit of new competitors entering your market, old competitors fading away from your market and increasing internationalization of your business and if you're seeing new competitors from other parts of the world competing for projects.

I would say over the last year or two, it's been a little bit more stable in terms of not a lot of new entrants. On the other hand, we have seen a continued loss of competition for some of the much larger projects and programs. And I think, clearly the market moved in our direction because of that competitive dynamic and the really large, particularly upstream and downstream oil and gas programs. In addition, we have had tremendous success in capturing market share in markets like power, of course unfortunately it's down now.

But in life sciences, I think without a doubt, if you look at the records over the last two years, we have really forged the front in terms of market share in that arena. I think it's largely because of our increased capabilities and the what I would consider weaknesses of competition. I think I'm sounding positive there, but I think it is. I think our balance sheet and our global position and a lot of the disciplines we put in place around execution and risk are really starting to pay dividends on that competitive landscape.

Is it fair to say, then, when you forecast forward in terms of what you might win against the opportunities that you describe, that you are forecasting a higher win rate given your enhanced position, especially for the larger projects?

We have been able over the last three years to ramp up our win rate to about a two out of three win rate on proposals at this point in time. We expect to be able to maintain that and our goal is to do better.

And then from a pricing standpoint, that assumes continued strong pricing and not a sort of aggressive move by your competitors to try and win back market share from you?

We always face that issue. We always face the possibility of overly aggressive pricing. I think that gets back to the risk equation that is one the whole industry has to deal with. We are very mindful of that and we put our best foot forward in terms of communicating to our clients the value of the benefit we bring and balance that against the competitive landscape that's out there.

My last question around the same topic and the context of the internationalization of your business, are you seeing emerging large competitors from any of the Asian countries? Are you seeing any backlash from any potential anti-American sentiment in other parts of the world? How does that all figure into your competitive landscape?

Let me answer the last question first, and the fact is, no we have not seen any backlash at all. In fact, I think again, based on just our overall capability and being able to be considered for some of these large projects, we have not seen any issue with that whatsoever. I do think that we had the reemergence, I guess is a better way to put it, of Asian contractors over the last several years. That's not been a significant problem for us. We have joint ventured with a number of Asian contractors, and very successfully, to be able to win work and to execute it for our clients. I don't think that will change in the intermediate term and it's a market dynamic that we are prepared to cope with and in fact, is some cases, benefit from.

Great, thank you very much. It's very helpful.

At this point we have one new person who is asking a question and four follow-up questions left in the queue. We will now hear from Mellina Flora of Smith Barney

Good morning. Most of my questions have been answered as well. I want to get a sense of what you think gross margins are going to look like. Your gross margin of 4.6% this quarter was better than I had expected, so are you looking for 4th quarter to trend a little bit down and similar into '04? I just want to get a sense of what you are expecting. It seems like the new oil and gas projects are going to have a little bit of a lower margin in the initial stages.

Well, as we've said before, and you know quite well, quarter to quarter, that can change. There's a lot of things that can occur. The completion of a large project in which incentives are earned can affect a quarter. I would say I think we are right in the leather with that number. I think again quarter to quarter can vary. I know Mike if you want to add any comment to that.

It definitely will vary quarter to quarter. We are at a stage in the power cycle, too, where we are experiencing some fairly attractive gross margins as you wind down these power projects and recognize some higher proportion levels of income on that. It's clearly going to vary quarter to quarter.

Then into next year, should we look for a little bit of a decline for the full year?

I think so. As we look for revenue growth next year along with the other dynamics of the business, there could be a very modest decline.

Thanks.

Operator, I think we have time for more question.

We have a follow-up question from Alan Metrynie of Copper Beach Capital.

Thank you. A follow-up on the last one. There could be a modest decline in gross margins next year and I'm assuming share count roughly stays the same. It sounds like tax rate goes up a little bit from the 32+% you have been running this quarter and expect to run next quarter. I'm having problems getting to anywhere near the middle of your range. How much in acquisitions or sort of Iraq work are you assuming in your numbers?

We don't divulge the component parts of the plan. I would say that acquisition numbers are not significant. Again, our srategy there is more niche acquisitions and Iraq, we've assumed a fairly good range based on the significant variables that are on that particular subject.

How do we get to the point -- I seem to remember a year ago when you guys came in and people asked, you know, obviously there is always hype in the stocks, in E&C stocks when Iraq came around there was hype last time and there was hype this time. You sort of said you are not going to put yearly numbers and you're not going to bet on Iraq. It won't be a big thing. If it comes to you, that's fine, it's going to be additive. It seems like now we are somewhat dependent on Iraq to show earnings growth this coming year.

I think we have been consistent. At the time that we said that, we had not gotten any awards. We were not involved in any material way. Not knowing how that would play out, we were not counting on it. At this point in time we have awards and I think we have to be realistic and we attempted to do that in our range with respect to -- it think it is realistic to expect we will be working in Iraq in 1st quarter and on into the year. We attempted to put a range onto that. I think we tried to do as best we can in ranging that. That is one of the significant variables.

Also when you were going through the corporate G&A and the components, has there been any change to the long term compensation accruals or any other changes for either management bonuses, given the revision in next year's numbers? I don't know how it works versus this year's numbers. It seems like you make the numbers that you set out. You can give us any sense of that?

There really has not. That accrual has been consistent for the past couple of years and has been consisten throughout this year and will essentially be next year.

Thank you.

With that, I think we will have to draw it to a close. I certainly appreciate everybody's questions today and thank you very much for your interest in Fluor. As you heard this morning, we have a great deal of business development going on across our markets and it's very much on a global basis. I would characterize it as being more new activity than we have seen for a long time. We recently did have a reorganization but that was done in a modest way to ensure our management team is aligned with the targeted market areas and where their experience and skill sets will serve us best. Along with talented people, we do have ample financial resource and we have a competitive advantage and the flexibility to pursue these major project opportunities. As we look forward to 2004, we really believe it's a transition year that will launch the next phase of a growth cycle for Fluor. We thank you very much for your opportunity today and your questions. We look forward to talking to you in the future.

Alan, this is Lila Churney. I just wanted to add, since we did have a a few more questions, if anybody wanted to follow up with me, you are welcome to give me a call. Thank you.

This concludes the teleconference. You may now disconnect.