Fluor Corp (FLR) 2005 Q1 法說會逐字稿

Good day, and welcome to Fluor Corporation's first-quarter conference call. This call is being recorded. At this time, all participants are in a listen-only mode. (Operator Instructions). There will be a replay of today's conference call at 10 AM Pacific Time today accessible on Fluor's website at www.fluor.com. A telephone replay will also be available, running through 5 PM Pacific Time on May 12 at the following telephone number -- 1-888-203-1112. The access code of 1442563 will be required. (Operator Instructions).

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

Thank you, and welcome to Fluor's first-quarter 2005 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 effect of strategic initiatives and other statements regarding the intents, beliefs 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 4, 2005, 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 the call over to Alan Boeckmann, our Chairman and CEO.

Thank you, Lila. First of all, good morning, everybody, and thank you for joining us today. This morning, we will review our first-quarter results for 2005 and update you on the current business outlook.

Let me start by saying that I'm pleased with the ongoing strength that we had in quarterly new awards and the growth in backlog, which continues to build a strong foundation for future growth. Our net earnings for the first quarter were $47.4 million or $0.56 per share, and that compared with $46.7 million or $0.57 per share a year ago. These results included strong growth in Fluor's Oil and Gas, Industrial and Infrastructure, and Global Services business segments. However, this was offset by lower earnings in Fluor's Government and Power businesses and by a higher effective tax rate for the quarter.

First-quarter results last year did include an after-tax gain of $5.1 million or $0.06 per share, which was related to the sale of two real estate properties. The new awards of 3.4 billion for the quarter continued the strong trend that we've experienced over the past 12 months. This was an increase of 7%, over 3.1 billion of last year, which was the beginning of our now five-quarter run rate for new awards in the 3 billion-plus range.

Also of note, new awards were again broad-based, with strength across all of our business segments. And Oil and Gas and both Global Services posted particularly strong new awards this quarter. As a result, our consolidated backlog grew 30% to $15.4 billion, compared with 11.9 billion just a year ago and up from 14.8 billion at the end of 2004.

As expected, given the significant growth in backlog over this past year, revenues for the quarter grew a strong 39% to 2.9 billion, and that was up from 2.1 billion a year ago. Our consolidated operating profit increased 20% to $118.6 million, compared with 98.8 million a year ago. We were very pleased with the substantial growth in operating profit in Oil and Gas, Industrial and Infrastructure, and Global Services. The strong operating performance in these business segments reflects the substantial growth in backlog over these past two years. And the underlying strength in these segments, however, was partially offset by lower operating profit in the Government segment due to estimated losses related to U.S. Embassy projects and combined with lower first-quarter earnings from work in Iraq compared with a year ago.

Let me comment briefly on the project losses. We've run into issues on Embassy projects that we obviously did not anticipate. And for a variety of reasons, which include scope changes, unexpected execution problems and subcontractor difficulties, we have estimated that we have overrun the fixed prices on these projects. In addition, as expected, earnings from Power were notably lower than a year ago. And you may recall that the majority of Power earnings last year were recognized in the first half, while 2005 is expected to pick up gradually throughout the year.

While margins were level or improved in the Oil and Gas, Industrial and Infrastructure, and Global Service segments, our overall operating margin declined to 4.2%, down from 4.8 last year as a result of those Embassy projects and the lower operating profit in Power.

Now, let's shift to discussion of our outlook going forward. We continue to see a favorable market outlook. The majority of our markets are in a positive part of their business cycle, and with several showing increasing momentum. We expect this broad-based strength in capital spending to continue to drive a steady flow of new awards and contribute to additional backlog growth. We continue to see substantial ongoing investment in the global oil and gas industry, and we're starting to see some of the larger projects moving forward in the chemicals market.

Both of these areas were substantial contributors to first-quarter awards. In fact, our two largest project awards were for a new oil sands project in Canada and the engineering procurement construction management contract for the utilities and offsites for a major petrochemical project in Kuwait, where we were already performing program management.

As we've indicated in our earnings release, we have realigned our chemicals business, which had previously been part of our Industrial and Infrastructure segment, to now fall under our Oil and Gas business. Due to the growing momentum and strong showing in petrochemicals, this change was initiated to ensure adequate support for the large number of projects anticipated over the next few years. And by placing it under Oil and Gas, the chemicals unit will have better access to a broad resource pool that is directly applicable to their projects and more closely related to the needs of this rapidly growing market.

On the industrial front, we are seeing continued strengthening in general manufacturing across a range of consumer and industrial markets, as well as additional opportunities in mining. And while life sciences continues to slow, there does remain a fair amount of ongoing activity and still new project opportunities. Encouragingly, there's also substantial growing potential in the power market, primarily focused on new coal-fired generating facilities as well as a number of opportunities for environmental cleanup of older facilities.

Collectively, these project prospects represent significant opportunity for Fluor and are expected to contribute to additional backlog growth. I would point out that a number of these prospects are large, multiyear projects, which means that they will take some time to ramp up before materially impacting the income statement.

Given the strong backlog growth already achieved, and the outlook for ongoing client spending, we're very well-positioned to deliver good earnings growth over the next several years. And while it is still relatively early in the year, based on our first-quarter performance, we are narrowing our earnings guidance to a range of $2.35 to $2.55 per share for this year. We have raised the bottom end of the range given the underlying strength in the first-quarter earnings, as well as the continued strength in new awards. However, with the estimated project losses reported this quarter, we also felt that it was prudent to lower the top end of the range.

And with that, let me turn it over to Mike Steuert, Fluor's CFO, to review additional details of our operating performance and other financial information.

Thank you, Alan, and good morning. Our business segment results are covered in detail in our press release, so I will focus on providing additional background on new awards and backlog for each operating segment. Starting with Oil and Gas, new awards were $1.5 billion, up 40% from $1.1 billion last year. New awards were booked during the quarter in both the upstream and downstream markets, as well as in chemicals. Downstream awards included a major new oil sands project in Canada, as Alan mentioned, as well as several fleet drills related projects for refineries in Canada and South Africa. We also received a second gas plant award for a project we're working on for Temex in Mexico.

On the upstream side, we saw additional scope on two current projects -- one in Kazakhstan and another in China. We also received a front-end engineering award for a gas production project in the Middle East. As Alan mentioned, we have moved the chemicals business volume to Oil and Gas. In chemicals, we had a significant award for the offsites and utilities on a major petrochemical project, which is a good example of how we expect our role to develop in a number of these large projects where we initially win the front-end engineering and project management and later receive a contract to perform a portion of the EPC work.

Backlog for the oil and gas segment increased 26% to $5.9 billion from $4.7 billion a year ago and up from $5.4 billion at the end of last year. In our Industrial and Infrastructure segment, new awards were a healthy $592 million, although down from an extremely strong quarter of $1.2 billion last year. New awards were broad-based and included an initial award for a major I&L (ph) project in Australia and two life sciences projects. Also included in new awards was additional scope on a telecommunications project for the UK for the London Underground and for two smaller manufacturing awards. Backlog at the end of the quarter for the Industrial and Infrastructure segment was $4.9 billion, up 40% from $3.5 billion a year ago.

New awards for our Government segment were $443 million, up from $412 million in the first quarter last year. New awards included approximately $260 million in task orders for our joint venture with AMEC in Iraq as well as some additional work under our existing CETAC 1 and CETAC 2 contracts.

We continue to anticipate that new work in Iraq for 2005 will be less than last year but, frankly, it's very difficult to predict. Visibility into the future remains murky and can change really from day to day.

Also included in the quarter were awards for Del-Jen and additional work for FEMA in Florida. Backlog increased 19% to 1.5 billion compared with $1.2 billion for the first quarter last year.

Global Services had a very strong first quarter, with new awards of $754 million, an increase of 89% over $399 million a year ago. Quarterly new awards included not only a number of contract renewals, which typically occur in the first quarter, but also included awards for a number of new sites and clients across the power, oil and gas, and industrial markets in both the U.S. and Europe. Backlog for Global Services increased a strong 42% to $2.7 billion from $1.9 billion last year.

In Power, we continue to see encouraging trends, with new awards of $82 million compared with $21 million in the first quarter of last year. The primary contract booked in the quarter was for the completion of the Luna Energy Facility in Deming, New Mexico. This is the second project where we've been rehired to complete a project that we had been working on that had been canceled by its previous owner. Also included in the quarter was a small award to continue to perform preliminary engineering work under a limited notice to proceed for a planned coal-fired facility in Nevada. Backlog for the Power segment decreased modestly to $483 million from $549 million last year.

Moving on to corporate items, G&A for the quarter was $38.1 million compared with $27.8 million, which was reduced by a pre-tax gain of 7.7 million on real estate transactions a year ago. We had modest net interest income of $131,000 compared with net interest expense of $759,000 last year, primarily due to a larger average cash balance. The effective tax rate for the quarter was markedly higher than normal at 41.2%, due to the impact of the foreign losses the Embassy projects had on our ability to absorb excess foreign tax credits incurred at higher tax rate jurisdictions.

Our effective tax rate for the full year is currently projected to be about 35 to 37%. Let me now shift to the balance sheet.

Cash and securities were $643 million at the end of the first quarter, up from $605 million at year-end. Including $120 million of commercial paper, the debt-to-total-capital ratio was slightly under 25% at the end of the quarter. To fulfill a near-term cash requirement, we entered into an equity distribution agreement in March to sell up to 2 million shares over time. During the quarter, we issued 758,000 shares and received net proceeds of $42 million. Deferred costs on the Hamaca project at the end of the quarter were $263 million, up modestly from $250 million at the end of last year.

Cash provided by operating activities for the quarter was about $37 million positive. Capital expenditures for the quarter were $33 million compared with depreciation of 23 million. Overall, our financial position continues to be quite strong and remains a top priority for the Company.

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

(Operator Instructions). Michael Dudas, Bear Stearns.

Two questions. First on the Power side. When you booked that limited notice to proceed in that coal-fired plant, is that -- is there more to book in that project? And secondly, I think the third project that Duke Energy canceled was just recently sold. Is that something that you would have an opportunity in garnering business this year?

Well, with respect to your first question, Mike, we clearly hope that that project goes forward with additional bookings. That's the intent under a limited notice to proceed. And so, we'll just have to wait and see. Obviously, we don't want to make too much of a guess here. But that's the normal process is we do -- when we get a limited notice to proceed is to go ahead and do some of the things that would set the project up for execution. On your second question, it has been sold, and clearly we would think that if the new owner wants to go forward, we would be a logical choice, as we were on the other previous two. But, again, that's not something that we're predicting at this point.

Nor do I want to jinx it for you. But my second -- my follow-up question is regarding the disappointment in the Government business. Can you give us a sense, without getting too granular, of the loss between -- the difference in the lack of earnings troubles is to the lack of Iraq business quarter to quarter and the project reserves, and are these projects that were legacy from when you bought the Jones out of bankruptcy? Are they ones that you've garnered since? And are there system issues? Was it just one-off issues that caused (technical difficulty)?

Mike, actually, I appreciate the question because I need to get a little more explanation there and I was waiting for a question to be able to do that. We have purchased J.A. Jones, and we had actually four projects in the mix that provides the losses. But by far and away, two of those projects made up the significant portion of it. And those were projects that were bid and won by Fluor prior to the Jones acquisition. We bought J.A. Jones for the purpose that they are the experts in this case, and this was a market we wanted to enter into to provide growth for the Company. And I think, in that mix and with the bringing on of J.A. Jones, a number of things occurred on these project that were very much in the area of changes in conditions, and also some serious difficulties with some contractors.

I can't discuss the specific issues because we're in the process of working through each project with the client, including some potential claims recovery. But I can say that we have performed thorough reviews on these projects and on the remaining ones, and we believe they are all on track, particularly the remaining ones. Two of those eight are near completion. We're doing now a total of 12 Embassy projects. And two of the remaining eight are near completion. The other six are tracking along or ahead of schedule and budget.

It is regrettable, but we do believe that it is a specific area and an isolated area, basically due to the integration. We're now going back and making sure that all the fundamental issues with our risk review and mitigation processes are in place in that area. Overall, our track record on Embassy projects is very good. However, we have responded to this current situation and have reinforced a number of the processes to make sure that we have reliable performance and delivery of margin in these areas. I can assure you that we're incorporating all the lessons learned into our risk model. And it is regrettable. Had it not been for these Embassy projects, this would have been the strongest quarter in earnings performance for Fluor since the spinoff.

And would you gather -- put a guess on the difference between lack of Iraq in these reserves without giving away too much?

Wall, Iraq clearly was not as strong as it was in the first quarter of last year in earnings. So, that's one issue. But the bigger issue was the losses on these projects.

Mike, the Embassy issues significantly outweigh any impact Iraq would have had on a quarter-to-quarter basis.

Curt Woodworth, J.P. Morgan.

I was wondering if you could talk a little bit about the amount of front-end work you're doing right now, if you can point to any particular markets, chemical or coal-fired plants, where you could see substantial new awards flows that you have good visibility on that right now relative to maybe where you were last year?

I would say our level of activity in oil and gas and chemicals is about the same as last year, which is still very strong in terms of new work -- new studies, conceptual and feasibility and front-end work. That continues in both those cases. We are, however, seeing some opportunities now in the power arena to look at projects and their viability. So I would say right now that those are the areas which we see the strongest opportunity given our visibility to this front-end work. One other I might add also is in the mining area. We're working on a number of studies in that arena.

Excluding the Peabody project, are there any other coal-fire projects that you are currently doing front-end design work for?

There are, but I would say that none of them are as close as the Peabody project in terms of getting a full notice to proceed.

And in terms of oil and gas and some of the drivers you mentioned, you didn't mention LNG at all. Can you talk a little bit about any project work there and maybe just kind of bring us up to date on your capabilities there and what you're looking at?

Well, in the LNG market, we participate in what I would call the receiving end of that in the regasification and terminal area. And we're currently involved in two projects in that arena. We do work on projects where the front-end cold side of LNG is involved but only in terms of program management and overall project management.

Jamie Cook, Credit Suisse First Boston Corporation.

My question relates more to the guidance. I understand you narrowed the range, but the midpoint is still the same at 245. Yet, you had two things -- you know, the Embassy projects obviously hurt you in the first quarter. Iraq is a little slower than you had anticipated. Yet, the midpoint is still the same. Are there other areas of the business that are stronger than you originally anticipated when you gave the guidance initially?

Yes, that's true. We're seeing very strong performance in Oil and Gas based on the previous bookings and strong execution. But I also say we're seeing it in the manufacturing and the mining areas of Industrial and Infrastructure.

Right, and Jamie, also, Global Services was strong as well.

Global Services is doing very well.

And that leads to my next question. In the Global Services, the margins were a bit better than I expected. Is that a reasonable run rate to assume going forward?

It's hard to predict run rates in that area because just given the timing. None of the projects that they do, even though they are longer-term projects, you'll have one of a kind instances at certain sites where a turnaround may occur. So I would say it was very strong and I think our margins have been picking up in that arena over the last couple of years. And certainly, Kirk Grimes and his team are targeting to have that be a reoccurrence. But I wouldn't predict it at this point.

Okay, and then I'm sorry, my last question. Of the projects that you're booking today, is there a trend that these -- you know, some of the projects, whether it's in Oil and Gas or Power or chemical, are these more fixed-price, lump-sum contracts or cost-plus? Should we expect a change in mix going forward?

Right now, in particular in this quarter, a significant number of the projects were reimbursable cost. In fact, at the end of the quarter, we're now at a fixed-price percentage in our backlog of about 24%. And that's down substantially from a couple of years ago, when it was in the high -- in the 40s.

Okay, but the projects that you're booking, that thing you're seeing out there for Power, you know, on the coal side, or chemical, do you think those would be more fixed or cost?

The Power tend to be more fixed-cost. The chemicals are a mixed bag, but on the very large projects where we're doing program management, those are almost always reimbursable costs.

Sanjay Shrestha, First Albany Corporation.

Just a couple of quick questions here. First one, $31 million in anticipated cost overrun for the Embassy project, and the guidance range for 2005 -- are you expecting any potential claims recoveries on that as a part of that guidance? I understand it's always difficult to give things like that, but is that also the part of the range here?

We gave some detail in our 10-Q on that. The actual loss on the projects on a gross basis, Sanjay, was 50 million. And there was 19 million of claims that impacted the 31 million net loss. But, no, we don't have any other kind of claim recoveries or settlements in our guidance for 2005.

Okay, great. So then, net-net, if that were not to be the case, you guys would've been in a position to be able to easily come at the high end of your range for 2005?

I'm glad you said that.

That's certainly the way the math works.

Exactly. Okay, okay. That's great. And also, another one -- in your 10-Q, you talked about potential for a decision on the labor agreement, you know, these are the labor issues in the Hamaca project expected shortly -- what do we mean when we say shortly? And two, could you remind us what would be the accounting treatment of that?

Well, we have been frustrated, I think, the decline for the last 18 months that we haven't had a decision so far. We're optimistic that we will get a decision sometime in 2005. The accounting treatment of that, since the project is essentially complete, we would factor that into our total expected cost for the project and decide what that does to our profitability in the project. The concern, Sanjay, and it's hard to tell you exactly how we treat that, because we wouldn't have the complete decision. There are still the open issues and the biggest issue surrounding the force majeure for the national strike, still an open issue. So we would probably be conservative with any partial settlement and reserve any profit pickup until we got the final decision on the national strike for force majeure.

And, Sanjay, all the arguments have been heard on the soils issue and on the Acta Convenio. And we got a partial award on soils. There is the final part of that award is still pending, as well as for Acta Convenio. And with the strike -- the national strike and related force majeure hearings are scheduled right now for late this summer or early fall.

Great, thanks, guys. And one last question, if I could. The kitsch (ph) reading some industry press here talking about BNF and AMEC looking at about 10 new power stations opportunities in the UK and also there's a lot of chatter about the remediation opportunity in the UK market. Could this translate into some potential opportunity for you guys during 2005? Or it would probably more be like -- if you were to win some of this it would probably be more of an '06 and '07 opportunity?

My guess is, to answer the first part of your question, yes, I think that market is one that we could potentially play in. We've got the skills and the capability and the resume for that. My guess is, though, if it is in '05, it would be a late '05. More than likely, in terms of any significant bookings, would be an '06 event.

Lorraine Maikis, Merrill Lynch.

Your Oil and Gas revenues were significantly better than we had expected. Is most of this work still in the front end, or are we starting to move into the construction phases?

Actually, Lorraine, it's a good situation we have, as we're doing both now at this point. We're still continuing to get some front-end work, but we're all -- some of our projects are now moving through design and just into the front, the first part of construction. And that's when we start to see the ramp-up in, as you know, and the pickup. And so, I think we're moving into a -- starting to move into a good part of the curve and we anticipate that will continue.

As a result of that, what do you expect for margins going forward? Do you see any margin expansion?

I would say probably not right now. Again, margin expansion in these large projects typically occurs right at the very end of the projects. And there are very few projects right now that are keying up for completion in '05.

For Oil and Gas overall for Fluor, we certainly don't expect a repeat of the Embassy issues.

No, that's true.

So, we need to factor that back into the overall margins for the Company going forward.

Yes, I was answering your question, Lorraine, specific to Oil and Gas and chemicals.

Could you give us a little bit of detail, now that you've moved chemicals into the Oil and Gas section of backlog, what is sort of the breakdown? How much of a percentage of backlog is that?

It's actually very small. In fact, I would say that on a comparable basis, looking to last year, it was actually very small. Even in the last quarter it would've been not a very significant difference. Again, but it is building up quickly. We've have a number of awards in that in this first quarter. Actually, our second-largest award was in the chemicals arena in this quarter. So we believe it is going to move up very rapidly. But if you go back and look at a comp when it was in the industrial infrastructure, it would not be a significant comparison.

John McGinty, Credit Suisse First Boston Corporation.

Michael, I apologize; I have not had a chance to look at the Q. The 31 million, which was 50 million of overruns, 19 million of expected recoveries, 31 million of net overruns, was that what you booked as excess cost in the quarter, or is that for the year?

That's in the quarter. But John, that's for the life of the projects.

I understand, but in other words, are you saying that Government services would have been $40 million taking the 31 plus the 9, or is that something more than -- I'm trying to understand what it would've been?

Absent the Embassy issues, they would've -- the operating profit would've been 31 million higher.

So okay, but, and would the tax rate -- in other words, the other factor is the higher tax rate. How would we -- what should we do to translate that 31 million to a per-share number?

The tax rate would've been back to our more normal rate of (multiple speakers).

33?

Probably this year, 34, 35%.

So in other words, what we would have -- what we should do is take a 34% tax rate on the 31 million, or what you are saying is that basically it costs you about $0.24 a share?

There are a lot of different ways to do the math.

Well, that's why I'm asking the question.

If you look at the impact, you've got to apply a different tax rate. It's between $0.25 and $0.30 a share.

Okay. All right. In the quarter?

Right.

Okay. Second question. In answer, I think it was Jamie's question, on the fixed-price portion, you know, if you go back a couple of years ago, you had a bunch of Power projects. You had Hamaca. Those things are gone. Where's the bulk of that 24% right now that is fixed-price? Which segment would that be in?

The bulk of it is in industrial.

Are the mines fixed-price?

No, the mining is not. Some of the infrastructure projects are fixed-price.

Oh, okay. And then, one of the things, Michael, you (multiple speakers).

John, wait a minute. We also have, obviously, the Embassy work in the Government section is fixed-price as well.

Okay, okay. But you are comfortable -- I think you said you have 12 projects and you talked about eight; that left four out. I assume those are okay?

No, no, what I said, John, was we had four projects that were in the loss position.

No, but you said you were doing 12 and then you said two of the eight are nearing completion and six are on schedule. So you talked about eight of them. What about the other four?

Let me back up. We are doing 12. Four of those were the ones that we have the loss of $31 million on. (multiple speakers). Four of the 12.

And those were Fluor, not Jones projects?

Two were Fluor; two were Jones. The two Fluor ones were the ones that made up the significant bulk of the number. Then we have eight remaining. Of those eight, two are nearing completion and the other six are on schedule and budget.

Thank you, that was not clear. It's my fault.

No, thanks for clarifying it.

On the Oil and Gas, one of the things that you've done in the past was to kind of size some of the orders for us -- it's 1.5 billion. Could you give us -- I assume that the largest piece of that was the oil sands and the second-largest piece of that was the chemicals. Do I have that right? Could you put parameters around any of that?

That's correct, John. The Canadian project was the largest and then the chemicals project was the next.

And are we talking 3, 4, 500 million, or I mean, just--?

It was north of that. But both were under one billion. But they were good-sized projects.

Okay, and then specifically on the Dow ethylene project in Kuwait, you took the project management, which was several hundred million that was at, what, a $2 billion-plus project? You got something under 1 billion; does that mean that there's another billion that you're letting out where you're going to subcontract that? What I'm trying to do is be able to get a size on the parameters as you begin to attack these elephants, not taking the whole ball of wax, but taking it as a project manager and doing the infrastructure to tie around. So should we be getting something close to 1 billion out of the 2, 2.5 billion that the project would -- I'm just trying to get a scope of that.

Alan Boeckmann You know, the typical model that we like to follow, John, is -- you've got it right -- is to get the program management. And then as a result of having that, you are the logical person to do the utilities and off-sites infrastructure. My guess is dependent on the project, the nature of how much of it is green field, and in a true green field situation, the total of those two can add up to between 30 to 40% of the project.

Okay, and then where are we right now on the elephants? Was the oil sands an elephants in your -- on my favorite chart, with your pictogram?

Yes.

And the other one had been an elephant?

Two elephants down, John.

Two elephants down. Any in the second half, or the next three quarters? Two more?

I hate to be specific, because as you well know, this timing is hard to predict.

I know, but you are on a roll.

John, I would say we could have one more in the quarter -- or in the year.

And then over on Global Services, phenomenal quarter. I mean, 750 versus just under 400. And as you say, the first quarter is the renewals, so that would be up there. But it looks to me like there's another 350 on top of where you were running. And then, Michael, in your commentary, you talked about new projects, new geographies, but it sounded like it was like bits and pieces. Does that mean that that was just kind of like normal follow-on business, or were there some bigger chunks of that global -- of that business?

There are definitely some new clients in there.

John, out of the top 20 awards in the quarter, eight of them were Global Services.

Okay. And those were all kind of with either new clients or existing clients, but I mean, all new work for you?

That's correct.

That's right.

And then final question, the G&A, was that -- tell me again, are we looking at 140, 150 for the year?

We're looking, I would say right now, 150 plus or minus 5 million.

Okay, so in your mind, the 38, which was higher than I thought it was going to be, was right in line?

That's right. Now, last year we had the 7.7 million (multiple speakers)

Yes, yes.

This year we had, if you compare it to the first quarter of last year, higher audit fees, as I think a lot of companies are experiencing.

Like a Sarbanes-type things?

Right. And some higher compensation costs.

And then the final question -- could you talk to the rationale for the -- and how this program works on the stock sale -- why you're doing it, what it's all about?

Sure. Let me make a few comments on that. As you may recall, about this time last year, we sold $330 million of convertible notes, which convert into common stock. We got -- it was a very attractive financing for Fluor. We got a 1.5% interest rate. Those notes contain some fairly sizable potential dilution. And when the accounting rules changed late in 2004, we elected at the end of the year to irrevocably commit to redeem those notes in cash to avoid the technical dilution that would have been caused by that. But our long-term goal always was to continue to build up our equity in the Company. We believe very strongly in having the strongest balance sheet in the industry and we regard our A rating very highly.

Absent that conversion, because we thought that potential conversion, from an accounting perspective, was very expensive, we would be suffering a lot of dilution without getting the cash benefit and without getting the rating agency benefit. We decided to enter into this equity shelf program -- some of the banks call it a dribble program -- which would, at a fraction of the dilution provided by the convertible notes, allow us to generate cash, allow us to take advantage of the current market environment, and allow us to build our balance sheet -- continue to build our balance sheet. We thought it was a very cost-effective program. We have ultimate flexibility in how we can implement that program. We can do it in a way that has very minimal impact on the market. And we just think it's a good tool to have in our toolkit, to be able to access the market at certain times. We decided to use that in March to generate a modest amount of cash.

Is there a time limit on when that -- is that done over, I'm sorry, what was the -- over some such a period of time?

We have flexibility to do it over whenever we want to do it. We can enter into a new market whenever we want, on a daily basis, or we can be out of the market for months on end. It's part of the shelf that we filed in December of last year. And we just think it's a great tool for us to help manage our domestic cash.

Okay, and then I lied. One final question. Why is the guidance not going up, since the first quarter was so much better? I mean, if you add in the $0.25 to $0.30, okay, that's there, that's the negative. But if you look at kind of where you are in the run rates and everything, that would suggest, given the strength in the Oil and Gas business in particular, and the strength in Global Services, since neither of those appear to be one-offs that go down, why are we not raising the guidance on the upside?

It's still early in the year, John.

Well, I understand that, but that still doesn't answer the question. What are the negatives? Okay, the Embassy is a one-time thing. That's not going to reoccur. Your Oil and Gas and your Global Services margins are extremely strong and should not be coming down -- not the margins, the operating income, sorry.

John, I'll just repeat what Mike said. It is early in the year. And at this point in time, we would rather be conservative.

Fair enough. Thank you.

John Emrick, Ironworks Capital (ph).

Two unrelated questions; I will ask them separately. How should we think about the provision? Is it as much unwinding previously reported profits as present valuing future losses that we would have experienced if the contract had run out? Or is it all taking in from the future or all from the past?

That provision reflects our expected losses on the projects through their completion. And both these projects are, I believe, roughly 20% complete. So it's really -- there's the future losses on the project that we expect to incur through completion.

Okay. And lastly, is the outlook for assuming you come in in the range of your earnings estimates outlook for cash flow from operating activities for the year?

We expect cash flow to continue to be positive through the remainder of the year, but just modestly so. We will continue to see some working capital requirements as the business grows, and as you noticed it grew very rapidly, especially in terms of revenue growth in the first quarter. We expect positive cash flow, but modest positive cash flow.

And negative with the free cash flow and after CapEx?

No, I think at worst it will be breakeven.

Alex Rygiel, Friedman, Billings Ramsey & Co.

Quick question with regards to Fernald. Do you have additional incentive fees to be paid to Fluor built into your guidance for the remainder of this year?

We continue to perform extremely well in that project. So our guidance for the year will reflect solid performance in Fernald through our ultimate completion in 2006. That project does have substantial incentives available in the project. And at that -- the future -- we're in a position right now where our future profits on that project is going to be -- just be based on our future performance there.

Yes, we're basically more on track for an early '06 completion on that project, Alex. And so we will assess our performance against milestones in each quarter. And then, based on that, we will calculate what we believe is going to be the effect of the incentive.

It would appear that the incentive fee was quite material in this first quarter. Would you anticipate a similar level in the second quarter through the fourth quarter?

Probably not. We had two very significant milestones that were achieved on that project in this first quarter, specifically the demolition of one particular area and the movement of waste, which were both significant milestones here. But it's much closer to assuring the final closure.

Richard Rossi, Morgan Joseph.

Could you go into a little more detail on this $10 million in the industrial sector? You refer to it as an offset by reduced recoveries in the press release. And you talk about it as the $10 million charge related to three claims settlements in the Q.

It was largely a settlement on a dispute with a client in making that -- completing that negotiation in the quarter. This negotiation was done on the basis of some ongoing work and other opportunities with that client.

And that was one client -- may have been three settlements, but it was an individual client?

No, there were several settlements and adjustments with a number of clients in the group.

All right, but evidently, one was the most significant?

That's correct.

That's correct.

So we could look at one, whatever that dollar value is, as the above-normal balance of issues that normally occur every quarter, I'm sure?

Correct.

That's right.

Okay, back to the Oil and Gas margins again. I just want to be sure I'm correct on this. You're basically saying the kind of margins you're seeing right now in Oil and Gas is probably what's going to develop through the rest of this year, and it won't be until '06 where you may see a reasonably significant leg up as more of that work moves through.

That margin growth, as we continue to grow the business, we're going to continue to see activity ramp up and more and more movement on the production side. We do expect higher margins, but the rate at which they strengthen is really going to be determined by the rate at which we add new awards.

Is it reasonable to look out at '06 and think in terms of 5%? Or north of 5?

I think our margin growth is going to be perhaps a little slower because the more success we have in adding new awards, we're going to continue to see bottom build. And that's, at least in the early end of these projects, will keep margin growth perhaps a little slower than normal.

Good build in orders, good build in backlog. Are you seeing, or given what you know you need to do in work, are you beginning to see any signs of constraints on the capacity side with manpower, engineers or field people?

No. And I've said this a number of times. We had over 15 billion of backlog. This Company had a higher backlog than that in the early '80s in those days' dollars. And our capability, our ability to integrate, to subcontract, to joint venture and to do worksharing along our network is so vastly improved with the technology and work processes we have today. So from a manpower standpoint, I think we have significantly more capacity. The only real challenge that the entire industry is having is making sure that the materials and equipment are available for these projects. And that's something that we keep a close watch on.

(Operator Instructions). Tom Ford, Lehman Brothers.

Alan, just going on that question, where you're saying the challenge is watching the materials and equipment. Is there anything that is impacting in that respect?

Not at the current time, Tom. As you know, we do a market outlook on all of these things. And in the area of pressure vessels is an area that's going to be a concern over the next number of years, as is particularly in the refining and the chemicals arena, which are huge users of pressure vessels as that ramps up. But that scenario that -- when the market does get tight, again, that's an area that we, because of our procurement capacity and our global basis, really do have an advantage.

But nothing has emerged as an issue at this point?

No, it's not stopped or slowed down any projects at this point.

Do you guys have -- it always seems like as we go through a certain amount of time, we get some reclassification. Is there any help that you can provide in terms of restating the prior periods, or at least for this quarter, giving us the breakout of Oil and Gas separately, as it was stated in the past?

We're trying to get our fact book clearly faxed out as quickly as possible, Tom, so we can get you all the restated quarters for this chemical restructuring. We should have that out shortly.

Great. I appreciate that, Mike. One other question I wanted to ask was about, Alan, obviously this is a favorite of the press in a particular part of the U.S. But this talk about Hanford, one, I just wanted to get a sense on the timing of that, and then two, are you aware of on the -- I think it's the corridor protest, the timing on that?

Well, let me take your question in two parts, Tom. The Hanford project that is under our current scope continues to go well. Our performance there is very strong. We are tracking on the most recent schedule for the removal of sludge. So that project is a significant project for us and we'll be -- we'll book in the third quarter our renewable revenues on that, as we do every year. We have filed protest on the river corridor. Those protest processes are generally very quick. My guess is we will hear something in the second quarter with respect to the adjudication on that protest.

Okay. And then for the total Hanford project, the timing on when that is supposed to be completed?

That's well out there. I don't have the date here in front of me, but it's a significant time period in front of us.

And then, just going back to the question on the size of projects. I think -- I assume that -- I know for sensitivity reasons, you don't necessarily point something out specifically, but I think it was the -- I think during the normal dinner that we have or that you guys host, you had talked about Equate II and the utilities. And I was trying to remember, though, I had thought that you guys had implied that the size of the utilities and support elements was a little bit smaller than something north of 500 million?

No, I think the normal size of a utility is -- if you can say there’s such a thing as normal, Tom, the average, let me put it that way, for utilities on a large petrochemical complex is roughly around 25 to maybe 30% of the total project.

Okay. And that's what we're talking about in this respect?

I think it's in that ballpark.

Right.

And the last question I had was just -- I just wanted to make sure about the -- or actually, the question I had, Mike, was with respect to your commentary about the stock sale program. I understand the flexibility it provides you. But, at the same time, I'm still a little bit curious as to why you would choose the equity market. And I would think also too, from my perspective, I would think that free cash flow should -- if you look out either six months or even later, I would think that the free cash flow performance here is going to improve quite a bit. And so I'm just curious as to why the equity markets were chosen as opposed to the credit markets?

Well, as we look at our free cash flow, Tom, you have to really look at domestic versus international. And a lot of our cash is -- cash flow right now is overseas. We're in the commercial paper market domestically. And we thought it was just an opportune time to use equity markets to reduce our dependency on the short-term commercial paper markets. We certainly do expect over the next couple of years to see a significant increase in free cash flow. But what we're doing here in the equity markets is fairly modest.

Stuart Sharp, Standard & Poor's.

I was wondering if you could talk a little about the upstream and downstream oil and gas projects -- what regions you might be focusing on and the breakdown if you are targeting more upstream than downstream?

First of all, if you look at the spending that our clients are doing, it's significantly weighted towards the upstream. And so -- and that is typically the development of new production capacity, transportation systems, and for both oil and gas. And so we're focusing on a number of projects and programs there. Those areas, or those regions, tend to be the Middle East and the former Soviet Union, by and large. A little bit in China. On the downstream side, that tends to be both in the refining arena and I would say also in the LNG or the treating facilities, and also the clean fuels. We have been focusing on Canada in terms of the refining and treating of tar sands; in the former Soviet Union, on upgrading and updating refineries. In the Middle East, where we are doing the front end there of a brand-new grass-roots refinery, and also in looking at prospects in the China and Far East region. Clean fuels is, by and large, the U.S. and somewhat in Europe.

Okay, and you mentioned that there could be changes in Iraq -- basically you don't know from day to day. What would generate -- trigger a change based on the current trends away from improving -- rebuilding Iraq and more contracts going towards the local contractors there?

You know, that's one that's hard to guess. It's been very difficult in the almost two years that we've been in Iraq to really predict the level of awards there or the pace of execution, just based on the political environment, the security issues and the overall questions around priorities of funding. So it's hard for me to give you a forward look on that. But we stand ready with a workforce there that's in a position to respond quickly, to get on projects and execute them both in the power arena and in the water services resources arena. I really would hate to guess what would drive that, other than just the normal issues we've been facing for the last couple of years.

Right, and we don't know right now what the role the new government is going to play in that going forward as well. That's just not quite clear yet.

Thank you. That will conclude our question-and-answer session today.

Operator, thank you very much. And ladies and gentlemen, let me thank you for your participation today, and certainly your continued interest in Fluor. While we regret the losses that we have announced on the Embassies work, we believe that that matter is in hand and now fully under the scope of our risk and execution program. We're very, very pleased, certainly, with the strong sustained new order flows that we've been experiencing, and believe that there are considerable additional opportunities that are still in front of us in a number of our markets. And that puts us very well-positioned to deliver solid growth as we go forward. And our whole team is working very hard towards that end. So let me thank you very much for your participation today, and have a good day.

This will conclude today's conference. We wish you all a great day. You may now disconnect.