Fluor Corp (FLR) 2005 Q3 法說會逐字稿

Good day, everyone. Welcome to today's Fluor Corporation third quarter conference call. [OPERATOR INSTRUCTIONS] A question and answer session will follow management's presentation. There will be a replay of today's conference call at 10:00 a.m. Pacific Time today accessible on Fluor's Website as www.fluor.com. A telephone replay will also be available running through 5:00 p.m. Pacific Time on November 10, 2005 at the following telephone number; 888-203-1112. The access code of 6388245 will be required. That number, again, 888-203-1112 using access code 6388245. At this time for opening remarks, I would like to turn the call over to Ken Lockwood, Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.

Good morning, and welcome. With us today are Alan Boeckmann's, Fluor's Chairman and CEO, and Mike Steuert, Fluor's CFO. Our earnings announcement was released yesterday after the market closed. Before getting started today, 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, tax matters, and other statements regarding the intent, belief, or expectations of Fluor and its management.

These forward-looking statements reflect our current analysis of existing trends and information and there is an inherent risk that actual results and experience could differ materially. These differences could arise from any number of factors. Information concerning factors that could cause actual results to differ materially from the information that we will give you is available in our Form 10-K filed on March 4, 2005 and 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, at this time, I would like to turn it over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you, Ken. First of all, everybody, good morning. I'd like to thank you for joining us today. This morning, we'll review our third quarter results and I'll give you an update on our current business outlook, including updated guidance for this year and also an initial guidance for the year of 2006. We had a very outstanding quarter on a number of levels in the third quarter, including growth in revenues, earnings, and cash flow, all of which were up sharply during the quarter.

Full reported net earnings of 131.2 million, or $1.51 per share, compared with net earnings of 47.3 million, or $0.57 per share in the third quarter of 2004. The earnings growth was due to continued solid operating results in oil and gas, government, and global services. In addition, the Caribbean hotel jury verdict, that negatively impacted the second quarter by 65 million, was overturned by the Judge in the case. And a no liability resolution was subsequentially reached, which resulted in the reversal of $32.9 million of that provision during this quarter.

Finally, as previously announced, the longstanding claims on the Hamaca crude upgrader project in Venezuela were resolved. Contributing $30.5 million in pretax earnings during the quarter and effectively reimbursing Fluor for its cost of capital in funding those deferred costs. Both events had the added benefit of contributing to its substantial reduction in the effective tax rate for the quarter. Our consolidated operating profit was $180.9 million, compared with 104.7 in the third quarter last year. Revenues for this quarter increased 45% to 3.4 billion, including $294 million recognized as a result of the Hamaca settlement, compared with revenues of 2.4 billion a year ago.

New project awards in the third quarter were 2.5 billion. Now, this compares with 3.2 billion a year ago. And it does demonstrate the quarterly variability that can be caused by the timing of a single project award. Shortly after this third quarter was closed, Fluor was awarded a $1 billion project to expand the Habshan gas complex in Abu Dhabi. And this award will be booked in the fourth quarter. Backlog at quarter end grew 7% to 14.7 billion, compared with 13.7 billion a year ago, but it was down sequentially from 15.7 billion at the end of the second quarter.

The outlook for the majority of Fluor's markets remains positive. Opportunities across all business segments are expected to continue to develop. With sizable projects pending in our oil and gas, our power, our mining, our transportation, and government markets. With the excellent start we've had in this fourth quarter and due to the award of the major gas complex I mentioned in the Middle East, we do expect our fourth quarter awards to be particularly strong. We continue to see expansion globally, with approximately 60% of both new awards and backlog now involving projects outside of the United States.

The Middle East is a particularly active region, with nearly a fourth of our new business this year coming from that area. The outlook for investment in both new and the expansion of existing mining facilities around the world, also continues to progress. And while there are no mining awards of a major category in this quarter, there are a number of sizable opportunities that we are closely tracking. I also though, want to mention the very strategic alliance we've recently formed with DuPont to pursue the Savannah River Project. Where the U.S. Department of Energy has announced its intention to award contracts worth approximately $7.5 billion over the next five years. This alliance brings together the Company's core competencies in globally recognized process management, safety, commercial technology development, and a range of operational management solutions for the Savannah River site.

Overall, we continue to be encouraged by the outlook for significant ongoing client spending across all of our diverse markets. But as I turn now to our near term EPS forecast, our guidance for 2005 has being increased to a range of $2.40 to $2.60 per share. Up materially from the guidance we provided last quarter and essentially on par with the guidance that was originally issued a year ago. As we look ahead to 2006, ongoing strength in new awards, combined with a strong backlog is expected to continue to drive a growth in earnings. Considering the variability that is, of course, associated with the timing of major new project awards, and the pace of project execution across our portfolio, our initial guidance for 2006 is a range of $2.80 to $3.10 per share.

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

Thank you Alan, and good morning to everyone. Our business results are covered in some detail in our press release. So I will focus mainly on providing additional information on new awards and backlogs for each operating segment in our corporate financial items. Starting with oil and gas, new awards were 179 million, down from 905 million in the third quarter of last year. It clearly would have been substantially higher had the $1 billion Habshan gas project closed a week or two earlier. New awards included engineering procurement and construction management for a compressor station in Spain. Engineering and procurement for four modifications for a refinery in the U.S. Along with several other refinery modification projects in the U.S. and the Caribbean.

We also booked preliminary engineering services for a new petrachemical complex in the Middle East and program management services for an additional petrachemical facilities in Kuwait. Backlog for the oil and gas segment decreased 4% to 5.3 billion from 5.5 billion a year ago. New awards in our industrial infrastructure segment were 690 million, down from 840 million last year. New awards were relatively broadbased, including awards of infrastructure, manufacturing, life sciences and mining. The largest award in the quarter was for the program management, design, construction, and maintenance. And renewed telecommunications system and upgrade and maintenance of existing infrastructure throughout the roadway network in the United Kingdom. The contract's value to Fluor is approximately 524 million. And it will be worked off over the next ten years.

This quarter also included three life sciences projects, two general manufacturing jobs and three mining awards. Backlog for the INI segment decreased to 4 billion, compared to 4.6 billion into the third quarter last year. This was primarily driven by the cancellation of three life sciences projects since the beginning of this year. In our government segment, three third quarter new awards were 1.1 billion, about level with the 1.2 billion in awards a year ago. As is our normal practice, we record the annual booking of our two large DOE projects at Hanford and Fernald in the third quarter of each year. This quarter's Fernald bookings represents the final year of this long term contract. After working at that site for over ten years, the project is scheduled for a successful completion and closeout in 2006.

In addition, new awards included approximately 100 million in task orders in Iraq, inclusive of our joint venture with AMEC and our existing CTAC 2 contract. The balance is primarily in military base operations and maintenance awards for [Delgian]. We were also awarded new work for FEMA under our existing public assistance contract and have been supporting FEMA's efforts to provide temporary housing in the State of Louisiana. However, pending a better definition of the scope of that work, we have not recorded a new award value. Backlog in government was essentially flat with a year ago, at 1.7 billion.

Global services had another strong quarter. Nearly doubling their awards to 510 million and 274 million in the third quarter a year ago. Operation maintenance awards were diversified across the power, mining, oil and gas, and industrial markets. The largest award was for a major new three-year contract involving maintenance of a power system at a U.S facility for a key industrial client. As a result of the strength in the awards, backlog increased 45% to 2.8 billion, up from 1.9 billion after ending the third quarter last year.

In power, boards were very small this quarter, with bookings of just $13 million. With the largest award for additional funding for a preliminary engineering for a coal fired plant in Nevada. Backlog for power is up more than tenfold from a year ago, at 869 million compared to 78 million at end of last year.

Moving to corporate items, G&A for the quarter was 25.1 million, including a pretax gain of 10.4 million for the sale of real estate, mainly driven by the sale of our corporate headquarters facility in California. This compares to 32.9 million a year ago, which included a pretax gain of 5.5 million related to the disposal of a residual property interest. We have negotiated a short term market rate leaseback arrangement for our California headquarters facility. Pending our move to our new Dallas location, which is expected to occur in May of 2006. We had net interest income of 1.7 million in the quarter, compared with 1.1 million a year ago, primarily due to a larger average cash balance and higher short term interest rates.

Let me make a few comments on our tax rate. The effective tax rate for the quarter of 16.7%, bringing the tax rate for the nine months to 33.4%. The variability of the 2005 effective tax rate has been driven by the Hamaca project settlement, the Cayman hotel project jury verdict and a subsequent resolution and the International Embassy contract provisions. During the first half of this year, foreign losses reduced the Company's ability to absorb excess foreign tax credits incurred in the high tax jurisdictions. Favorable settlements in the third quarter substantially reversed the foreign losses recorded in the prior quarters and restored our ability to absorb excess foreign taxes. The effective tax rate for the full year of 2005 is now expected to be between 28% and 33%, compared with 33.6% in 2004.

Let me shift to the balance sheet and discuss a few cash flow and other financial items. Cash flow from operations was very strong again this quarter, as Alan mentioned, generating approximately $180 million. When combined with the strength we saw in the second quarter, cash flow from operations on a year to date basis exceeded 350 million. This on top of the roughly 300 million collected with our Hamaca project settlement. The majority of the improvement in cash flow resulted from improved operating performance and reductions in working capital levels. As a result, Fluor's financial condition was further strengthened with cash and securities rising to 1.470 billion at the end of the third quarter up from 689 million at the end of the second quarter.

Part of the cash generated in the quarter was used to repay commercial paper balance of $100 million, which was outstanding at the end of the last quarter. We do expect cash flow in the fourth quarter to be negative, as we typically fund our pensions and pay our insurance premiums for the year. The strong cash generation and payoff of short term debt balances had the effect of further reducing Fluor's debt to capital ratio to 18.5%, down from 24% at the end of the second quarter. We paid our normal quarterly dividend of 16%- - $0.16 per share, or 13.9 million.

The Hamaca settlement also resulted in the complete elimination of the 266 million work in process balance that had accumulated on our balance sheet. Capital expenditures for the quarter were 59 million, higher than previously anticipated, mainly due to additional investments in equipment and vehicles to support international structure and opportunities, and FEMA work in the Gulf Coast. We are also beginning to see capital costs of new corporate headquarters show up in our capital expenditures, as construction continues to progress. Depreciation in the quarter was 26 million. Overall, we are very pleased that Fluor's financial condition continues to improve. With that, Alan and I will be happy to respond to questions.

[OPERATOR INSTRUCTIONS] We'll go first to Richard Rossi of Morgan Joseph.

Actually, the first - - let me just, if I could just clarify some things that were in the Q, I just, just to bring us up to date. I saw you had another charge related to the embassy projects of around 4.3 million, I think. Where are we in regards to those projects being completed, how much further do we have to go?

Rich, we have quite a few embassy projects. I would say some of them will be complete early in '06. Some of them go on through '06. The charge that you see was a compilation of charges across - - not charges but of results across the whole program.

Now, you also note or that you've identified claims of 84 million. Have you filed those claims, or are you just assembling the data related to that?

We're in the process of filing those, Rich. There are a lot of different claims that are in different parts - -

Right. I understand that it's spread over the number of contracts there. Working with the government is like working with any other client? Is this going to be a - - likely to be a relatively long and drawn-out process?

It's a much more defined process than what I would call your normal commercial arbitration. But it does have a series of steps that you go through, and, again, depends on the issue and the claim. It can take anywhere from three months up to a year or two, depending on the complexity.

Okay. So we probably have - - and are you anticipating identifying claims when received specifics for this, or are you can just lump in with the other claims?

We've been fairly open, Rich, and transparent in talking about the embassies. And to the extent that any action during a quarter is material plus or minus, we will certainly disclose that.

Okay. Moving on to that California transportation projects, again, where are we in terms of getting it completed, another charge in the second quarter?

We had a modest - -

Third quarter, I'm sorry.

We had a modest charge in third quarter, yes, Rich. That project continues to progress. Progress is being made at a fairly reasonable rate. The charge was rather modest. As we've indicated, there are substantial claims with that project as well, which we will continue to aggressively pursue over the remaining life of that project.

Okay.

But it definitely is moving forward.

All right. And just in terms of the move to Dallas, you identified 19 million in costs for '06. Does that cover, as you see it now, does that cover all the relocation, the manpower, et cetera, costs? I mean is that fully loaded?

Yes, yes, it is. It's our move cost, plus our personnel severance costs that are involved with the relocation. Just to give a little more light to that, that will impact our corporate overhead in 2006, as that will be included in our corporate overhead number.

And is included in the outlook, Rich, we provided.

Right.

All right, and regarding that SG&A, as we look at '06, what kind of an annualized rate should we be using? Let me comment on that a little more.

If you look at our normalized rate, excluding real estate gains. And granted we do have real estate gains on a fairly regular basis. But absent real estate gains, our normalized corporate G&A is approximately $150 to $160 million. To that, you can add about 20 million for the move. In addition, some of the rules regarding expense, the way you expense items for equity compensation with restricted stock options are changing in 2006. That will impact Fluor $10 to $20 million next year. So the combination of the changing rules for expensing equity compensations, as well as the move to Dallas, we're looking at guidance of 180 to 190 million for G&A for 2006.

Should I just spread that relatively evenly over the year, or is the Dallas thing front-end loaded or middle loaded?

The Dallas expense will be primarily over the first two quarters of 2006.

Okay. All right. I also noticed that the currency gains in the quarter seemed a little higher than they have been in the past. Is there any particular reason for that, or is that just general business trends?

That's just general business trends.

Okay. So nothing individually that - -

No, there's nothing unusual at all, Rich.

Okay. Well, let me get back in the queue. I've got some other things, but let me let somebody else.

We'll go next to John McGinty of Credit Suisse First Boston.

Just to follow up on the corporate, Mike, you gave us the 181.90. What tax rate should we be using in 2006 or what's the tax rate glad that's used in your guidance?

It's basically 34%.

34%.

Right. We expect the rate to be somewhere between 34% and 35% next year.

And when you talked about the changing rules on basically equity-related compensation, the 10 to 20 million, that is the adoption of FAS 123R?

Yes.

Okay.

And then just to be clear, that impacts the way we expense our restricted stock as well as our stock options.

Okay. Okay. Does it - - is there any - - should there be any change from those aspects in terms of the share - - the number of shares? I assume not.

No.

Okay. You make the comment that your orders in fourth quarter will be I think substantial. I don't exactly know what - - particularly strong, I think were the words you used.

Yes, particularly strong. That's how it looks at this stage.

If you come back and you look at the orders, your orders have been running 3.5 - - 3-plus billion. They were 2.5 billion, because you missed 1 billion by a couple weeks. That's totally understandable, lumpiness and everything else. But are we talking about orders that are going to be in the $4 to $4.5 billion level? In other words, if we just move, move 1 billion from the fourth quarter to the third, are we going to be left with a fourth quarter that's in the same neighborhood in terms of order rates that you guys have been running for the last six or seven quarters? 3-plus billion?

I'm not going to forecast an exact number, or even a tight range for the fourth quarter, John. But I think we'll - - we've had seven, the last previous seven quarters have been in the plus $3 billion. This one fell short because of timing. We are looking at substantial projects, though. Including the one we've announced already in the fourth quarter. So it will be a strong quarter, indeed. But at the end of the day, we can still have things that move over the line, as you know. So I'm really hesitant to put a number out there.

Okay, and I understand that fully. But you do have 1 billion and the underlying potential is as strong as any of the last six or seven quarters. Timing obviously is an issue if something slips, just as this one, did but the underlying business is still strong?

Exactly right. That's exactly how we put our business is strong. We're seeing strong prospects in mining in particular, government business, oil and gas and petrachemicals and infrastructure.

You made what I thought was kind of a positively provocative statement where you, in fact, talked about sizable projects pending. You mentioned oil and gas, power, mining and government in the prepared remarks. Can you put up - - I know you don't want to identify them, nor should you. But can you put any kind of numbers around them, in other words, are we looking at $4 or $5 or $6 billion worth of projects? Are these - - is there an elephant in each of those categories? Not that any may land in the fourth quarter. You know what I mean? But obviously I guess - - I'm trying to get a flavor of what the projects you're pursuing.

The challenge again is always how we contract for those. In a couple of the cases, they are very large projects, but we may only book the front end work or just the engineering on some of the as we land them.

Well, $1 billion that you got after the quarter ended in the gas project that you alluded to, how did you end up booking that? In other words, is that booked on total, sore that just booked on a projects management basis?

That's booked on a total. That was a total bid.

That was a total bid.

So, that was a competitively bid total project cost.

And then just a couple of - - just to follow up on a couple nibs that Rich asked about, I guess the question is on the embassy project and on the California project, I understand the 4.3 and the 3.2. What I guess I don't understand is why. In other words, you took the large charge for the embassies and we go along and then there's another one required. The California thing kind of keeps going. Are there more of these things? In other words, why weren't you able to get everything taken care of when you took the earlier charge, at least on the embassies, for example?

John, I'm going to rack it up to just being fully transparent. When we had the problem with the embassies in the first quarter, we talked about the total program. Now, truthfully, if you look at the disclosure in the 10-Q today, that's at a level that really, I don't really even consider material. But since we had been talking about it in a total program, we went ahead and mentioned that. We're going to have projects that go up or down 1 million or 2 in a given, on an individual basis.

Right.

In a quarter, but those don't come to materiality and don't get disclosed, certainly not by our competitors. But we generally - - since we had the program and we had talked about on a program basis, we felt compelled to do that again on the 10-Q.

That's a very fair comment.

Normally if that was just the third quarter charge, we wouldn't even mention it. But we really mention because it was material was year to date impact of the quarters.

That's a fair comment. Now, let me ask one broader question, which is that you all have every time everybody's asked about cash, you have said, "oh, God, working capital leads, we don't know about Hamaca" And Mike went on and on and on, which is fine because he's a conservative CFO and that's great. Okay. Everything's done. You got $1 billion in cash. When are you going to do something? You continue to look at acquisitions, but you have said yourself that they are - - you look at acquisitions that are very meaningful, but small. You're not going use $1 billion on acquisitions, I hope. At what point do you say we're going do a $3 or $4 or $500 million buyback? Since Hamaca's done. The major issues are out there. Isn't this time to now say, "okay, the things that have been - - that we have at least used for excuses not to do anything are all done. And so we either have to do something or at least come up with new excuses?"

Well, I'll make the first comment, then I'll let Mike chime in. First of all, you're right, Mike is a very conservative CFO. But he happens to be paired with a conservative CEO. We're looking at the use of cash. Clearly we have - - the positive challenge in front of us is the opportunity and the leverage that that cash gives us. We do have a situation, I'll let Mike talk to that, where a significant portion of that cash is overseas. And it's not available for things like dividend payments, et cetera. And/or even acquisitions on, in the, say, States side. But we are looking particularly at options of dividend, buyback, and acquisitions in a total strategy around the use of that cash. And we have, we've had discussions with our Board, just recently as this meeting this last week and we are going to have a total discussion around that and come out with an '06 strategy at our first Board meeting in February of '06.

You can't bring that cash back under the new, under the new laws, the new rules?

John, we brought back as much as we could.

As much as you could.

Yes, and that was about $89 million that we brought back. That was all that we could bring back on tax basis. A lot of - - as Alan mentioned, the majority, perhaps, 75% of that cash is overseas. As you know, our international business has been growing. Some of that cash grows overseas represents advances for that international business, so it's, 100% is not clearly at our disposal to use.

Great. Thank you very much.

Our next why First Albany, we'll hear from Sanjay Shrestha.

This is actually Steve calling in for Sanjay. How is everybody doing? Just to change gears here and talk about your end markets, clearly we're looking at a very robust end market backdrop. Given what happened in the Gulf States and perhaps the U.S. looking to more strategically diversify our energy supply, how should we start looking going forward at some of the mega projects out there, like the Alaska pipeline and new refinery work?

Well, I think there's two really strong markets right in front of us, Steve, in the U.S. Specifically I think we're seeing tremendous activity in ramp-up in the use of coal for power. Both in terms of critical and subcritical pulverized power plants and also in the gasification of coal. I think that's going be a very, very strong market and we're well poised for that. The second one is in the refinery side. And a significant number of the refineries in the U.S. are developing plans and very aggressive plans for modifications at their plants to change the crude slate that they accept to a much heavier crude. So, there's going to be quite a few poker projects, heavy crude projects, hydrogeneration projects in the U.S. in the refineries. We're focused heavily on those. Of course there are other work that will be available and I think the pipeline is probably something that is in fact out there, but it may be a year or two away.

Okay, great. And then following up on your comments on new clean coal initiatives. It seems like Peabody is still pretty positive on everything moving forward in '06. Could you confirm that?

They are doing an excellent job, but signing up the power agreements. They, of course, have their air permit. It's under appeal at this point in time. That appeal decision should come fairly soon. We expect that it will be positive. We are working with them to finalize the execution and the cost estimates for that. It's likely, though that, given all the issues around the appeals and the things that need to be done to then put the project in place, we will probably not get a full notice to proceed on that until probably mid year '06 to fall of '06.

Okay. No, that makes sense. And then just another large kind of elephant project that you're looking right now is , I guess you booked the front end this quarter, that Oman petrachemical complex. How should we look at your involvement in that and kind of your potential role in that project?

That's a - - the role we have in that is one that we really have a great competency and track record in. It's starting off as the program manager, looking and configuring the entire plant. Putting out - - developing and putting out for bid packages for the process units. And then typically integrating and doing the design and construction of the off sites utilities and infrastructure ourselves. To provide for a faster schedule on the project and to do a better integration. So we start off in those cases with booking the front end of the program management. That's probably the smaller of all the bookings that will occur on a project like this. And so we're hopeful that as we move into '06, we'll be booking the utilities and off sites construction and engineering.

And one last question on the cash position to confirm what John is talking about. You said 75% is overseas right now. So, should we assume $750 million is not available for kind of shareholder enhancement initiatives whether it be dividend or buyback or acquisitions?

That's a good assumption at this stage. We continue to bring funds back to the U.S. as reasonably possible through dividends, through normal, reasonable transfer pricing. And we have continue to work at bringing that - - repatriating those funds. But at this stage, the vast majority is overseas and not available, as you said, for shareholder enhancement activities.

Great. And congratulations on the Hamaca and the Caribbean resolution. Take care.

Thanks.

Leone Young of Citigroup has our next question.

I know you won't be explicit about it. But within the '06 guidance, do you have some general observations in terms of the revenue and margin trade-off? I would assume most of the EPS gain that you're forecasting is coming from the top line with relatively more or less constant margins?

Mike, do you want to go ahead and start on that?

We have seen, we have seen this year in some of our businesses and will continue perhaps a little bit into next year, the top line will grow a little bit faster than our bottom line.

Okay.

Just because of the stage we're in and the mix projects, as we see a lot of CFM go through some of our businesses. As we ramp up activities and the business grows, it really reflects the stage we're in and the mix of business as we go forward. And that's pretty much across a lot of our businesses. Especially, oil and gas and industrial infrastructure. So, while we're looking for solid bottom growth, you may see a slight diminishing in margins next year. In fact it may seem the top line will continue to grow faster than the bottom line.

That's very helpful. And secondarily, could you just make a comment on CapEx sort of full year or trends into next year?

Yes. We're, as I mentioned in my comments, our CapEx is fairly strong this year. It includes a lot of capital spending to support our construction efforts around the world. As well as some capital spending in the third and fourth quarters to support our FEMA activities. We expect that to continue next year. Obviously our business is staying very robust. We expect CapEx to certainly exceed 150 million next year. Maybe even approach 200 million as we combine the investments we're making in supporting our businesses as well the investment we're making in our new headquarters.

Great. Thank you very much.

Moving next to John Levin and Companies', Louis Thomas.

Just a quick question. I was wondering if you could give us a breakdown of the - - just to understand the difference on the one time items. I'm not sure what tax rate you're using, but if we - - if you back out all the one time gains from the Caribbean hotel verdict and the Hamaca. And then you - - the repatriation, which, what was that, 4 million, is that correct? From the repatriation benefit?

Yes.

Okay. So the impact that is, what, $0.53 from those three items?

We, we haven't calculated a number because all these variables, they are really not truly independent. They are quite dependent on one another and it's hard to isolate and a lot of the analysts on the call have done their own analysis. I think it's safe to say however you tax effect all these adjustments, it still comes out to be a very strong quarter on an operating basis compared to last year.

Absolutely.

it's just too difficult. We really don't want to indicate a specific number because it's too difficult to isolate the impact of all these dependent variables.

Okay. Can I just - - you're saying for the full year you expect tax rate to be 28% to 33%.

Right.

And so for the nine months, it was 33.4. So what's implying - - what are you implying for the Q4 tax rate, what should we expect?

Either 33 or slightly lower.

33 or lower. Okay, and then do you have any sense for what the pension payment is going be in Q4?

It's a little early to tell. We determine that pretty close to end of the quarter based on stock market performance for the year. We generally top off our pension plans to be fully funded at year end based on performance as we estimate through end of the fourth quarter. So, it's really going to depend somewhat on how the markets perform in November and December.

Okay, and so in your Q, you mentioned that your plan is for 80 to 100 million for '05 and then you're up to 39 million so far. So is it - - so the 41 to 61 million differential between those, is that a reasonable starting point still?

It is, and how that actually plays out will depend on market performance.

Right. Okay, great. Thank you.

Tom Ford with Lehman Brothers has our next question.

Couple things. Since you were talking about pensions there, Mike, the G&A, I think had a reduction in pension in 3Q. I think it was like 6 million or 7 million. I'm just wondering is that - - how do we think about pension expense either in 4Q and then looking further out?

That's really included in our total G&A. I wouldn't try and isolate pension expense as one element of G&A. The third quarter adjustment in 2005 was kind of a one-time issue, Tom.

That was a one-timer, okay.

One time adjustment to foreign pension plan. That won't be, that won't reoccur on a quarterly basis.

It won't? Okay.

No.

Okay. Okay, great. I just want to make sure I got it right. Because you were saying the tax rate in 4Q is going to be below 33% or 33.

It has a potential. It depends on our mix of U.S. versus foreign income in the fourth quarter.

Okay. I was just trying to figure out what was the difference between that and looking to '06. Okay. Okay, great. Another question I had is; with the cash balance up so much, I was just wondering, embedded in the outlook that Alan laid out for '06, how much interest income are you guys thinking about?

We don't forecast individual components, but it's just a modest amount that we built in there.

Okay. I mean the reason I'm asking is; Alan, I was just kind of going through some numbers. And this is rough, and I don't mean to put you on the spot, but if I look at 2005 and try and get to sort of I guess sort of a normalized segment level, it seems like it's been running somewhere in like, I guess like a 117 to maybe call it 117, 118 type range per quarter. And if I take the midpoint of your earnings guidance and I kind of true that up and take into account, or back - - or exclude out or add back the G&A, I come to '06 at something in the low to mid 140's on a quarterly basis. Which would be up like low to mid 20% over '05, and it just - - I don't know. I haven't gone through all the numbers and everything. It just seemed, just kind of struck me as pretty strong and I just wasn't sure about exactly what is driving that there. I would have thought that margin would have played into it somewhat. So I was kind of surprised when Mike said that margins would be similar to down in '06. Is there anything that you can comment on or add more color there?

Couple of things. Tom, let me add more color on this. First of all, if you just take the midpoint of the guidance we've given for '05 and just for sake of argument, just take the midpoint. I'm not indicating anything here, just using some - - an example. And that would be 250. Then you look at the range we've given for next year. That's somewhere between a 12% to almost 25% growth - -

Right.

for next year.

Right.

Clearly, with our backlog growing, we've got a stronger earnings potential in that backlog. Certainly because of the additional revenue we're going be burning. But on a normalized basis, there's a number, a bit of that revenue, depends on where we're going to in '06 that is going to be client-furnished material. If you were to normalize out that CFM, you would our find margins are still - - would be pretty strong. So we're not - - I don't think we're showing any real deterioration in the work from a margin standpoint. It's just that we do have a significant amount of CFM forecast, particularly in the industrial arena and in some of the oil and gas segments.

Right. I understand that. It's just - - because the G&A number looks like it would be up a pretty decent number.

It's up from last - - or from next year - - or from '05 because of the accounting method for equity compensation, and primarily for the costs of our move to Dallas.

Right, okay. That's all. It just seemed to me like the underlying implication for the operations was pretty strong. Like I said, maybe I'll come bother you guys at the luncheon later in the month.

There you go. We'll certainly see you there.

Okay. Just two other quick questions. Oil and gas, if I exclude out Hamaca on the revenue and the segment profit, I get a 4.6% margin, which is pretty good. Were there any milestones that were hit in the quarter?

None that I would mention. Our margin performance in that group is pretty high. We've got a good mix of business going on there right now. We've got a - - still continuing to come in on a fairly regular basis is a lot of front end work. That front end work carries a strong margin with it as well.

Okay. So, it's a strong market and we've got strong performance there. Okay, and then the other thing I was looking at, Alan, was on INI. If I kind of try and remove the Caribbean noise, I think I came out to about a 1.5 margin. And I was just wondering about anything going on there? I think we were thinking that it should probably have been incrementally better than that.

Well, a couple things there, Tom. That's a very good question. The margins in INI are being impacted by what I call a mix of work in that unit. Particularly, I'll point out the large mining projects that are reimbursement construction management jobs. Those include a pretty significant volume of pass-through revenues relating to material and equipment. And as those jobs wrap up in the field, as they are now, it does dampen our margin percentages. But I will add, I have not been satisfied with the margin performance in the industrial side of our group. And I made some fairly dramatic changes in the management of that over the last four months. Steve Dobbs, who has been running the infrastructure business for me and doing extremely well with good results has now taken over the industrial business as well. And he's made some changes in those business lines. So, I think given the change in mix of work and performance that I'm expecting there from Steve, I think you'll see - - we'll probably be low in that area based on those trends and issues for probably another quarter or two. And then I think you'll start to see them trend back up.

Okay. Well, I think I've probably taken enough time. Thanks. I'll get back in queue.

You bet.

Up next, we'll hear from Andrew Obin of Merrill Lynch.

Hi, good morning. Just a question on PowerGen. Could you talk a little bit more about what kind of projects you are bidding on? Are we talking about sort of starburst kind of work? Or is there talk about new coal fired facilities? And can you also talk about the contract structure? Is anything different from, say, the previous cycle in the late '90s?

Well, PowerGen, as you know, for those of you who may not know, it's a company that we have a small equity stake in that provides technology for the removal of stuff from the stack gases in power plants. It's very promising technology. We've got a good, strong - -

I think I was just referring to just the power generation, the power sector as a whole.

Okay. Well, the power sector as a whole is trending up dramatically. It's trending up, particularly in the coal fired arean. As you know, we have been working on the Peabody project for sure. But we're also doing front end work on some gasification programs and positioning for competition on other coal fired plants. It's going to be strong. These plants are larger than their gas fired brethren that were the projects that made up the last cycle. So they are much larger projects. They take longer to develop, and they are more involved from a construction standpoint, take longer to construct. I don't think it will be as strong from a total standpoint as the last cycle. But I think it will be a more sustained cycle than the last one was.

Is the work we're bidding on, still scrubber work, as I said or - -?

No, we've got a good mix going. We're doing a lot of scrubber work on existing plants. Both already contracted for and competing for that are out there in front of us. But we're also getting awards on power plants themselves. We've got two that we're currently doing the front end and development on. I think we've got a great chance of signing up in '06. I've already mentioned those, and we also have scrubber work that we're going be working on.

Some of your competitors are talking about the fact that there was a little bit, there is a little bit more scrubber work coming online than they were thinking. And, a) are you seeing that? And, b) do you have the resources to deal with them on the work that's coming online?

Yes, I would agree with their assessment there. We're seeing a lot of scrubber work come up and a lot of opportunities for that, particularly in the, I would say the central and eastern part of the U.S. Because of the nature of the coal that's being burned in those locations. So I think that's going to continue for sometime. From standpoint of technology and engineering, we don't have a challenge in resources. Obviously when you get into particular locales, you have to assess the construction and labor that's available in each of those locations. But from engineering standpoint, think we're in very good shape.

I should assume you'll get your fair share of whatever is out there.

We intend to.

Thank you very much.

Up next, we'll move to John Rogers of D.A. Davidson.

Couple of just quick things. First, on Fernald, you noted that should close out next year. Looking at the number, is that accounting for what - - it looks like over half your operating income out of the government services. Is that correct?

That's a little high.

Yes.

Fernald has been a very good performer over the last 18 months.

Okay, and - -

And particularly, John, in the last six months. A we come to closure on this, there's been significant incentives tied to that closure. And as we hit milestones that contribute to that closure, we do take up on those.

Okay, but that will finish at the end of '06, it looks like.

It will finish actually towards the middle of '06.

Okay, and then my second question, Alan, just in terms of your work in Iraq, can you give us a sense of what you're seeing there and what's ahead, if you've got any thoughts at all?

I was hoping you could tell me. I don't mean to be facetious there. It's difficult to predict. I think it is slowing down. We had a good third quarter in Iraq. But we do see the - - that the awards slowing down. I tend to think that's probably going to continue to occur.

Okay. And I'm sorry, just back on the government services, too, when does Savannah River, the work that you referred to there, when does that bid?

That bids towards the middle of '06, I believe.

Okay. And then startup in '07 and 08?

I think that's correct.

Okay, great. Thank you.

You bet.

And, gentlemen, we do have time for one final question. That will come from came from [Kapesh] Patel of Bear Stearns.

It's Mike Dudas. Good morning, everybody. What's the current composition of fixed price cost plus in the backlog?

Got that here somewhere. Do you got that handy, Mike?

Just a second Mike. We've got it right here.

And I assume these coal fire plants and scrubbers you might be booking over the next few years, is that more fixed price variety?

It is more fixed price. That's correct.

Fixed price is 29%, up from 27% last quarter, reimbursable is 71.

And remind us historically how you guys like to be positioned there?

We - -

Mike, honestly we don't have a specific rate. We do, though, take a look on a regular basis at our overall risk portfolio and so it depends on our assessment of risk on each of those projects. As you know, each of them is pretty unique and we take it through our risk program. We topped out at about 45% during the last power cycle in terms of total lump sum projects. So where we're at now is probably as low as it's been in four or five years.

All right. It's been fairly low this year. I would expect that it perhaps will inch up through 2006.

Well, clearly, I think as we sign, let's say a Peabody project, that all by itself will take it up significantly.

Alan, could you remind us on what type of acquisitions and your structure, what kind of returns you're looking for? And - - because we haven't really seen anything from that front over the past 18 months. And is that - - does that tie into any capacity issues in the industry? That seems like that would be a hot topic over the past few months.

Well, there is a number of factors there, Mike. Our strategy has been and continues to be what I would call niche acquisitions that add to our capability in a particular market that we consider strategic. So we pretty much contain our search to that area of strategic interests. And then on top of that, Mike has put together a fairly rigid and disciplined system around looking at what sort of acquisition we'll make. And we want that acquisition to basically be accretive in the first year. And we've been successful so far in the ones that we've done at getting what I call strategic sellers. Now, we've not come up with one over the last 18 months, as you rightfully point out. We are looking at some. But I don't think there are any out that are on the very immediate horizon. But that doesn't rule out one that could happen during '06.

Right. Mike, we're looking for fairly high double-digit returns to our rate of returns on these acquisitions. And we're being extremely selective, as Alan mentioned. It's not a capacity issue. It's more selectivity issue on our part.

All right. Terrific. Thanks, gentlemen.

And Mr. Boeckmann, I will turn the conference back over to you for any additional or closing remarks.

Thank you, operator. Well, first of all, let me say thank you for your questions today and your interest. We're very pleased to return to what is effectively our original guidance for this year. And we believe that our guidance for next year offers the potential for some very good growth. With the successful resolution of Hamaca and the no liability recent resolution on the hotel project we have removed some major uncertainties in our portfolio. And we continue to be very successful in capturing, what I call a significant percentage of the prospects that we pursue on a global basis. We also continue to view our overall market as a much longer lived upcycle than some of the previous cycles we've been in. Our operations are generating substantial positive cash flow and our very strong financial condition continues to improve. And that provides ample resources to support future growth initiatives. And with that, we appreciate your continued interest in Fluor. We look forward to seeing many of you at our upcoming investor meetings in New York and Boston on November 17 and 18. Have a good day.

And that does conclude today's conference. We thank you all for joining us.