Fluor Corp (FLR) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to Fluor Corporation's third quarter conference call. (OPERATOR INSTRUCTIONS) At this time, for opening remarks I would like to turn the call over to Lila Churney, VP of Investor Relations. Please go ahead, Ms. Churney.

Thank you and welcome to Fluor's third quarter 2004 conference call. Our earnings announcement was released yesterday after the market closed.

Before getting started, I'd 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 effect of strategic initiatives and other statements regarding the intent, belief or expectation 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 15, 2004, 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'd like to turn it over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you, Lila, and good morning, everybody. Thanks for joining us today. This morning I'll review our third quarter results and update you on our current business outlook.

Before diving straight into the numbers, let me first say that our strategy of market diversification continues to serve us well. Our backlog continues to build as the global economy improves and our capital spending forecasts are strengthening and while the power market is clearly at the bottom of its cycle, the majority of our other markets are expanding. This positive outlook continues to support our expectations for continuing growth.

As I turn to third quarter results, let me say that net earnings for our quarter that ended September 30th, were $47.3 million or 57 cents per share. This compares with net earnings in the third quarter last year of $44.1 million or 55 cents per share. Our revenues were up 11 percent to $2.4 billion and are beginning to pick up, as we've been expecting given the growing trend in our backlog.

Consolidated earning profit in the third quarter was $95.5 million compared with $97.5 million a year ago. This operating margin for the quarter was 4.0 percent, down from 4.6 percent last year.

And, as we've been saying, the real story this year has been strong new awards and growth in backlog and our third quarter results continue to deliver on these expectations. New project awards in the third quarter increased 18 percent to $3.2 billion, up from $2.7 billion a year ago. This is our third consecutive quarter of new awards in excess of $3 billion. Our quarterly new awards were distributed broadly across our industrial and infrastructure, oil and gas and government segments and included the annual booking of our two major ongoing Department of Energy projects at Hanford and Fernald.

As a result of strong quarterly awards, our consolidated backlog grew 33 percent, up to $13.7 billion compared to $10.3 billion a year ago and up more than $800 million from $12.9 billion at the end of the second quarter.

We're very encouraged by the continuing growth in backlog, which should build the basis for good earnings growth over the next few years and we continue to see strength in a number of our markets. And although the timing of major new project awards is difficult to predict, we do anticipate further growth in backlog, driven by the ongoing investment and rising capital spending cycle that we're seeing in key markets.

Specifically, in the oil and gas market, we continue to see a number of significant project opportunities, including ongoing upstream new oil and gas production programs, as well as LNG, gas-to-liquids projects and additional oil sands opportunities. We are also continuing to do quite well in the market for diesel clean fuels modifications.

Let me remind you that while many of these oil and gas opportunities are quite large in their overall capital cost, our role does vary. We are particularly well suited to act as the overall program manager, which can include EPC responsibility for the project's offsites and utilities that are critical to successfully tying together all the parts of a large, complex facility. Most projects are also broken into phases, generally beginning with the front end engineering and design phase, and, depending on the nature of the project, the full EPC effort can often be released in stages and involve multiple contractors.

Now my point here isn't to dampen your enthusiasm over the opportunity that these large projects represent for Fluor -- quite the contrary -- but to help you understand how they are likely to flow through our numbers. A good example of what I'm talking about occurred in this quarter where we were awarded the front-end design and program management consultancy services for a major petrochemical project that we've been (technical difficulty) We are very pleased to have early involvement on this significant program and expect that there will be additional opportunities for us as this project progresses over the next year.

This is just one project that reflects the growing momentum for investments in new chemical facilities over the next two to three years. I would add that virtually all of the prospects we are seeing are located in the-- either in the Middle East and are close to inexpensive feed stocks or in China, where the demand for product is greatest. Both locations represent areas of significant strength and experience for Fluor.

In addition to growth in the chemicals business, our industrial and infrastructure segment, we also continue to see significant ongoing investment in the life sciences market, increasing activity in general manufacturing and a strong cycle of capital spending unfolding in the global mining industry.

In our government business, our activities in Iraq continue to have limited visibility beyond the current task orders that we've received and our revenues during the third quarter were about $150 million, a little bit below the $180 to $190 million range we saw in the first two quarters. We did see some pickup in the release of new task orders in Iraq toward the end of the quarter, however, and this work has a fairly fast track record, but it remains very difficult to predict, going forward. Perhaps the pace and extent may become clearer once this election is decided.

We continue to make excellent progress at both the Fernald and Hanford projects for the Department of Energy and have achieved a number of very important milestones throughout the year. Meanwhile, we continue to pursue a number of other government opportunities with the Departments of State, Defense and Homeland Security in order to meet our growth objectives in this very vital business segment.

Before I turn to earnings guidance, one major quarterly highlight that I'd like to mention is that we have completed the Hamaca crude oil upgrading project during this last quarter. It was successfully started up and all units turned over to the client. Needless to say, the arbitration process has continued to move slowly and has stretched much further than expected, but we continue to remain extremely confident, however, that we will reach a satisfactory resolution of the outstanding claims.

Let me now turn to our earnings guidance for the balance of this year. While we're quite pleased with the strength of our new business that has been booked through the first nine months of 2004, our forecast continues to be impacted by the unpredictable nature of the work in Iraq and with the startup of projects at an unexpected pace. We've been indicating that with the sharp decline in power, we're anticipating that 2004 earnings will be relatively flat and, taking all of this into account, our guidance for 2004 is now at a range of $2.15 to $2.25 per share. And in looking ahead to 2005, the strength of new awards of 2004, combined with a continued broad-based expansion in our backlog, has set the stage for new earnings growth next year.

We continue to remind investors of the lag time inherent in translating rising backlog into earnings growth, particularly as we're in the early stages of project execution and development and, given the variability associated with the timing of major new awards and that pace of project execution, our very early guidance for 2005 is a range of $2.30 to $2.60 per share.

So with that, let me turn it over to Mike Steuert, Fluor's CFO, to review additional details of our operating performance, our new awards and other financial highlights. Mike?

Thank you, Alan. Good morning. Our business segment results are covered in detail in our press release, so, as has been our practice, I will mainly focus on providing additional background on new awards and backlog for each segment.

Starting with oil and gas, let me mention one small change that was implemented in this quarter's reporting. In the past, the ICA Fluor Daniel joint venture in Mexico has been consolidated in the power segment, given that the predominance of the business has been power-related. However, this mix has been changing. The bulk of their awards now relate to oil and gas. The impact of the change in the current quarter's revenue and earnings-- revenue and operating profit was de minimus. The change did result in the shift of about $300 million in the backlog for oil and gas.

New oil and gas awards were $612 million in the quarter, up 64 percent from the third quarter a year ago. While this was down from the very strong bookings in the first half of the year, given that no major project was concluded in the quarter, we believe this was very respectable performance. I will remind you that this is a lumpy business and you should continue to expect some variability in quarterly bookings.

Included in the quarterly awards were a number of clean fuels related projects, primarily in (indiscernible) and South Africa. Also included in the quarter was a capacity upgrade for an export gas terminal in Norway and services for expansion of an LNG re-gasification plant in Spain. We also booked additional front-end engineering services for an offshore oil and gas production project in China that we've been working on for the past few years.

Backlog for the oil and gas segment has increased 43 percent to $4.8 billion, up from $3.3 billion a year ago. I would point out that while this backlog was effectively flat compared with the end of second quarter, this follows several quarters of very strong growth.

Turning to our industrial infrastructure segment, new awards were a strong $1.1 billion, up 63 percent or $696 million from third quarter of last year. Included in this segment's quarterly awards are two major pharmaceutical projects, one in Puerto Rico and one in the United States. In addition to the front-end engineering and development and program management services award for a major petrochemical project in Kuwait that Alan mentioned earlier, we also received a $200 million chemical project in the United Kingdom. Other awards included a second phase to a major glass manufacturing plant in Taiwan and a variety of smaller assignments, including additional work on our telecommunications project for the London Underground, engineering alliance with a major snack foods manufacturer, reconstruction of a 22-mile existing rail corridor.

Backlog for the segment continues its quarterly growth trend, rising to $5 billion, up 62 percent from the $3.5 billion in third quarter last year and up 4.8 percent (technical difficulty) billion at the end of the second quarter.

New awards for the government segment included $1.2 billion, about the same as the third quarter last year. In addition to the annual booking of our two major Department of Energy projects, we received various task orders related to our work in Iraq, as well as other logistical support activities from the Gulf area and ongoing base maintenance and services awards for our (indiscernible)

Backlog in the government segment continued to post strong growth, increasing 28 percent to $1.7 billion compared with $1.3 billion in the comparable quarter last year.

Global services new awards were $274 million, essentially flat with the $267 million in the third quarter of last year and up modestly from $247 million in the second quarter. The backlog in global services continued its steady build, now totaling $1.9 billion, up 20 percent from $1.6 billion a year ago.

Moving on to power, as expected, new awards continue to be very modest, just $9 million, primarily reflecting an award for preliminary design and engineering to be performed under a letter of intent by Peabody Energy for a planned $2 billion coal-fired power project in Illinois. The Peabody project represents a very significant opportunity for Fluor. We hope to receive the full EPC award sometime in 2005.

Although not included in this quarter's results, I am pleased to announce that we have recently also finalized an agreement with Nevada Power to complete the 1200 megawatt Moapa Power Plant, which they acquired from Duke Energy. You may recall that this was one of the plants that Duke Energy canceled prior to completion 18 months. The Moapa project will be in fourth quarter bookings for Fluor.

Backlog for the power segment continues to trend down, concluding the quarter at just $78 million, mainly comprised of the Brazos project in Texas. As noted earlier, we have moved approximately $300 million of backlog at ICA Fluor from power into oil and gas this quarter, where it will be reported going forward.

Moving on to corporate items, G&A was $23.7 million compared with $33.5 million in the third quarter last year. Third quarter G&A includes the gain of $5.5 million related to the final disposal of the residual interest in a property that we sold in 1985, the net effect of several adjustments related to currency translation and other accruals. As has been the case for several years, we have generally spending at the end of the year. We expect G&A in the fourth quarter to be in the $40 million range.

We had net interest of $1.1 million in the quarter, essentially level with a year ago.

The tax rate for the quarter was 35.2 percent, a little above our forecasted rate of 34.5 percent.

Let me move on to the balance sheet and make a few comments on cash and other financial items. Cash and securities were down $33 million to a very healthy $562 million. Debt-to-capital ratio at the end of the quarter was 28 percent, below our 30 percent target. The decrease in cash was primarily used to repay a $27 million (indiscernible) lease for our Calgary, Canada, engineering office. Cash used by operating activity was $200,000.

Year-to-date capital expenditures were $69 million while depreciation was $64 million.

We continue to place a very priority on maintaining our strong financial condition and our A credit rating, which we view as a valuable competitive advantage that it provides the corporation.

With that, Alan and I will be happy to respond to questions.

(OPERATOR INSTRUCTIONS) Michael Dudas, Bear Stearns.

Just following up on the balance sheet question, my first question, Mike, given that you've had such a huge move in the backlog and it could possibly continue over the next 12 to 18 months, and, given your cash balance, given the bonding requirements and the potential positive from Hamaca arbitration, could you help us a little bit about how much cash is the company going to require? How much is available to put into acquisitions or to do other things that return to shareholders? Can you give me a sense as you maybe look to 2005 once all these issues get resolved how it's all going to stack up for us?

Sure, I'll be glad to. That's a really good question. As I said, our cash balance right now is about $560 million. We expected to end the year about $500 million, plus or minus, maybe $50 million. The fourth quarter traditionally represents cash outflows as we fund some of our insurance payments and fund our pension plan.

You need to step back, Mike, and take a look at our-- our mix of our cash. The majority of our cash is overseas. That, in part, reflects the growing trend of our business moving overseas. About 60 percent of our new awards and backlog are overseas. That cash really supports local projects that are growing in the international arena. So a very small amount of that cash is available for corporate purposes.

We-- as we look at our balance sheet, our debt-to-total capital is about 28 percent, as I mentioned. Our corporate goal is to keep it under 30 percent to maintain our A rating. So in terms of adding new debt to our balance sheet, domestically, to fund share repurchases or to fund niche acquisitions, we have very little flexibility in the near term.

Certainly, as we move through 2005 we expect to generate positive cash flow and we'd like to use that cash flow for nice acquisitions, as well as, if it meets our price targets, for share repurchases. But our number one priority, as we've maintained for quite some time, is to keep our A rating, which is very valuable, as you alluded to, in terms of gaining our access to the surety market and other credit markets. That's our number one corporate goal. We will adjust our acquisition program and our share repurchase program around maintaining our A rating.

And how would Hamaca arbitration resolution add to subtract to that, going forward?

The-- at the end of the third quarter we will show on our balance sheet about $254 million of costs associated with Hamaca that we hope to recover through arbitration. As we recover those costs and generate additional cash for the corporation, that will certainly improve our financial position and make it even stronger. That will give us resources, cash resources, to continue our successful strategy of nice acquisitions and, if we decide the price targets are correct that will allow us to perhaps repurchase some shares to avoid the share creep that we've seen in the past 18 months or so.

So that's how we view the potential proceeds from Hamaca and, again, we remain very optimistic about the outcome of the arbitration and we hope that those proceeds would enhance our financial position throughout 2005.

And my followup for Alan. Could you elaborate further on the operating loss that you reported in the third quarter in the power business and give us some of the color around that issue and how we should portray in other opportunities that you've booked in that segment or other segments, going forward?

Sure, I'll be glad to, Mike. The loss that we alluded in the power arena was evident in the numbers simply because of where we're at in terms of our total backlog in power. As Mike alluded to, we really only have one other significant ongoing EPC project in the power segment at this point in time, so as we close this particular project, it was a waste-coal power plant, we encountered a process problem with the processing of the waste-coal into the boiler and a problem with the boiler manufacturer's system for feeding in that coal. It impacted the startup of that project.

As a result, we had to take a modest charge related to liquidated damages. That process problem has been fixed and the plant is now operating and so we have a pretty good handle on the numbers. Even though it is a loss that we had to recognize in this quarter, I'd go back to all of the changes that we've made in our risk program and our entire risk profile and point out to you that I've said over a number of times that I can't guarantee that we won't have losses. What our risk program does, though, is it takes out all of those potentials for the significant losses that really, truly impact the bottom line. And we had, in this quarter, the ability to offset that and still come in with good results.

So, I guess, the last comment that I'd like to make is since we really put in our risk program into the power effort, if you look at the last three years of power projects and the result of power projects, including this subject project that I'm talking about, our overall EBIT margin on completed power projects for the last three years has been well over 8 percent. That includes the losses from this project.

I also would say that we have not put in to this financial accounting for this quarter any potential for recoveries and claims for clawback in terms of the cost of the implementation of the fix. We'll-- if we have the opportunity, which I think we do, to improve on that, we'll report that in succeeding quarters.

Sanjay Shrestha, First Albany.

Just a couple of quick questions here. First one, I'm hoping to understand a little bit better about the earnings guidance for 2005 from $2.30 to $2.60. Is there anything in that range related to a potential favorable settlement on the Hamaca, or is it mostly related to, kind of like, you know, large-size projects in the backlog and the gradual burn on those projects and a little difficult to sort of gauge how exactly they unfold.

Well, Sanjay, the guidance that we gave for 2005 really has two factors that determine where we'll wind up in that range. The first one, in terms of its uncertainty, is probably the-- our situation in Iraq. We're counting on very little in that in terms of our '05 results, but it could come up and be more positive.

OK.

The second is with the increase we've had in backlog, the challenge we have is these are all front-end awards for the most part that we're getting in a lot of our projects and it's the pace, not only of the startup of those awards, but it's also the pace at which we take on new awards in '05. We do think that '05 will be another strong year of backlog growth and every year when we project forward, we do have what we call stretch. It relies on us winning and being able to execute certain parts of it in that year. So that, then, comes down to a timing issue and a startup/ramp up rate in each of those projects. And that's really what has determined the range that we've given you.

OK, that's great. To kind of follow up on that same backlog question again, Alan here, on the industrial and the infrastructure side of the business, it now accounts for like, give or take, about 38 or so percent of your total backlog, which is really impressive. Now the burn within that segment of the business seems to be a little bit slow. Now is that, again, strictly related to, like, the front-end-related stuff that you're doing right now or is there anything that we should be reading into that?

Well, if you look at the track record in recent times of our bookings performance in the industrial and infrastructure, we, in fact, have been booking strong for the last several quarters, but in the last year, the last couple of quarters, we were not. And I think the-- what we've seen in the last couple quarters has been simply that. It's the effect from the slow booking that occurred toward the end of last year.

In addition, just the timing of project completions and a number of other factors.

Right and, Sanjay, as you may recall, we also took a couple of projects out of backlog.

Correct.

Yes, OK, so it's strictly, really, just the time lag between the book and the burn on the large-size projects?

It's a timing issue. I think particularly as we now-- as we go on into the finish of this year and into '05, we'll see continuing strong EBIT performance from industrial and infrastructure.

OK, great. And one last question. One of the-- you know, the Reliant Energy's Seward project, I guess, was, you know, ranked as the power plant of the year by Platts this year. Now I wanted to sort of confirm the-- you know, the level of involvement that Fluor Daniel had within that segment and also, second thing, I wanted to kind of confirm, you know, given sort of like the Peabody-related stuff on the clean coal side clearly that the power market seems to be hitting the bottom here. Could we expect an incremental order flow similar to that going into 2005?

First of all, we were the contractor for the Seward power plant. The-- the overall power market, though, I think if you look at the award we got on Peabody, the one that Mike just talked about on the completing of Moapa, while that market segment has hit bottom, we are-- we have been, still, successful on what we would call the target opportunities. We see gathering momentum in that arena that will, I think, point to increased awards as we go into '05. I think the momentum is going to continue to build in the power market on in through '06 and for the rest of the decade.

Gina Gordon (ph), Merrill Lynch.

Hi. I'm calling in for Lorraine Maikis. Really quickly, can you just give me a little more insight into the Nevada power project that you'd mentioned? Is it a joint venture? Is it a fixed-price project?

That project was one that we were the contractor for in our previous Duke Fluor Daniel joint venture. That project was canceled by Duke towards the end of the cycle based on the power market. They then sold-- Duke Power then sold their interest in Nevada Power, who has now contracted directly with Fluor, not in a joint venture, for that project.

And what's the value of this project, approximately?

We don't divulge the power-- the individual value of projects in this particular case.

Understood. And is it a fixed-price contract?

No, it is not. This is reimbursable. We will-- we might have the opportunity to settle on a fixed price as we get into the project.

OK. And then the DOE projects that you renewed, what is the nature of those and the timing? Is it generally just a roll off over the full year?

In both of those projects, they're both significant projects. Both have to do with closure of nuclear sites for the Department of Energy and we have-- those are multi-year contracts. We book on a very conservative basis, only the funding that current year. So in-- and that's the government's current year. So in third quarter we always book the annual value of revenue for each of those projects.

Now the Fernald project is due for closure in 2006 and we're moving strongly towards that date, hitting all the milestones and really doing well on schedule. The Fernald project-- I mean, the Hanford project is a longer-term program than that.

OK and then my final question, have you been hearing any pushback, receiving any pushback from your customers regarding materials pricing? Are they experiencing any impact from increases in material prices?

Material prices have gone up. It's more a commodity-by-commodity basis and even more than that probably regional. I think, as most of you know and have seen and read in the papers, steel prices have gone up over the last year and that's been pretty much a general trend. But other commodities are seeing some upward pressure based on the continued expansion, particularly in oil and gas, that we're seeing for capital programs.

Right, but we haven't seen that materially impact the economics of the projects overall.

No, not at all. In fact, the economics of the projects are continuing to get better based on a number of the other factors around the business plan of our clients.

Jamie Cook, CS First Boston.

My first question has to do with the oil and gas side. You know, your revenues were up significantly from the second quarter. Could you give a little color on the ramp and should we-- and I-- first could you give color on the ramp and second, when you look at your margins, your margins were pretty good and I'm just wondering if you think that's sustainable in the fourth quarter and in '05?

Well, I guess one of the things that you'll hear Mike and I say on a long-term basis, most of the times we talk, is it is a lumpy business. We've had bookings in oil and gas. We see that market continue to trend up in its capital spending. All of the signs are positive there.

However, we have been in, particular this last quarter, in a period of fairly fast burn on a couple of large projects. Now as we go into the last part of '04 and '05, we're on-- we're really starting up on a number of new awards. So it'll be lumpy, quarter-to-quarter, but we do see continuing growth in that business and we're very bullish about our prospects going forward and adding to the growth of overall Fluor Corporation.

Jamie, just for example in the quarter, TCO has moved from engineering phase out to the field and there's a lot of burn in the field at TCO. That's part of the increase in the revenue this quarter.

And what about on the margin front? I mean, is there a reason why the margins were so good?

Margins, again, are things that-- depending on the timing of events, can move over the boundary line from quarter to quarter. And so it will change, quarter to quarter. But, again, our margins-- if you look at backlog growth, margins are typically stronger on the front end of projects, where as we book in the total EPC revenue value with the total summary of revenue that that entails, it tends to make our margins look smaller as we get into the overall EPC side of the program.

Right and you're really correct. We had very strong margins in the third quarter. We don't expect those margins to continue every single quarter. As Alan said, it's going to be lumpy.

OK. And then my next question, for Iraq, I think operating income was $25 million in the first quarter and $2 million in the second quarter. What was that in the third quarter.

I'm not sure where you got those numbers. We do not divulge numbers for individual programs like that. In fact, that's not the numbers--

No.

We saw very strong results, though, in our first quarter from Iraq. Less so in second quarter and even less in third quarter.

OK.

We have seen a ramp up-- in the very, very last weeks of the quarter, we did start to see some additional activity with respect to task orders, but, again, even those task orders are on the front end of those where we're doing estimating and before we move into actual execution.

OK. And the finally, my last question, and I'm sorry, I don't think you covered this, but there's a lot of calls going on today. On the power side should we-- in the fourth quarter, should we-- you know, what should we expect? I mean, should we expect, you know, another loss or should we expect -- I guess, in talking in terms of operating income -- should that improve versus the third quarter?

We really don't generally give quarterly guidance by segment, but we certainly hope and expect to have the loss on this one power project behind us and not to report another loss in the quarter.

Correct. And when we get into the fourth quarter, we really will have just the activities, the front-end activities from our Peabody-- our ongoing EPC activities on a couple other projects--

Right, on the Brazos project.

And some maintenance activities, plus the starting efforts on Moapa.

Richard Rossi, Morgan Joseph.

Just to follow up on a couple of things, on this power project you've had a problem with, I just want to be clear on this. The problem is fixed. Is the project delivered and are your liabilities legally behind you or is there a period here where you might have further costs?

No, it-- Rich, it's essentially fixed. We've taken the loss in this quarter. We don't expect any other results from this project.

OK.

Other than potentially, hopefully, positive.

And would that be-- would that be mostly from recovery of costs from-- it sounds like the boiler manufacturer?

It could be from a number of factors, Rich. It could be from recovery costs. It could be from our ability, now, to-- as we complete this fix-- the fix is working, but as we complete it and do the wrapup on it, to have lower costs than what we might have estimated.

OK. Could you give us what the order or backlog impact was for the bookings on Hanford and Fernald?

Again, we don't divulge individual programs, but it is a-- it has been an annual occurrence for a number of years.

OK, I guess the better question is, is it any different than it's been in the past?

No.

Not--

Materially different?

No, just (indiscernible) is all, Rich.

OK, all right. One other thing, also, if you take the $5.5 million out of the G&A that you had a gain and the other "several adjustments" you've made in the currency, et cetera, et cetera, what would G&A have been for the quarter?

Our normal run rate is mid $30s for most quarters throughout the year and, as I indicated, perhaps, ballpark $40 million for the fourth quarter. In the fourth quarter we have some discretionary spending. My whole career, we have been-- it's also a little bit of human nature--

Spend it or lose it.

In the year, yes, they tend to spend a little more in the fourth quarter to meet their budget targets.

Right. So it would have run in the mid-$30s had those items not hit the P&L?

That's correct.

OK. And just one final thing for my clarification, I understand that profitability in the front end of the job on oil and gas jobs, you know, may be higher, but I also-- normally when I see that big a jump on the revenue side, quarter-over-quarter, I expect that to include, maybe, more pass-throughs and, therefore, penalized margins and that certainly wasn't the case in this quarter. Was there anything else in the oil and gas side in the quarter, project completions, the ability to book profits that you had held back on jobs that you're now completing, that influenced the profit line?

You know, Rich, there's always some mix of that and you're correct in some typical cases the pass-throughs do, in fact, lower our effective-- or apparent margins. That wasn't really the case in this quarter. This quarter we had a fairly fast burn, as Mike said, particularly with the transition to the field on TCO, and we had some other projects that we were able to recognize, you know, the ending of liabilities or risks and be able to take those. But none of them were, what I would say, were significant. They just were cumulative and it resulted in a good quarter.

All right. And here's one final thing -- pardon my ignorance here, I've kind of lost track of this -- but I know on the Florida ballot there's an item related to the high-speed train, the governor wants that pulled back. I remember you were involved in that. Are you still involved in that project? I'm sure there isn't anything in the backlog, but have there been costs involved in that job?

You're absolutely right. We are involved in it, as we were previously. There is nothing in backlog for it and the cost in terms-- in pursuit have been pretty modest.

Those have been expensed. They're not on the balance sheet.

OK, great.

Jim Kostel (ph) with Cuyahoga Capital (ph) has our next question.

Hi. It's Jim Kostel (ph) with Cuyahoga Capital (ph). OK, first of all, congratulations on getting Hamaca done. Just so I make sure I understand it, your people are completely out of there and it's completely done? That's the first part of the question.

Secondly, you mentioned that there's $254 million of costs sitting on the balance sheet that relate to Hamaca. Is that a gross number or a net number and, you know, could you give us how many dollars of assets and how many dollars of liabilities are still resident on the balance sheet?

Thirdly, looking at the proposed arbitration, with what you're asking for there, would the number you'd be getting, if you got everything that you wanted, what would that number be?

And finally, if the arbitration process drags out over a period of time, how does that affect the company's cash flow? I mean, when are you folks expecting to get $254 and-- or whatever that number is and if you don't get it and it drags out even further, what will you do to make up for that cash flow situation?

Well, maybe we'll tag-team this question. First of all, let me report on the status of the project. The project has been completed. It has been totally turned over to the client and it has been started up. We still have people at that site, which is, again, always the case when we finish a project. In fact, we are working for the same client on a reimbursable basis, supporting them in their startup and initial operation. But it has been staffed down to a very de minimus number of people. So our expense in terms of Fluor direct-hire labor and-- is extremely minimal at this point in time.

We'll have some ongoing expenses as we go on through the year just as we close out subcontracts. So there will be some ongoing financial and cash flow requirements through the year, but, by and large, the project now is complete and that will come-- those cash requirements will come to an end as we go through '05.

Let me have Mike talk to you specifically about the balance sheet issues and what that means, going forward.

All right. The-- in response to your question, the $250 million on the balance sheet in the third quarter is a gross number. It's not offset with any other liabilities or assets. It's our costs that we've incurred above contract value that we expect to get reimbursed through the arbitration process.

It's a fairly complicated arbitration process. We have a number of arbitrations going on over soil issues, for labor or "Acta Convenia" issues, for force majuere, national issues. The size of the arbitrations are significant.

The way the contract is structured, depending on the decision rendered by the arbitration panel, they could render decisions in excess of our costs. Given the nature of the contract, that's clearly possible.

Fluor is fortunate to be in a very strong financial position. We have funded the majority of the costs incurred to complete this project, maintained our A rating and maintained our strong cash position and a strong balance sheet with a debt-to-total capital below 30 percent and we think as we move into 2005, independent of any actions by the arbitration panel, we will continue to be in a very strong financial position and we'll be able to weather any kind of processes or any kind of impact given by the arbitration process, if it would be unexpectedly delayed.

The size of the claims that are under arbitration on Hamaca are substantially larger than that number.

If you read our 10-K and 10-Q, I think you'll add the numbers up and do the math, the size of the claims will exceed $700 million.

Thank you very much.

That's not the cost that we've incurred to date.

Steve Bravel (ph), Botti Brown Asset Management.

I was wondering if you could just give us a little more-- a few more balance sheet items, accounts receivable, work in progress and advanced billings?

We'll come out with that when we issue our 10-Q. I hate to give a few items absent looking at the total balance sheet. There's not a material increase in the balance sheet except in some work in process that really relates to the rate of revenues and burn that we had in the quarter. The key ratios for our balance sheet that we look at is a cash decrease by $33 million. We used $27 million of that to repay debt. So the way I calculate it, the way we do it internally, that means our free cash flow the quarter was a very modest negative $6 million. That's the key number.

OK, thank you.

It's basically a push in terms of free cash flow for the quarter.

Scott Vald (ph), UBS O'Connor.

I wanted to ask a specific question on the $5.5 million that was in your SG&A, because if you strip that out you would have reported 4 cents less in earnings and I'm just trying to-- you say in the release that part of it is due to some sort of FX adjustments and certain other accruals. I guess, could you give any more detail on what sort of adjustments those were?

Those are very modest. All those are, on a net basis, very modest translation adjustments and some accruals. You know, let me comment on corporate overhead in general. And this may be a little long-winded, but it's something that's near and dear to me.

A couple years-- back in 2000 and 2001 we made a significant investment in our IT systems and SAP as we went forward in this company, especially in finance and HR. At that time, we also recognized that in 2003 and 2004 we were going to have to replace some earnings due to the downside in power and, in fact, the more successful we were in the power cycle, the bigger the hurdle would be to replace those earnings and we were very successful in the power cycle.

So as we looked at our strategy for 2003-2004, we really focused on growing our non-power businesses within Fluor, but we also wanted to complement that by decreasing our corporate overhead and putting us into a much more efficient position going forward in the corporation. So we undertook a major effort to reduce our corporate overhead. We assigned some key executives to that task, including Jeff Faulk, who currently runs oil and gas was one of the key executives assigned to that task. We brought in some outside help to give us a disciplined process and we were successful in reducing our overhead.

That overhead reduction complemented the growth in our non-power business and let us offset the decline in power in 2003 and, for the most part, offset it for 2004, as well. So as you look at the progress we've made on corporate overhead and the lower numbers that we're reporting this year, that's, in large part, due to a major effort by a lot of devoted people in Fluor and it's not just due to an accounting adjustment in one quarter or another.

The other comment I want to make is we realize the long-term growth strategy is based on growing-- profitably growing new awards and executing those new awards, but as we look to the future, it's also imperative that we maintain or continue to reduce our corporate overhead so we don't erode the growth provided by new awards on the bottom line. And to do that, we continue to focus on a very disciplined process to reduce corporate overhead.

So quarter-to-quarter our business is lumpy. We do have some items in corporate overhead that move in and out, some accrual adjustments as we implement new processes and improve administrative efficiencies. We may reduce an accrual here or there for something that's no longer needed.

We're also in the real estate business. We have over 140 properties, 4.3 million square feet of space to house all of our engineering and project execution people and we do-- we do adjust our real estate footprint to match the market dynamics and to match our growth plans for the company. That does result, from quarter to quarter occasionally in some gains or losses and, you know, impacts on real estate.

Some people consider those non-operating but, quite frankly, the real estate-- the cost of occupancy in real estate is a major operating expense for this corporation. It does impact our P&L from quarter to quarter, so we do have that. It's a little lumpy. It's not always straightforward, but we view that as just part of the ongoing operations. In fact, we're very proud of the progress we've made in reducing our corporate overhead last year and this year to offset the kind of-- the impact of the decline in the power business.

OK. I appreciate your answer. I mean, I understand over the last several year, you have made great progress. I just noted that this quarter appeared to be somewhat of an anomaly in G&A and so that's why I wanted to ask about it. Of that $5.5, how much was the gain versus the other adjustments?

That was a net gain on real estate was $5.5.

Oh, it was?

Yes.

OK. And in the fourth quarter, if you take the first three quarters and add them up, with what's reported in earnings and back into the fourth quarter, you're guiding to 53 to 63 cents, I guess, which is a modest reduction from before. What-- could you give any more detail? I know you pointed out on Iraq that that work is slowing down and some of these projects are slow to start up, but just any more detail you could give on why, I guess, fourth quarter would be a little bit lower than what you were thinking previously?

A number of things. First of all, we anticipate the corporate G&A will be higher in the fourth quarter. We also know that given the strength in oil and gas in Q3 that we can't expect that same level of margin performance in Q4. So I think-- and, again, as we finish up the year there are some things that we will be doing in terms of completing some strategic initiative programs.

So I-- it all points to an ability to close in on that range and to give you what we think is our flexibility, if you will, or the amount that we're going to come in in the fourth quarter.

Right. There's still some uncertainties Alan mentioned in terms of Iraq for the fourth quarter, as well. Last year we had a very strong fourth quarter in Iraq because we were ramping up activity there.

OK. One other question I had was on free cash flow. You had made a comment earlier in this call that it was, I think, negative $6 million, but-- and I don't know how you guys calculate it, but when I just took the $200,000 in operating cash flow and subtracted it off of CapEx, I was getting like a negative $26-$27 million in free cash. So I don't-- maybe my definition is-- I was just using that cash from operations minus CapEx.

Well, what I'm doing at this stage, since we don't have all the details out there, we're just using change in cash minus change in debt.

OK. OK, yeah, when I did that, I was getting $6-$7 million, but then when I did the other method, I was getting $26-$27 million. So I guess we'll just have to wait for the filing.

And just as a-- I guess just advice in the future, if you could ever give a cash flow statement on the release, it would be great.

Alex Rygiel, Friedman, Billings, Ramsey.

Thank you very much. Just one clarification. I do want to understand that your range of $2.15 to $2.25 does include that 6 cent one-time gain from the first quarter and, therefore, your fourth quarter guidance is really 47 to 57 cents?

Repeat that question, Alex, if you would.

I'm looking for clarification on your fourth quarter guidance. Is it really 47 to 57 cents? Because your $2.15 to $2.25, I believe, includes that 6 cent one-time gain from the first quarter.

That's correct.

That's right.

Thank you. And then just, you know, stepping back, backlog is up huge in the last nine months, higher than, you know, the better part of the last six years and maybe longer than that on a restated pro forma basis. Conceptually, can you talk about the margins within your backlog as we start to think about 2006 and 2007? And is that backlog-- is the quality of that backlog as good as six, seven, eight years ago?

Yes, Alex, that's an extremely good question. We don't post the margin numbers in backlog, but I will tell you that we're not disappointed at all with the margin capacity in our backlog. The one thing, though, that you do-- we do always expect is that when we start booking larger projects that have significant amount of pass-throughs, it does tend to lower the overall apparent margin, but these are strong bookings. It is strong backlog growth and will point to higher earnings as we go work off that backlog.

And a couple of times you've mentioned that you expect backlog to continue to build through 2005. I don't want you to forecast that figure, but are you talking about less than 10 percent? More than 10 percent?

Well, it would be a good try if you were to try to get me to forecast the absolute number, but I can tell you that we do expect backlog to continue to show growth in '05. All of the markets that we're in that are strong look to be continuing their dynamics on through '05 and, in addition, we think we'll see a number of other markets start to join in that parade.

Particularly, I think we're going to start to see more upturn in power as we go into '05. We continue to see chemicals strong and growing stronger.

So the signs are good. We anticipate to continue to add to backlog as we go through.

Now the percentage increase is hard to anticipate, again, because even on a particular project we may book it in passes or we may book it all at once, depending on how it's contracted.

One last question. You basically said a lot of the incremental opportunities are in the Middle East and the Asian market place. Can you quickly just comment on the competitive market in those regions versus other regions of the country-- or other regions of the world over the last couple of years?

Well, they're highly competitive. There's no doubt about that. I think the specific advantage that we have -- let me mention a couple of them. First of all, particularly as we get into these large projects that have significant challenges to them -- logistical, technology, political -- that's where we really start to see limited competition. In particular, with our balance sheet strength and our overall global reach and our program management capability, we really do have a great track coming in to look at the overall program management of these projects and to do what we call program management plus, which then takes on the EPC in certain segments of those large projects.

So while it is, clearly, highly competitive and we do have competitors, we really think that, particularly the type of market that's unfolding, really plays to our advantages.

John Rogers, D.A. Davidson.

Alan, I was wondering-- you answered my question primarily about margins, but particularly in the markets such as power and chemicals where you're starting to see an initial rebound, can you talk just a second about where that work is happening and how it's different from the last cycle? I assume that the power work is more outside the U.S. and chemicals, as well, and how Fluor's positioning for that?

Well, those markets are in very different phases of their development right now. Let me take each of them, John, quickly here. The power market, first of all, is down, probably, about at its low part of the cycle. What we are seeing, as evidenced by the Peabody (technical difficulty) is the first-- the first signs of gaining strength in that market.

We see a lot of power projects, coal projects, primarily in the United States, that are under planning and development that we think we'll have a great opportunity for and we are seeing certain opportunities internationally, but not-- not in a significant mode. I think the real opportunity is going to be in the U.S. as the power margins and the reserve margins close on the need for new investment.

In chemicals, however, that market has already started to grow and has been showing significant signs and new bookings for us over this year. And those projects are typically large. They're in either the Middle East or China, primarily, areas where we have significant position strength and have a significant technology advantage, as well. So that market is already strong for us and is already adding to our backlog in this current year.

And, operator, with that we will need to wrap up the call today. First of all, let me, in closing thank everybody for their participation on this call today.

I would like to close by saying that I continue to be pleased with the performance of this company overall. We are very encouraged by the general trends in our economy and in the markets and the growth potential that they represent and we're extremely happy with the positioning and the strategic initiatives that we've undertaken to be prepared for the market.

With 2004 nearly complete, we will continue to focus our efforts on building a solid foundation to grow. We appreciate your continued interest in Fluor and wish you a great day.

Take care.