Fluor Corp (FLR) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fluor Corporation's fourth quarter conference call. This 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 10 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 P.M. Pacific time on Thursday, February 12, at the following telephone number -- 888-203-1112. The access code of 567213 will be required. At this time for opening remarks and introductions, I would like to turn today's conference over to Ms. Lila Churney, Vice President of Investor Relations. Ms. Churney, please go ahead.

Thank you operator. Welcome to Fluor's first quarter and year end 2003 conference call. Our earnings announcement was released yesterday after the market close. 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 outlook, new awards, margins, the effective strategic initiatives and other statements regarding the intent, belief or expectations of Fluor and its 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 would like to turn it over to Alan Boeckmann, Fluor's Chairman and CEO.

Good morning, ladies and gentlemen. I would like to thank you for joining us today. This morning, we will review our fourth quarter and full year results from 2003. Also, we will comment on our current business outlook. We feel very good about our performance this year and are pleased to share these results with you today.

First, as we look at the fourth quarter, earnings from continuing operations were 51.5 million, or 63 cents per share, up 15 percent from $44.7 million, or 56 cents per share, in the fourth quarter of 2002. Revenues from continuing operations in the fourth quarter were $2.4 billion, down a bit from 2.5 billion a year ago, but sequentially up from $2.1 billion in the third quarter.

Turning to our full year results, earnings from continuing operations increased 6 percent to $179.5 million, or $2.23 per share. This is compared with $170 million, or $2.13 per share, last year. Revenues from continuing operations in 2003 were $8.8 billion, compared with $10 billion last year, driven mainly, as expected, by our Power segment, which was down $1.4 billion.

New project awards for the fourth quarter increased 53 percent to $2.4 billion, bringing the full year total to $10 billion, which was up 16 percent year-over-year. This contributed to growth in our consolidated backlog, which increased 9 percent to $10.6 billion, compared with a year ago, and was up sequentially from $10.3 billion at the end of the third quarter. Estimated gross margin in our backlog increased 11 percent to $649 million, or 6.1 percent, and was up sequentially from the third quarter as well. Consolidated operating profit for the year was $406 million, down 2 percent from last year. An improvement in the operating margin helped offset the impact of the decline in revenues as the Power segment continued to come down.

Fluor's performance in 2003 included a number of significant strategic and operational achievements. Our operational results demonstrate that our strategy of market diversification was able to offset the significant decline in Power that we had expected. Combining this with a reduction in corporate G&A, we were able to deliver earnings growth and performance within the upper range of our annual target. We also made significant strides in positioning for long-term growth through expansion in our key targeted markets, including three acquisitions that support our goal to grow our Government and Operations & Maintenance businesses. Additionally, we continued to position the Company for long-term growth, particularly in the Transportation and Global Oil and Gas markets.

We are very encouraged by the growth in new awards and backlog, even while remaining fully committed to the selectivity and the financial discipline that has been fundamental to our business strategy. As Mike Steuert will review in more detail, our new bookings in Government nearly doubled, and our Operations & Maintenance business increased its new awards by 24 percent. In addition, we booked several major new Oil and Gas awards and have begun to grow backlog in revenues for that segment after several quarterly declines.

In addition to the two major upstream awards booked early in the year, we have been successful in positioning ourselves in the emerging LNG market, winning both front-end and full EPC work during the year. While we continue to track a number of large Oil and Gas projects, we have also had a number of smaller strategic awards that we believe position us well for future opportunities. These include the long-term consulting services agreement with the Kuwait Oil Company for their capital spending program, as well as the sole source award this quarter with Lukoil for an export terminal in Russia. We became involved early with Lukoil in the development stage, and were their exclusive financial consultant on this project, helping them to structure and arrange long-term financing.

Also, we anticipated (ph) -- we are starting to see new diesel clean fuels activity. And we believe these awards reflect tangible evidence that the anticipated cycle of increased capital investment is beginning to unfold. As a result, we remain convinced that the market for our services, particularly in the Global Oil and Gas industry, is in the early stages of a long-term cycle of investment that will continue to develop over the next three to five years, including both large project opportunity, as well as a host of smaller ones. The global economic recovery is also beginning to stimulate increased activity in our economically sensitive industrial markets. If this economy continues to strengthen, we would anticipate that this will have a positive impact on our general manufacturing, microelectronics, and certain targets of opportunity in our mining business.

In Chemicals, we have already started to see the early days type of planning activity and believe that this market will continue to develop in 2004 and beyond. We have dedicated senior resources to ensure that we have a strong focus on this reemerging market. We are pleased to note that these efforts have already begun to produce results, as highlighted with the significant award in our third quarter for a major chemical project in Shanghai.

In the Transportation and Infrastructure area, we are continuing to fill that development pipeline and expect continued expansion for Fluor in this market, where we have developed a strong reputation and presence. Lastly, there seems even to be a few signs of life in the Telecom market.

With respect to Iraq, we have a variety of activities going on in that country and have been successful in winning a second task order opportunity with U.S. Army Corps of Engineers, supporting activity for their central command. We also continue to pursue additional opportunities in Iraq, along with a host of other government prospects.

Looking ahead to 2004, we fully expect further expansion in new awards and backlog, which will build the base for future performance and long-term earnings growth. As we have previously stated, we expect 2004 will be a transition year from an earning standpoint, as we move from the final completion of a cycle of Power projects, where our realized margins are at their highest, to a new cycle of Oil and Gas projects, where margin recognition is lower in the early stages. While the precise timing of major new Oil and Gas program awards remains difficult to predict, continuing front-end activities, positive ongoing client discussions, and improving global economic conditions all point towards major new investment.

Given all of these variables that could affect our earnings in 2004, we continue to project a wide range of guidance at this early point in the year and our maintaining our previous estimate of $2 to $2.40 per share. And with that, let me turn it over to Mike Steuert, Fluor's Chief Financial Officer, to review additional details of our operating performance and other financial information. Mike.

Thank you, Alan, and good morning to everyone. Since our segment results are covered in detail in our press release, as we have been doing this past year, I will focus on providing additional background on new awards and backlog for each of our business segments. Starting with oil and gas, operating profit in 2003 was $121 million. New awards for the fourth quarter more than doubled, to 752 million, and nearly doubled for the year as well, to 3.7 billion. Significant awards in the fourth quarter included a crude oil and petroleum products export terminal near St. Petersburg for Lukoil; three major clean-fuels-related refinery projects, one each in Canada, Europe, and South Africa; along with a number of additional small refinery projects in both South Africa and the U.S. Contributing to the significant increase in year-over-year, of course, were the two major projects booked in the first and second quarters respectively, of TCO in Kazakhstan and Sapon One (ph) in eastern Russia. Backlog for the Oil and Gas segment grew 46 percent from a year ago to 3.4 billion.

For industrial and infrastructure, operating profit for the year was $62 million. Fourth quarter new awards were 483 million, down from a strong 883 million last year. The most significant new awards in the quarter included two major pharmaceutical production facilities and several biotechnology projects. For the year, new awards were 2.6 billion, down from a very strong 3.5 billion a year ago. Major variances between the two years were primarily a still significant but slowing level of investment in the pharm-bio market and weakness in the economically-sensitive markets, particularly mining and manufacturing. Additionally, the major SH 130 toll road was booked in 2002, contributing to a difficult comparison for the current year. Backlog for the Industrial & Infrastructure segment declined to 3.3 billion from 4.2 billion a year ago, in part due to the removal from backlog of over $700 million for three projects in the third quarter.

The successful completion of Power projects contributed to a continuing significant operating profit contribution from the Power segment, finishing the year very strong at $77 million. New power awards in the fourth quarter were 170 million, primarily driven by a combined cycle power project to (ph) Mexico to our ICA/Fluor Daniel joint venture. New Power awards for the year were 485 million; as expected, below last year's 1.1 billion. A majority of 2002's new awards were booked in the first quarter of last year, which was the end of the cycle in the new Power projects award. Power project backlog declined to 605 million from 841 million at end of last year, reflecting continuing work off of projects. Modest awards in the third and fourth quarters of this year, however, have stabilized the Power backlog for the past three quarters.

Global Services segment contributed $97 million of operating profit for the year. Global Services had a very strong fourth quarter in new awards compared with a year ago, posting awards of 408 million compared with 96 million last year. Quarterly awards reflect three new maintenance service support projects and small capital project agreements, as well as work performed by our P2S unit. Backlog for both Global Services grew 17 percent to 1.8 billion from 1.6 billion at the end of last year. Backlog for the segment has been relatively flat, and this marks the first upward movement in the last five quarters.

Our Government group posted record profits in 2003 of $48 million, demonstrating significant success toward our goal to expand within this large, long-term market. New government awards were quite strong in the fourth quarter at $545 million, up 62 million from last year. Awards included two new embassy projects in Kazakhstan and Jamaica for the Department of State and additional work on our logistical support programs in Iraq for the U.S. Army Corps of Engineers and the Air Force. Our Army Corps of Engineers program, CETAC, alone has grown to over $300 million and we have established a significant presence on the ground in Iraq. Full year awards for the Government group increased 84 percent to $2 billion. This translates into an 87 percent increase in backlog to 1.5 billion.

Moving now to corporate G&A and other financial measures. Corporate G&A for the quarter was 39.9 million, down from 51.8 million last year. For the year, corporate G&A totaled 141.5 million, well within our forecasted outlook of 140 to 150 million. As you may recall, corporate G&A in 2002 included approximately 21 million in nonrecurring items. We had interest income of 1.1 million for the quarter and 3.2 million for the year. Our tax rate for the quarter was 35.2 percent -- 32.5 percent, consistent with our forecasted rate. For the year, the tax rate was 33 percent, slightly higher, primarily due to provision taken in the second quarter that was without tax benefit.

Let me now shift to the balance sheet and make a few comments on cash flow and other items. Capital expenditures for continuing operations in 2003 were 79.2 million, while depreciation was 79.7 million. Cash and securities were 497 million at year-end, consistent with our forecast of approximately $500 million. Our debt to total capital ratio was 20 percent. This increase is due to commercial paper borrowings of 121 million in the quarter, driven in part by ongoing funding of the Hamaca project in Venezuela, as we await arbitration resolution on various issues, and by higher working capital requirements for projects that are in the early stages of execution, including activities in Iraq. We are told that an announcement on the first two arbitration issues for Hamaca will be made in the near-term, and we expect that decision will provide some relief to the working capital required to complete the project.

During the quarter, Standard & Poor's, Moody's and Fitch undertook reviews of Fluor's credit ratings, citing potential uncertainties and the variability in our cash flows. Obviously, the unexpected buildup of work in process in Hamaca as arbitration has stretched out has contributed to their concerns. While we do not anticipate that these modest rating changes will have a material impact on the cost or availability of funds going forward, we continue to be committed to maintaining a strong financial condition and an A rating for the Corporation. With that, Alan I would be happy to respond to questions.

Our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Michael Dudas with Bear Stearns.

Good morning, gentleman. My first question, and Alan this is a pie question, in the sense of how big is the pie, right? I know you love these. What percent of the government business opportunities that Fluor is looking at is concentrated with regard to any activity in Iraq?

It's all a matter of timing. As you know, we have a substantial amount of forward opportunities in Iraq. We are bidding just as we speak the awards for the electrical and water and other systems rebuild in Iraq. The total of those is somewhere over $2 billion. Of course, we would not be in a position to get all of that, but there are some significant opportunities remaining there. So in terms of the very near-term prospects, we have a substantial number of those with our sights on Iraq.

I would quickly add, though, that the Iraq focus, while it is near-term, is not our longer-term focus for the U.S. government business. We are looking very heavily at the programs for the Department of Defense, the Department of State, where we have added the acquisition of J.A. Jones, and also with the logistical and operation support through the addition we made this last year of DEL-JEN. So we believe we have a really significant expanding marketplace with the U.S. government, and it's not dependent on Iraq, even though some of our near-term opportunities would certainly be in that area.

Thank you. My follow-up is relative to your continued guidance on the wide range relative to 2003 results, is the Delta driven by the pace of the release of current backlog or is it the pace of what the first half order book may look like in certain markets? Is it acquisitions that need to contribute, whether they have been made or are going to be made, or execution issues?

I think you just answered the question for me. Actually, if I look at the range that we have quoted, I would point to probably five things that in my mind make up the dynamics that will determine that range. And in I guess pretty much order of priority, I think it is first the awards that we would book in Q1 and Q2 that would contribute earnings in this year. Secondly would be a combination of the pace of release of current backlog and also our performance on that backlog, as probably the second most important dynamic. Third would be the effect of some of the arbitration decisions that pending as we go forward. And then I would add fourth the opportunity to continue to do work in Iraq. And then fifth would be the continuing focus that we have on niche acquisitions. Those are the things in my mind that really determine where we are going to be within that range.

Is that going to have significant impact on 2005, i.e. if you're low end of 2004, is that going to impact or will the timing catch up (indiscernible) maybe '05?

I'm not sure that it has direct correlation. I think clearly the first issue of new awards in quarter 1 and quarter 2 will obviously have an impact on '05, but then so would the awards we get in Q3 and Q4. So, I think really for '05 what I would be looking at is the pace of new awards and our buildup of backlog as we go through the full year.

Thank you, Alan.

Sanjay Shrestha with First Albany.

First of all, excellent quarter, guys. My question is along the lines of the Oil and Gas industry. When we look at your margin, and it's been up sequentially for the last several quarters, and seems like there is clearly some front end related work there and the selectively is certainly playing a part there. Can you help us understand in terms of how does that break down with the downstream versus the upstream front-end related work that you guys are doing right now?

You're absolutely right. Front-end work by its very nature is services oriented and involves a lot of highly technical talent and does come at a higher margin. When we book the full award, that then starts to get in a number of pass-through revenues in addition to procurement revenues. But, while it's on a much, much larger revenue base, the larger, full-scope awards do tend to be at a lower margin. I would say that there is not a significant difference with respect to upstream and downstream in terms of our targets. Both have to pass through the criteria that we set for return on assets and return on revenue as we look at each opportunity.

That's great. Just a quick follow-up. In terms of the downstream clean-diesel-related work, when do we think we will start to see some meaningful new bookings there, given that they need to be in compliance by 2006? And also, if you could care to comment on some of the things that have come out of major integrated oil companies that they expect a significant increase in the CAPEX during 2004, and how that might actually impacts Fluor's booking trend during '04 and beyond?

With respect to the clean diesel, when you use the word significant, I look at the award of the front end of those as the real significant opportunity, even though it's not the higher revenue part of the award. Typically, these awards come in two pieces. You get the front end, which is significant in that that is when you really work with your client to determine how you do the project, how you come into compliance, how much capital you're going to have to spend, how much return can you build into the project through other opportunities. That is highly technical and involves a significant amount of expertise. But it's that front-end award that really allows you then to close on and book the larger revenue of actually doing the work. That second half is really going to start to manifest itself in late '04, early '05 and on into probably the second and third quarters of '05.

Okay.

Your second question, though, I think with respect to overall capital spending. We really continue to see very high confidence in our clients in terms of their intentions to increase their capital spending. I think you can look to several recent announcements by some of the majors with respect to that, because they truly have an issue of declining oil reserves and production, and you look at the continuing dependence of the United States and China primarily on importing oil. There is going to be some dramatic increases in capital spending as we go into this year and on in through the next several years, and we are in a great position for that.

That's fantastic. Once again, excellent quarter. Thank you.

Merrill Lynch's Lorraine Maikis.

Thank you. Could you just briefly walk us through the uses of cash in the fourth quarter? Why that commercial paper was taken out. Was that all Hamaca related, did you fund the pension? What were you using your cash for this quarter?

Mike, why don't you respond to that?

Sure, I'd be glad to. You touched on some of them. There was definitely use of cash in the fourth quarter for Hamaca. In addition, we did fund the pension, both domestic and internationally, we put about 44 million into the pension. The third major the item that occurred in the fourth quarter was as we moved out with some of these task orders in Iraq, we had some working capital buildup associated with Iraq as well. The last item would be that as the Power business continues to move through the cycle, as we wind down our backlog in Power, there was some working capital that was used to support that as well.

I know you commented on some of the rating agency actions. Could you look into '04 and see where you think the cash flow trends will be? I know some of it depends on the resolution of Hamaca, but excluding that, just the base business, what your performance will be for '04.

We think we will generate positive operating cash flow from our operations during '04. We certainly expect that to be supplemented with some funding coming from arbitration decisions resulting from Hamaca, as well. We do expect to end the year with still a very healthy cash balance of 500 million so for the Corporation at the end of '04.

Thank you.

Richard Rossi of Morgan Joseph.

Good morning, everybody. You've talked a couple of times about how you've gone through a cycle of completion of a number of jobs; now we are moving into a cycle where you're starting a number of jobs. Could you give us some help in measuring the magnitudes here, maybe talking about how much of '03's revenue related to jobs that were in their final third of being completed, and how much of '04 you're going to have of jobs that are in their front one third? Something of that major; some way of giving us a measurement of magnitude.

Rich, the one measure that I can give you that you can see in our results is between '02 and '03, we had about a $30 million EBIT downturn in Power, which we had to offset through other means, other businesses. And if you look into '04, we have pretty much come down to I think our lowest level in Power at the end of '03. But that is going to include then an additional dip of earnings as we compare '04 to '03. That is the most significant effect that we are having to offset as we go into '04.

For the most part, though, the remainder of the balance of our work in Oil and Gas is pretty much in what I would call the front of one-third to one-half of its cycle. There is a couple of large petrochemical projects that we will complete this year, and the Hamaca project we will complete this year. But other than that, for Oil and Gas, we're pretty much in what I call the front end of the cycle.

In Life Sciences, which is kind of a mixed bag. We have been successful at winning work there for the last several years, and so a number of those projects are completing. But we've also been filling up the pipeline over the last two years, even up through this last quarter, with very successful bookings. So, I think the rest of our backlog you can see is a pretty good mix, but I think as the capital spending increases in Oil and Gas, and as the economy heats up and we get some additional spending in Chemical and some of the other areas, we are going to continue to grow and be more on the front end of that cycle.

Just as another definition, how much of your work in '04 will be started and completed within that twelve-month period?

I'm not sure I have a number for you there, but --

General magnitude.

We do a lot of smaller projects that aren't really -- I don't think we get credit through our reputation of being a large project company. I would say -- and I will not give you a number, but it would be not a majority of our revenue, but --

20 percent? 25 percent?

I think probably somewhere in there is not a bad guess, Rich. I don't have data in front of me. But we do turn over a lot of work to our Operations & Maintenance business, particularly at Amico (ph) and I would say also in a number of our business groups, that is small-project related, site services related and small capital related.

Okay. Thank you.

Alex Rygiel with Friedman, Billings, Ramsey.

First question, with regards to your gross profit margins in your new awards, it's very strong in the quarter. Can you talk about the trends that you would expect over the next couple of quarters?

I would quickly caution that our quarters are going to vary. They vary by the makeup of awards. We had a number of front-end awards during this quarter. Actually, some of the -- a couple of even the larger projects this year -- of this quarter had very strong margins with them. I think this is a strong quarter. I think subsequent quarters will tend to be just a bit lower on the average, probably in maybe the mid-six to mid-seven range. But I think, again, our focus is on being selective, looking at those opportunities where we know we can be competitive and where we add value, and focusing on margins and return on assets is something that we've been using as go-by for our selectivity process for quite some time now.

Great. My second question, could you expand upon the LNG market as well as the our market opportunity in Iraq, sort of quantify the number of projects or the value of projects you have ongoing right now or quantify what your backlog is? And potentially size those markets for us and maybe discuss the timing over the next couple of years as to how they will develop.

Well, if I look at the LNG market first, the opportunity that we have in the LNG market, where I think we have a significant amount of strength, is in the regassification and the receiving terminal portion of LNG. The awards that we have booked, both front-end and EPC this year, were in that area. As you know, there is a significant amount of planning for capital spending for receiving terminals in regassification throughout the coastal areas of the United States, as the U.S. looks to rely on the import of LNG to offset its shortfall in natural gas. We think that can be a significant market. We think we have an opportunity to play in a significant amount of that. The exact size of it remains to be seen because there's a lot of regulatory and other issues that have to be cleared there, but we do believe that that will be a sizable market.

With respect to Iraq, again, that is something that while we think there may be good opportunity there, we have been very cautious in terms of what we have planned on as a going forward expectation. We have, in terms of already executed work and work in backlog, somewhere around $500 million of Iraq at this point. We announced an award here just recently of a camp facility that we are getting ready to build for the Air Force. There is a number of bids -- a number that other companies and ourselves are actively proposing for right now in what I will call the infrastructure side of Iraq, both electricity and water and other building facilities. We hope to be successful in that, but again, the size of the opportunity is somewhere between 2 to 3 billion and it will be parceled out to a number of companies.

Thank you.

Tom Ford of Lehman Brothers.

Good morning. Just one quick question on the Government Services. It looked like there was a pretty notable adjustment in the backlog. I think our number we came out it was somewhere a little bit north of 200 million. Alan or Mike, could you -- is there anything that you could comment on there?

Mike, why don't you go ahead.

I'm not aware of adjustment. We certainly added to backlog in the Government area with new awards in the fourth quarter.

Right, which was also -- no, and definitely very solid. But it just looked like sequentially, adjusting for the burn and what have you, it looked like there was a step up of a couple hundred million.

Are you talking about in the fourth quarter, Tom?

Yes.

I'm not aware of that. We did add some backlog with the acquisition of J.A. Jones International.

Do you think that might have been it?

That would have accounted for some of it, but certainly I don't think it's going to be the whole amount.

Right. Okay. I can circle back and ask you on it. The other question I wanted to ask Alan was about your comments on Oil and Gas and the step-up in expected spending. I just wanted to get your thoughts in terms of the mix of that spend, because it seems like the energy companies, there is a notable shift there from liquids to gasses in terms of focus and infrastructure and what have you. I just wanted to get a sense as to one, do you think that that is true? And then two, how well-positioned do you feel that you are one versus the other?

I think the increased spending, Tom, is predominantly upstream. And when you then look at splitting the upstream, it is heavily I think focused towards gas. I think we're extremely well-positioned in gas. We as a company have had an expertise in that market for decades. In addition, if you look at where the spending is going to occur, it's going to occur in the Middle East and in the form of Soviet Union, primarily, and also in some areas of Africa and Asia. Again, if you look at our awards and where we are strong, those are areas that we have a fairly, I think, significant competitive advantage.

But, I wouldn't ignore this capital spending that's going to occur in the downstream, particularly in the regulatory-driven projects like the clean diesel area that's going to start receiving awards of some size probably late in this year. Again, we're very, very well-positioned in the arena.

Great. Thanks very much.

Credit Suisse First Boston' John McGinty.

First, if I could start with a clarification. Mike, in the past, I think you said that G&A next year would be in the 160 area. You didn't mention what that one way or the other. Is that still kind of what you are talking about or lower or higher?

As we refine our look at next year, it's probably going to be around 150, maybe 140 to 150 -- pretty much the same range as this year.

140 to 150? Okay. Did I understand the comment, Alan, that you made that the fourth quarter rate in power, which was 17.5 million, which annualizes to 70 million, is the ongoing run rate in power?

Not at all John.

Okay. I'm sorry.

What I was referring to, I was comparing our earnings in '03 versus '02, and that was about a $30 million reduction. We are going to see another reduction in '04. This fourth quarter was a very good run rate for us in Power and not repeatable as we go into '04.

In fact, that is what I'm trying to understand, because the one thing that is almost impossible to make an assessment of is where Power goes and whether or not it is sustainable may or may not be the case, but are we looking at another 30 -- are we looking at a 40 to 50 million number down from the 77? You have to give us -- because there's a number built in to your $2 to $2.40 and I bet there's not a lot of variability in the Power piece of that number?

Well, Power is pretty well worked off in terms of backlog, with the exception of some of the awards we have been able to book during this year, which actually have been more encouraging that we might have thought. But, we will see a downturn again, Mike. It is hard to predict what that's going to be in absolute dollars, although it will be significant because we still have a project or two that we will complete during the year, and how we do those has an effect on earnings.

So you can't give us any kind of help in terms of order of magnitude of decline as we are building our models to look at '04?

I would say look at the trend for the last two years and if you use that same trend you will probably be pretty close.

Okay. And then the other question I have was if we are looking at a transition from Power going down to Oil and Gas going up, the Oil and Gas orders, if we look at a trend, which is really if we took the two elements (ph) out, we really don't have much of an improvement and yet we are talking about a lot of stuff. How comfortable are we or what do we have to see in order to get to where you are toward at least the higher end or get some improvement in earnings? Do we have to book two or three or four -- 2 or $3 billion of major projects in addition to all of the smaller ones you talked about?

It doesn't seem to me to be much of a transition other than the fact that we have been talking for three years about all these things out there that they haven't started to come in it. How comfortable are you or when are we going to start to see -- what should we look for as milestones of saying, yes, it's going to happen, or, no, it isn't going to happen?

I think, John, as we go through '04, I don't know that we are going to see a significant number of really large projects come into backlog during '04. I think we've got some good opportunities. But I really think again it's going to be a development of a position on the front end, moving into these projects as program manager, and then the ability to do some of the peripheral units with those that are going to be really where we are going to play. We continue to see significant momentum in this market, but as I've always said, it's difficult to predict the timing because these are very complex deals, they are in difficult locations with a lot of political issues around them. We are in great position having done the front end on about two-thirds of all the prospects that we are chasing. While they offer great potential, it is hard to predict the timing.

I would say if we looked at '04 and we look at the range that we've given you, it is not -- we are not relying on just an influx of Oil and Gas projects. It is pretty much across the board if we look at our new order intake that's going to dictate how we do in '04.

Okay. Thank you very much.

Alan Mitrani with Copper Beech Capital.

You mentioned something in your response to Michael earlier I just want to explore -- Michael Dudas -- regarding the $2 to $2.40 range. You have talked about acquisitions as the -- how much of the $2 to $2.40 -- how much of the numbers that you expect for this coming year are going to come from acquisitions and do you have that baked into your numbers?

I would say that it is not material at all. What I was referring to there is as we bring these niche acquisitions on board -- you know, we had the J.A. Jones acquisition as our most recent one -- and we are looking at some others that I think we will be able to hopefully announce in the first quarter. But, really it is not the actual income from those acquisitions; it is what they add to Fluor's capability that allows us then to secure other work during the year that then results in income. These niche acquisitions are ones that we are targeting on a strategic basis, that really add to our capability, and when you leverage with our size and our balance sheet and our relationships, allow us to really make headway in some of these markets.

Also, you mentioned the arbitration pending. Are you including whatever you expect to get from the arbitration in your numbers for this year?

No, I wouldn't say so. We take a very conservative position on arbitrations. We do look at and get outside opinion on what our position is on these arbitrations. And then we take a fairly conservative approach to them.

Do you have an apples-to-apples comparison between backlog and new awards for the year, excluding all of the acquisitions? I have to assume these acquisitions have added revenue this year and backlog. Can you give us an apples-to-apples number what last year's versus this year is, normalized for the DEL-JEN, the J.A. Jones, the other acquisitions?

We don't break out things like that on our backlog. But I would say that the addition of those has not been really significant or material.

Our backlog would have still been up nicely without those acquisitions.

Lastly on the balance sheet, if I can, and I will get back in queue. This seems to be the first time you have used commercial paper in a while, at least from my perspective, from where I'm looking at it. When do you expect to get off the commercial paper? Is it the arbitrations settling which will help you or is it just generating more cash now that the Power jobs have sort of stopped? Following up on that, are you start still going to see exits in the first quarter, reductions in cash, due to the completion of Power jobs. Can you give us some sense of timing of completion of Power jobs?

We expect realistically to probably be using commercial paper sporadically throughout 2004. It's not just a first-quarter item. There will probably be times when we are out of the commercial paper market and be times when we are using it. Certainly the resolution of some of the matters in front of the arbitration panel will help our cash position. But our use of our borrowing during the year is also going to be impacted by our niche acquisition program, as well as the pace at which we do work in Iraq, and also move forward on some of our backlog as well as new awards.

And from the Power perspective -- cash usage?

I really think that we are probably near the end of the cycle of the drawdown on cash usage in Power. I think as we start to continue to get additional awards, we will stabilize in that arena.

The drawdown of the Power backlog impacted cash to a much greater degree in 2003 than it is going to impact us in 2004.

That's right.

Thank you.

Leone Young with Smith Barney.

Following up on John McGinty's question -- correct me if I'm wrong, but if your expectation is that we may not see any large projects in '04, it seems to me last time we talked there was an expectation of one, possibly two. So I am kind of wondering if despite all the good front-end signs, is this another delay, which is why you're keeping such a wide range in essence, although you arguably had a nice finish to the year and a great quarter?

Leone, I was not -- actually, I'm trying to avoid absolute numbers because as you know it's hard to follow up some of these projects -- and we do -- there will be our current track one or two that we expect to have decisions on in this year, and we think hopefully are going to be positive for Fluor. But by the same token, if they were to move a quarter or two, it wouldn't really impact the long-term earnings growth of the Company. Again, these very large projects, that can happen. But we are attracting probably one or two that we expect to have during this year.

What I was just trying to get at was whether the pace is status quo with the last time you talked to us or --?

I would say so. I think it is moving. In fact, if anything, I think there is a lot more momentum gathering.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Richard Rossi of Morgan Joseph.

I just want to clarify something about Iraq, given the obvious uncertainties in that country. If you were for whatever reason decide to pull out of working on the projects you have there, temporarily at least, is there any EPS impact? Is there any cost to you or would you get fully compensated by the government for having to move people out or whatever?

I'm not sure. Let me ask the question -- I'm not sure I understand what you're driving at there. The projects that we have in Iraq are largely reimbursable cost.

That would include -- we've seen other engineering companies announced -- the one I remember offhand is South Koreans, and that was a sub (ph). They pulled their people out because they lost a few people over there. If you would have to make that kind of a decision or the government decides to make that decision for you for whatever reason, that is all part of that reimbursable, whatever cost that you would incur for pulling out and going back in and starting up at a later point, would all be compensated?

Yes. If the government were to ask us to evacuate, that cost would be covered. I don't think it would be a significant impact on us. We do -- as opposed to many of the other people that are working there, we are using almost 100 percent Iraqi subcontractors, which doesn't have the same issues and challenges.

That was my follow-up. How many of your people do you have there actually?

We have just over a 100 ex pats there, but the bulk of our construction forces are all Iraqi.

Okay. Thank you.

Alex Rygiel of Friedman, Billings, Ramsey.

Could you provide some guidance for your tax rate in 2004?

I would be glad to. We expect that rate to go up to perhaps -- from 32.5 percent to perhaps 34.5 percent. That is due entirely to the elimination of the Fisk (ph) benefits in 2004.

Great. Thank you.

John McGinty of Credit Suisse First Boston.

A couple follow-ups. Government Services new awards were 1.995 billion -- call it 2 billion -- in 2003. And I think you said in answer to Rich's question or someone's question that your Iraqi work in the backlog right now was 500 million. Did all of it come in '03? In other words, did the orders X Iraq go from 1.1 billion to 1.5 or was it a little bit more split?

It was split, John. I think up through the December 31st we booked about 300 million in Iraq.

The other 200 million comes in '04?

That's correct.

Are we -- when we are looking at the Government Services, because the number has risen so dramatically over the past -- from '01 to -- 22 to 30 -- I'm talking about operating income -- to 48. Are we at this point, given the backlog of the orders, but what we don't know is the timing. Does that number take another substantive jump in '04 or a more moderate increase? It's just it's difficult to tell because what is included in there obviously has changed over time and there's no reason you should, but we don't what is what. So could you help us kind of with what the earnings progress would look like as you see it? In other words, to get to the $2 to $2.40, what is embedded in there for the Government Services income -- relative gain compared to where they been running?

John, we really don't want to get into niche unit and give projections for each of our business segments. We avoid doing that. But, I would say we have said now for the past two years, our strategic intent is to grow both our Government business and our Global Services business to the extent that in several years they would equal 40 percent of both backlog and earnings. So, we absolutely intend to continue to grow our Government business as a percentage of our total, and you will see it grow in '04.

And then related follow-up. One of the areas that you mentioned when you were talking about businesses you were looking at on a selective basis was mining. One of the things that is going on with higher commodity prices is there is a tremendous amount of mining activity, people talking about things of all different types of minerals and output all over the world. Could you talk about whether or not anybody is talking to you about the kind of things that could result in some fairly substantial mining orders, or how does that look for you as you look in '04?

I would love to say that we think mining is going to be a very hot market during '04, but I think it's more one of target of opportunity for us. Having said that, I think were in a very good position on a couple of opportunities. We do anticipate -- knock on wood -- some good awards in and mining during '04.

Okay. Maybe all over the world kind of thing?

Yes, they will.

Final question. Chemical. You talked about you are committing resources, you are talking about the business beginning to pick up. Can I assume that that is almost exclusively outside the United States?

Yes. On that, when the downturn occurred in 1997 in Chemicals and has pretty much lasted during all of the time since then, we really had one of the highest market shares of anybody else in that market at that time. We retrenched and rolled a lot of those resources into other units. But we reconfigured that unit this past year based on what we saw happening in the marketplace, and we have been pretty successful early on now in this cycle.

All of the development that we see happening is in fact outside the United States. It's in the Mideast, it's in Southeast Asia, it's in China. But we are well-positioned for that and we continue to see growth in that area.

Absolutely. Thank you very much.

Tom Ford of Lehman Brothers.

Just one quick question. I'm not sure if you answered this. If you did, I apologize. Alan, any help that you can provide -- let me start with this. What was behind the notable step-up in Power in the fourth quarter in terms of the margin?

Tom, it was just a better-than-expected execution. I won't say better-than-expected -- better than budgeted execution on projects.

Did that have any -- did you deliver any plants in the fourth quarter?

We finished one plant in the fourth quarter.

So was there some bonus or incentive realization then?

As you complete these Power projects, it is not necessarily bonus, it is just the completion under the cost, because they are all lump sum.

Great. Okay. So, again, I apologize if someone asked you this already, but is there anything that you can say in terms of helping -- because you're saying it seems like you are kind of done with Power except for one project or so -- kind of just trying to get an idea of sort of a normalized or longer-term trend?

I think we will have come down from a peak in 2002 in Power to what I would continue (ph) probably our steady state level in '04. While we don't give predictions with each business segment, I would say that at that point, we would hope to start coming up slightly as we go into '05, but certainly '06. I see an uptick in that market occurring during the '05 time frame, just based on reserve margins and based on the continuing growth in the economy.

Okay. One last quick question for you, which is with respect to Iraq, any sense timing? I know people had thrown out, I think it was a March time frame for a next round of award activity? Is that what you think?

I think that is probably pretty close. The awards -- or the proposals for this next phase are all due within this next week. And so if you look at a three- or four-week cycle for evaluation and award, that is probably about right.

Great. Thanks very much.

There are five minutes left in today's conference.

We can take one more question and then we will do closing remarks.

Vinny Muscolina (ph) with L. Babson & Company.

I apologize if I missed this, but what was operating cash flow in the fourth quarter and what is your expectation for 2004?

Operating cash flow in the fourth quarter was -200 million. For full year 2004, we expect it to be approximately 100 million positive, but that is going to really depend on the arbitration results on the Hamaca issues as well as on our acquisition program.

What is the mix in terms of -- to get to 100 million positive, what kind of arbitration assumption will that require?

That is something we're not really disclosing in terms of our assumed (ph) positions on these arbitrations. That is very confidential.

I assume that you expect that will be skewed toward the second half of the year in terms of generating cash versus the first half of the year?

We certainly expect the arbitration decisions in the first half of the year.

Okay. Thank you.

Operator, what that, let me make some closing comments. First of all, though, I would like to thank everybody for participating today. But as we close this conference, I would like to say that when we entered 2003, we laid out a number of objectives, including the ability to offset our decline in Power and executing accretive, strategic niche acquisitions that would support our growth goals in our targeted markets, particularly Government and Operations & Maintenance. We have been very pleased with the progress we have made in each of these areas and we continue to believe that this strategy of market diversification will position us well for long-term growth.

In line with that, let me say to those of you who have highlighted the significant advantage that Fluor has in the Oil and Gas market as it grows, I would ask you to hold that thought, because while I believe that is absolutely true, I would also ask all of you to not overlook the significant growth that we have shown in Government, in Life Sciences, in Chemicals and in Infrastructure.

As a final note, let me also acknowledge and thank the thousands of Fluor employees worldwide for the hard work and dedication in this past year. They are in fact the ones that have really accomplished so much and in fact will make our goals for the future a reality. So thank you very much for joining us today and I certainly want to thank you for your interest in Fluor.

That does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a good day, and at this time you may now disconnect.