Fluor Corp (FLR) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to Fluor Corporation's fourth-quarter conference call. This call is being recorded. At this time, all participants are in a listen-only mode and a question-and-answer session will follow management's presentation. 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 March 9, 2006 at the following telephone number, 888-203-1112. And the access code of 4969098 will be required. At this time for opening remarks, I'd like to turn the conference call over to Ken Lockwood, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning. With us today are Alan Boeckmann, our Chairman and CEO and Mike Steuert, Fluor's Chief Financial Officer. Our earnings announcement was released yesterday after the market closed. Before getting started, I would like to read our cautionary note regarding forward-looking statements. In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market 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 and information concerning factors that cause actual results to differ materially from the information that we will give you is available in Form 10-K filed March 1, 2006, 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'll turn it over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you, Ken. Good morning, ladies and gentlemen and thank you for joining us. This morning, we will review our fourth-quarter and the full-year results for 2005. We will also give you an update on our current business outlook and discuss our guidance for 2006.

Reflecting a substantial pickup in project activity, Fluor posted double-digit growth in revenue, earnings and earnings per share in 2005. Our revenues grew 40% to $3.2 billion, while net earnings increased 22% to a record $227 million or $2.62 per share. This compares with net earnings of $187 million or $2.25 per share in 2004. We are extremely encouraged by these results, which include strong operating performance from four of our five business segments.

The operating profits from Oil and Gas rose 50% to $242 million reflecting an outstanding performance in a robust global marketplace that is driven by escalating world energy demand. Global Services segment's profits were up 14% to $114 million in a strong market for construction and maintenance services. Our Government unit had another solid year with significant contributions from the Department of Energy projects, from reconstruction work in Iraq and disaster recovery work for FEMA. This growth was offset by the charges on the fixed-price embassy projects however. The Government unit earned $84 million in '05, which was equal to the previous year.

Our Power division had a profitable year at $13 million with residual gas-fired projects and some early progress on scrubber work. Our Industrial and Infrastructure segment faced a number of difficult dispute resolution and project issues and recorded a loss of almost $17 million for the year compared with a $62 million profit a year ago.

As a result, we have strength in the management team in that group had have refined the business model, which I believe will substantially improve the results going forward.

In total, operating profits for the year were $436 million, up 4% over 2004. While revenues were up substantially, our operating margins decreased to 3.3% from 4.5% a year ago. This lower margin was primarily due to the loss taken as a result of the settlement of the Caribbean hotel project dispute, some loss provisions on a highway project and several other I&I projects, but also a provision related to foreign employment taxes for expatriates. And while this ex-pat issue had a material impact on the quarter, it is not expected to materially impact any future periods.

Clearly, the I&I group's loss had a significant impact on our Company's overall operating performance. But I think it is important to note that if you look at the aggregate performance of the other four segments, their collective operating performance was up over 25% year-to-year. And finally, net earnings were improved by a lower than normal tax rate of 24% versus our historical rate of 33%. This is primarily due to the impact of favorable audit settlements with the IRS and the utilization of certain other tax credits.

Mike Steuert will provide some additional detail in his comments.

As I shift to new awards, new bookings for the year were very strong at $12.5 billion, just under the Company record $13 billion reported in 2004. We're very pleased with this result with all five segments making significant contributions. Oil and Gas specifically booked over $4 billion of new project awards. I&I, Global Services and Government each booked more than $2 billion and Power booked just over $1 billion new work.

Now, taking a look at our performance during the fourth quarter. Net earnings were $65.1 million or $0.74 per share. That compares with $47.9 million or $0.57 per share in the fourth quarter of 2004. The quarter was substantially improved by a favorable tax rate, which resulted in a $9 million benefit on the income tax line versus a $23 million income tax expense a year ago.

Operating profits for the quarter declined by 10% to $104.6 million and that included a $20 million loss provision for a transportation project and the $19 million provision for expatriate tax costs. Strong growth in Oil and Gas, Global Services and Government was offset by an operating loss, as I mentioned, in Industrial and Infrastructure and the expatriate issue related to taxes in foreign jurisdictions.

Revenues for the quarter rose 45% to $4 billion and that compared with $2.7 billion a year ago reflecting a substantial growth in all segments. Fourth-quarter awards were $3.4 billion, level with a year ago and this included the $1 billion Habshan Gas project, which we previously indicated would be booked in the quarter. I think it is important to note though additionally if you look and reflect on our conservative method of booking new awards, we did record new scope of an additional $910 million, which when you combine with the new awards, gave us a total of $4.3 billion of new bookings against a $4 billion revenue work-off that resulted in a net gain and backlog of $300 million during the quarter.

As we look ahead to 2006, we continue to see a very favorable outlook for new project prospects. Opportunities across all our business segments continue to develop with numerous sizable prospects pending certainly in Oil and Gas, also in Chemicals, Power, Mining, Transportation and Government. We are very encouraged by the outlook for significant ongoing client spending across our entire diverse marketplace with a number of large prospects in the pipeline for '06.

Our EPS guidance remains in the range of $2.80 to $3.10 per share and that includes the cost of moving our corporate headquarters to Dallas, Texas and the impact of the new rules on accounting for stock-based compensation.

So with that, let me turn the call over to Mike Steuert to review additional details of our operating performance, including new awards and other financial information. Mike.

Thank you, Alan and good morning. 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 backlog for each operating segment and on corporate financial items.

As Alan mentioned, I will also provide some additional comments on our income taxes.

Starting with Oil and Gas, new awards were $1.6 billion for the quarter, up substantially from $772 million last year. This brings the total for the full year to $4.4 billion, which was up 10% from last year. New awards in the quarter included engineering procurement in construction of the $1 million Habshan Gas complex that Alan mentioned. We also booked engineering and procurement for sea water cooling towers associated with the petrochemical project in Kuwait. And, as we had indicated in a press release in November, we booked a preliminary engineering services for the Ras Laffan liquefied natural gas projects in Qatar. The balance of this $1 billion project for the common off-sites and utilities is expected to be booked sometime in the first half of 2006.

We booked a front-end engineering and design for Marathon's [Grayville], Indiana refinery expansion program, as well as front-end work for a number of other refinery modification and expansion projects for other clients. Backlog for the Oil and Gas segment increased to $6 billion, up 13% from a year ago and up 15% from the last quarter.

New awards for the Industrial and Infrastructure segment were $720 million bringing the full year to $2.3 billion. This is down from a very strong $4.6 billion booked by Industrial and Infrastructure last year, which, as you will recall, included $2 billion of new mining project awards. New awards in the fourth quarter were relatively broad-based, including mining, life sciences, transportation and telecommunications. The largest award in the quarter was for the engineering procurement and construction management of a major iron ore expansion project in Australia.

The quarter also included a life sciences project where we are providing commissioning and validation services for a key client in Puerto Rico. After the quarter, we released details in our participation in a joint venture that will construct a transportation hub for the World Trade Center. Our $325 million share of this $1 billion contract will be booked in the first quarter of 2006.

Backlog for the Industrial and Infrastructure segment decreased to $3.9 billion compared with $5.1 billion at the end of last year driven by lower new awards and significantly higher revenues associated with the progress on the [units] mining projects.

In our Government segment, fourth-quarter new awards were $601 million, up 50% from a year ago. The new awards for the full year totaled $2.5 billion compared with $2.3 billion last year. The quarter included $300 million of contract work for FEMA for individual assistance related to providing temporary housing in Louisiana. We also booked another $67 million with contract relating to the emergency planning and response efforts in Louisiana and Texas. Both of these awards are in definite delivery and definite quantity contracts, but I can tell you that we have made very substantial progress on both these contracts.

Our [Delgen] unit booked several operations and maintenance contracts. In total, worth about $50 million. Finally, new awards also included approximately $85 million in task orders in Iraq inclusive of our joint venture with AMEC and our [CTech II] contracts. Backlog at the end of the year was about $1.4 billion, essentially flat with the $1.5 billion a year ago.

Global Services operations and maintenance unit booked $165 million of new awards in the fourth quarter, which brought their full-year total to $2.2 billion, up over 40% from last year. Operations and maintenance awards were diversified across the Power, Oil and Gas and Industrial markets. The largest award for the quarter was for a new three-year contract involving rehabilitation, maintenance and (indiscernible) of work at a chemical facility in Illinois.

Backlog increased 9% to $2.5 billion, up from 2.3 last year.

Power had a good quarter receiving full notice to proceed on a 200 megawatt coal-fired power plant in Nevada. Fourth-quarter awards totaled $366 million mainly from this power project, which we announced recently. Full-year awards totaled $1 billion, up 67% from $612 million a year ago.

Backlog for Power doubled to $1.1 billion compared with 552 million a year ago.

Moving on to corporate items, G&A for the full year was $143 million, including $5.7 million of cost relating to the relocation of the corporate headquarters from California to Texas. G&A also includes nonoperating income of about $11 million primarily from the sale of our corporate building in Aliso Viejo. This compares with G&A of $142 million last year.

As Alan mentioned, our guidance for 2006 includes two items that will cause our G&A to be higher in 2006. First, the projected costs associated with our relocation to Texas is about $20 million in addition to what was spent this year. Second, the adoption of the new rules regarding FAS 123 relating to accounting for stock-based compensation expense is estimated to add between $10 million and $20 billion to full-year G&A.

Our full-year EPS guidance for 2006 assumes that G&A will be in the range of $180 million to $200 million.

We had net interest income of $7.4 million for the year compared with $3.5 million a year ago primarily due to larger average cash balance and higher short-term interest rates. As Alan mentioned, we did have two non-recurring tax items in the quarter; one related to foreign employment taxes and the other to income taxes. We accrued $19 million in the fourth quarter for what was essentially double taxation of expatriates due to an increasingly aggressive positions our examinations recently conducted in several foreign jurisdictions.

Our quarterly tax rate has obviously moved around quite a bit this year. In the second and third quarters, there was a lot of variation driven by the Caribbean hotel charge and the subsequent partial reversal, the embassy loss provisions and the Hamaca settlement. In the fourth quarter, we ended with a net tax credit on income tax line. There were several factors that caused this.

First, we had a favorable settlement with the IRS relating to prior year returns. Second, we realized some tax benefit associated with dividends made pursuant to the American Jobs Creation Act. In addition, our tax rate was further reduced by the utilization of certain tax credit carryforwards, as well as other realized tax benefits.

In the interest of time, let me refer you to our 10-K where we have included a fairly substantial disclosure on these items.

Our tax rate for the full year was 24.1%. For 2006, we expect to return to a more normal tax rate of 33% to 34%.

Let me make now a few comments on the balance sheet, cash flow and other items. The consolidated cash balance grew to $789 million at year end from $605 million at the end of last year, a decline from one billion at the end of the third quarter. Cash flow from operations in the quarter was a use of cash as expected and totaled about $250 million. The primary driver of this cash usage was a buildup of project working capital in our Government segment relating to our work for FEMA, which we were not able to bill until we had a contract in place. While this does not account for the whole change, it does represent the majority of the change.

As previously discussed, we also fund our retirement plans in the fourth quarter of each year and this year, we used approximately $44 million of cash to fund these plans. We had no outstanding commercial paper at the end of the year and our debt to capital ratio was reduced to 21%, down from 26% at the end of last year. You will note that the 21% includes about $58 million of nonrecourse project financing associated with the U.K. highways agency project that was booked in the last quarter.

The new accounting rules regarding verbal interest entities required that our December 31, 2005 financial statements include the accounts of this entity, including the nonrecourse debt. We paid our normal quarterly dividend of $0.16 per share. Based on the timing of our fourth-quarter dividend, the payouts to shareholders, which is essentially in early January, we funded the disbursing agent in December resulting in two cash dividend payments in the fourth quarter totaling $27 million.

At our last regular Board of Directors meeting on February 9, the Board approved a 25% increase in the quarterly dividend of $0.16 per share to $0.20 per share. This increase brings our total payout to about 3% of earnings and the impact on our cash flow will be an additional annual outflow of $13 million.

Capital expenditures for the quarter were $68 million bringing the full year to $213 million, which is much higher than our normal run rate. This is mainly due to additional investments and equipment and vehicles to support certain international construction projects, to support Iraq and to support the FEMA work in the Gulf Coast.

Also included in the full-year amount is $24 million in capital spending related to our new corporate facilities in Dallas. Depreciation for the quarter was $27 million and for the full year was $102 million. Overall, we are very pleased that Fluor's financial condition remains very strong and continues to strengthen. With that, Alan and I would be happy to respond to questions.

(OPERATOR INSTRUCTIONS). Michael Dudas, Bear Stearns.

A question -- you mentioned in your early statement on the I&I business and you changing your business model and rearrange management. Can you give us a little bit more detail on that? You have some pretty disparate end markets and contract types I would see in that group and obviously it has been very disappointing in the variability of the performance and what kind of comfort can you give us that we have gotten behind that and the projects in the backlog there are scrubbed enough so we see better performance at the bottom line?

Very specifically made some management changes at the top of that organization that I think definitely strengthened the decision-making capability there and also the execution capability. In addition, when I talk about redefining the model -- if you'll look at the projects -- where we've typically had problems over the recent times have been in projects that are really in what I would call the commercial and institutional side. We have changed our business model as to what our whole search criteria is in that particular arena. So we just simply are not taking on any development type projects in that area.

In addition, in our risk model for Industrial -- in our Infrastructure group, we have taken on a project in which we really didn't have execution control and then we were more of an equity investor. We are no longer doing that. So I think we come out of this year, even though it was disappointing performance, we come out with a much stronger position in terms of having a number of legacy disputes already resolved and we have a management team that I have a lot of confidence in in making decisions and executing as we go forward.

And a follow-up question. If you look at a year from now, which end markets in your five groups do you expect possibly the most upside surprise to relative to new business opportunity, bookings or performance?

That's a very good question and I'm going to answer by saying actually the potential is there in almost all of the groups. We have some very strong markets as we go forward. In fact, I would say that as we have come into '06 we have gotten across the board some of the strongest markets we have looked at since I can recall being at the Company.

In particular, I would mention our oil and gas and petrochemical area. Tremendous strong spending and we are in a great position there. Probably doing more front-end work on large projects there than we have ever done in our history, both upstream and downstream.

In the transportation infrastructure business, we have got a number of prospects that are coming to what could be a very strong commercial close during '06. Mining, some very large projects being considered out there from some of our very best clients and also and I would mention power. We are in very strong position with a lot of front-end work being done, particularly in competing for some coal-fired power plants. Then Government has some significant competitions that we're going to be entering into during the middle of the year. So I think we've got strong prospects across the board and I think we're very bullish in terms of our opportunities for new bookings in '06.

Tom Ford, Lehman Brothers.

Just had a question -- I hate to harp on this with you, Alan, but taking a look at I&I, if you back out the $20 billion, the margin there still looked pretty light and I know that you had said -- we talked about this last quarter and you had said you had talked about making the changes. One thing I am curious about -- how long do you guys think -- how long do you think you're sort of working through these projects? Is this something that over the course of 2006 we're going to see the margin really start to move back towards a sort of long-term average or is it something that you think happens immediately in the first quarter? Just curious about that.

I think, Tom, with any change like that, it doesn't have an immediate effect, but I think in this particular case, I am looking for a pretty quick turnaround. I think we're going to see, as we go through '06, a return to normalized margins in the I&I group.

Okay.

I think we have got -- just so happened, these projects and issues have been tackled and resolved and clearly we have disclosed those and while it is disappointing, I think the group is in a very strong position in terms of their bookings for the year, prospects that are in front of them and a team that has really gotten around the issues and resolved to go forward and make a big difference.

Great. Mike, I wanted to ask you about -- you had made some references on the tax in the fourth quarter. I am just trying to get a bit more detail there. Maybe I'll ask it this way. Is there anything wrong with assuming a 33% rate or something like that for the fourth quarter as sort of a normalized level?

I would say 33%, Tom, is our normalize long-term rate. The fourth quarter had a lot of tax items, some of which you could classify as normal; some of which you could classify as non-recurring. But the vast majority I would say is non-recurring. I know all you guys are struggling to figure out how we did on a normalized basis in the quarter. Let me just give you my view of how I look at it very simplistic. There a lot of pluses and minuses for the quarter, as well as for the year. By for the quarter and the year if you just look at the tax side, we had two unusual tax items. One was the ex-pat -- the foreign employment taxes for ex-pats and the other was the low tax rate. If you do a fairly simplistic adjustment for both of those, recognizing that the majority of the tax benefit was probably non-recurring, you get to a fourth-quarter number and a number for the year, which is solidly within the range of guidance that we gave out.

So I mean just sticking to the fourth quarter, when you say within the range of guidance, does that mean something like a low 30s number? Or is it lower than that?

I think it is in the low 30s.

Okay. The other question is I know other companies that have been going through these audit issues with the government, are you fully done with that or are there other years that have yet to be reviewed with the government that could in fact be a positive next year?

As with other companies, Tom, we're almost always in one audit cycle or another with the IRS. What happened in 2005 was we completed one audit cycle and we are now in another audit cycle for another group of years and we will reach a resolution of that in 2006 or 2007 I am not sure but we are always going through audit cycles with the IRS and usually revolve around three or four years at a time. So I would say my guess with our current audit cycle, probably looking at 2007 for any final resolution. But obviously we would look at our accounting reserves, our tax reserves and update those as appropriate every year.

Just two quick questions or hopefully quick. Alan, it was a transportation project in the fourth quarter here. Is that the same project that was at the source of some adjustments in prior periods?

I think this project did have a prior adjustment but that was I believe a year ago.

Was this the one too that was still in the design phase and if so, are we any closer to the construction phase yet?

It is in construction. It has got about another year plus, maybe even another 15, 16 months to go. But I think we have -- it is a joint venture project with another company and we have taken a good hard look at the costs as we have now got all the subcontracts out and unfortunately, we had a trend that was unfavorable in that regard but now we have got most of it all subcontracted. The construction work is ongoing and fairly substantial in terms of -- it's a road project. So it has got a lot of earth moving that has already been done.

And then the last thing is just in the release, it referenced the year-over-year improvement in government and said that it seemed like the release said that it was largely hurricane-related. I mean it seemed to imply that there was like $300 million to $400 million of hurricane-related revenue in the fourth quarter. Is that accurate?

Yes. I mentioned that in my comments, Tom. We had about roughly $300 million of activity from Katrina mostly in the fourth quarter.

Just real quickly, how do the margins -- how would the -- because the government margins seemed to step up a little bit in the 4Q. So I am just wondering was that because the FEMA related work?

No, there were a number of factors in there. We had a close-out on a particular project that was very favorable and so we were able to recognize some incentives off of that project in another area of the government.

Sanjay Shrestha, First Albany.

A couple of quick questions here. First, again on this transportation project. Given that we have one more year left to kind of complete this job, do you feel like the loss provision that you have taken here is adequate enough or do you think that that is something you would continue to see again in 2006?

Obviously when we do these, we take the estimate of the going-forward cost to complete. So it is our absolute best estimate. So I can't guarantee there won't be others, but we try to be conservative in that and we try to make sure that we have got all of the issues contained. And of course we work with our joint venture partner to make sure that that happens and look at it from both sides. So I don't anticipate any other charges. I can't obviously (indiscernible) to do that but I think we're on track to get this thing done.

Alan, in your prepared remarks, you talked about some pretty big opportunity across the board and when we kind of look at your new bookings number, while pretty healthy for the year at 12.5, it is down from last year. Your backlog is flat on a sequential basis. So as we look into '06, the earnings growth, is it going to be any more on the margin gain front that is going to give you that acceleration in the earnings or do we think that '06 is again going to be another massive year for new booking and a backlog build and some of the projects that are early enough to contribute to the EPS numbers?

I'd make two comments with that. First of all, the way we do bookings is different than most companies. We don't put project adjustments and new scoping projects in our new awards. Most other companies do. If you look at that, we actually had a stronger year in '05 than we did in '04.

Fair enough.

And so I think that is one thing that we do. We are a bit conservative in how we do that, but we had net new scope on projects of about $1.5 billion. On the other hand, we are seeing upward trends in our margins on bookings. Very specifically because of the market we in and the position we are in. So I think as I look to '06, I think we're going to see a very strong year not in terms of revenue bookings certainly but I hope to see a continuing uptrend in new award margins as well.

Absolutely. And so then while you guys don't disclose the exact number but then it is fair to say that the margin in your backlog at the end of the year is probably better than what we have seen in 2005 early part?

That's a fair statement.

Two quick questions. One, what about related to the Alaska pipeline opportunity? It seems like it's going to continue to move forward, could you actually comment on that a bit more.

I think obviously there are a number of issues with that but I am very positive in my outlook on that. Number one I think it is just from a market standpoint and the need for gas in the lower 48 it has a tremendous impetus gathering both politically as well as market wise. Then when I add our position in that I think we're very strong in terms of a position to be able to capture a significant portion of that project. So the question is timing and I think that is the real issue. I do not think we'll have any significant bookings in '06 on that but it is probably something that would probably occur in '07.

Got it. And then one last one. With your cash position and increase in the dividends here so is it (indiscernible) to say that you're (indiscernible) regarding the acquisition hasn't changed? You are not going to go for anything big but it is still going to be some sort of like a tuck-in acquisition.

We are still looking for acquisitions. They will be strategic in nature, not market consolidating but strategic to add to our position in certain markets. And I think the increase in dividend was made by our board recognizing our increased position in earnings and also our very strong position in terms of where we are in the marketplace.

One last comment on margins as well for 2006. We also expect to return to normal profitability industrial infrastructure to help overall margins as well.

That's very helpful.

Barry Bannister, Stifel Nicolaus.

Just trying to get a feel for the potential revenue growth in 2006 and wondered if you had any follow-on guidance to some of the brief comments that were made in the third quarter?

Not really, no. Our guidance for 2006 primarily focused on our earnings per share guidance.

And as you have had a slight slowdown here in the growth rate of orders in the past sometimes your burn rate increases when that happens, and would you expect that at least to reoccur so perhaps the revenue growth would be positive at least in tandem with your earnings expectation in '06?

You are correct in your observation relative to our burn rate with the activity and supporting FEMA Katrina, that activity is burned almost the same quarter as booked so we have a very fast burn rate for that and our RAC business continues to have a very rapid business. So we have seen a modest increase in burn rate in the fourth quarter and that could certainly continue in the early part of 2006.

If I take your earnings on a per share basis and restated to exclude all the onetime items that occurred in 2005, it is interesting that your restated earnings did grow about in line with revenues so one of the criticisms that you didn't have any incremental margin would be incorrect. You would have about 40% profit growth per share. But from that base to have your guidance where it is in '06 you are not forecasting much growth. Is that because you are assuming a continuation of so many onetime items that it is just impossible to use the restated level as a beginning point for next year's guidance?

It's really hard to take 2005 and restate for a lot of items; we clearly have a lot of negative items in 2005. We also have a number of positive ones and unfortunately we tend to disclose the negative issues more than the positive in terms of disclosure requirements. As we look at 2006, we did indicate that our growth was going to be tempered a little bit by higher corporate G&A, up in the 180 to $200 million range due to the cost of relocating our corporate headquarters to Texas, as well as new accounting rules on stock based compensation. That is going to temper the growth somewhat. And that is what is driving perhaps your view in terms of our earnings growth in 2006.

Yes, $193 million of SG&A is in our model but I am just wondering what about the permanency of that level? Would it step down in '07 since some of those items are onetime?

Typically it would. I would look to that.

Okay. That's good news. And very last question, the initial projection of the cost of the Alaska pipeline made in '02 was $20 billion but steel subsequently doubled. Have you done any front-end kind of work on what you think the new cost of the pipeline will be?

We have but it is not recent. So I wouldn't want to put any numbers out there.

I understand. Thanks.

(OPERATOR INSTRUCTIONS). Alex Rygiel, Friedman, Billings, Ramsey.

Thank you and I apologize I had to jump off for a minute or two. You mentioned the scrubbers business picking up in the quarter. Can you highlight to us how much scrubbers domestically you're working on today and how many scrubbers you anticipate are market opportunities for you over the next one to two years? Can you also provide CapEx guidance for 2006? And can you also break out cash between cash advances and cash that is actually yours to keep?

That's a list there. If I just speak to the scrubber question for a minute and I'll let Mike talk about cash. We have booked a number of scrubbers. I think we have booked two specifically in the year and we are probably looking at good strong prospects where I think -- we're in a good strong position on several others that hopefully we will be able to pull down in '06.

In terms of the total market, there is any number of forecasts out there. Suffice it to say with the fuel situation for power as it is with the high price of natural gas, coal has continued to be looked at as the fuel of choice for expanded generation and for extending the life of some of the plants and it is definitely going to require scrubbers in government projects. A number of contractors, including ourselves, are targeting that market and we anticipate that it will be a very active market over the next three to five years. I wouldn't want to give any numbers because I think there is such a wide range of what is out there. But I do think it will be a strong market.

In terms of the CapEx, we expect it to be in the range of about $200 million again in 2006. That reflects the high level of activity in a lot of our new awards and project activity around the world and also reflects continued support of FEMA regarding the Katrina effort as well. So of course we will have some CapEx related to our new corporate headquarters. So it will stay about that level.

On your question about cash, of the $789 million that we look at, a lot of that is project-related. The majority of that is overseas in support of our international projects. It is hard to say exactly how much of that is advance billings versus other activities. Our advance billings did increase modestly year-over-year but our cash still substantially exceeds our advance billings on contracts. And as we go forward, we expect our advance billings to be in place for quite some time and remain a healthy number as we execute. I would think that the majority of that cash overseas is going to be there for quite some time. We do have a very aggressive program of repatriating cash. We have brought back over $200 billion in 2005 and we'll look at bringing back some more cash in 2006 as well.

Andrew Obin, Merrill Lynch.

Just more of a general question on backlog. Looking at the end of '06, do you think backlog is going to be much higher than it was at the end of '05? Do you think it is going to be flat? Do think it is going to be down? Just sort of very broad view if you have --. How long do you think backlog can continue to grow? Two, three, four years, has it peaked?

Obviously we're involved in a lot of markets and so you have to look at the -- and you have to combine all of those market profiles to get a total portfolio picture. But I think if you look at the markets we're in and some of the strength of them and the projection for how far out they are going to go, oil and gas probably is -- not only is it the strongest -- it has the longest projection in front of it as does our infrastructure. So my guess is we will be adding to backlog in '06, certainly probably again in '07. When you get out beyond that, it really gets hard to judge as to what is going to happen in the markets. So I wouldn't want to go much further than that. But I think we will be able to add. The question is how much and it is a lumpy business. So I would hesitate and I wouldn't put out a number or give you any projections there, but I think we are in a very strong position and the markets we're looking at are extremely strong. So I think you will see that unfold as we go through '06 and I think it will be a good story.

Just a second question on cash. The receivable we have with the government, when will we -- because I understand it is a pretty fast [burn] rate -- does it mean that it will come back on the balance sheet in the next couple of quarters?

Yes. We would hope to see both the work in process and the receivables related to our work for FEMA reduce as we move toward the middle of the year.

Terrific. Thank you very much.

Leone Young, Citigroup.

Good morning. Just two related questions in terms of thinking about moving into your guidance for next year. Was there anything particularly unusual in the fourth-quarter revenues like a big project that finished up or anything like that and also sort of related to that, although you think you'll get a pretty good comeback on the margins pretty quickly, given that, as we have talked about before, the oil and gas margins because of the big size of their contracts are just typically a little bit lower than has been the case in the past, is it more likely obviously understanding all your divisions move around a lot but is your gross margin more likely to be closer to 3.5% type of range or back towards the 4%?

We are going to look, as Alan indicated earlier, for some solid margin improvement in 2006 in part due to the return of normal profitability in Industrial and Infrastructure, as well as, as he indicated, the fact that, if you look at our new awards and backlog, we have certainly seen year-over-year improvement in the profitability and the work that's in backlog.

And specifically the marketplace we're in, Leone, from just a supply and demand standpoint and the position we're in gives us an opportunity for better margins. So I think that -- and I think you're probably seeing that with a lot of our competition as well.

And back to the revenue? Was there anything unusual in the fourth quarter?

Not really. No. I think clearly -- Mike made one comment I think that bears repeating. This is we had a pretty big step-up in the FEMA work in Q4 that was not in prior quarters.

Yes, you did mention that. I apologize. Thank you.

John McGinty, Credit Suisse.

Alan, I missed the first five minutes. I missed your prepared remarks and if you addressed this then I apologize for it. But going back to the third quarter, we had $1 billion order that slipped from the third quarter into the fourth and so in fact we were looking for I thought over $4 billion of bookings in the fourth quarter and in fact, to some extent, one could argue since you had the one billion going in that the 3.5 that you booked, which is kind of the same 2.5 that you booked in the third. You just got that $1 billion sliding back and forth was slightly disappointing. Could you address that? If you addressed that already, I apologize and I'll get it offline.

Let me go ahead and address it, John. I made some comments about it but let me go ahead and reiterate that. Clearly we did have that booking and it occurred just right over the wire going into the fourth quarter. But they count just as much in the first day of the quarter as they do on the last day of the quarter. It is a lumpy business and I would have been obviously a lot happier with the $4 million number, but some of our projects continue to move out.

Did you lose some in the quarter that you though you were going to get? Did some of them slip over into January?

No. We didn't lose any significant projects at all in the quarter. Quite the contrary. So it wasn't a win/loss issue.

I didn't mean lose.

It's a timing issue but I made another comment, John and I really think we may have to look at how we do this, but we record adjustments of new scope on projects in an adjustments line, not in new awards.

You mentioned $1.5 billion, but what was it last year? Put it into perspective for us.

It was significantly less than that.

Like under half $0.5 billion.

It was approximately $0.5 billion.

Correct.

So that is $1 billion more that you had in '05 versus '04 if you were to follow -- I don't mean you don't follow the industry practice, but kind of what a lot of other people do?

And we disclose that in our statements so you can see it in there what the adjustments are. But it is 1.5 billion more than what we had in new awards and $1 billion more than last year.

That's a fair point. Let me just ask a couple of nitty-gritty questions. If we take the oil and gas business at $54 million in the fourth quarter and add the $15 million or $16 million of the ex-pat that went into that, that is like a $70 million number. Did you have some unusually strong or is that the new quarterly run rate?

Well I hesitate to say that is the new quarterly run rate. We did have a few items in there that were positive but it's going to be -- oil and gas is going to be a strong contributor as we go into '06 and on.

So maybe a little bit less is the quarterly run rate but still a strong -- I mean there wasn't anything unusual in there, really unusual in there.

There were some positives in there, but I wouldn't say that they any one of them were significant.

And then in Industrial and Infrastructure in the K, Mike, you talked about $50 million of write-offs of a bunch of miscellaneous -- not miscellaneous -- you identified a couple of life sciences and a couple of other things. How much of that was in the fourth quarter?

I don't think we have disclosed that, John. That was spread throughout the year, but there was a fair amount in the fourth quarter.

Like $20, $30 million in the fourth quarter.

Could be.

And I guess in a way then if we take the $20 million of the highway write-off and $20 million, $25 million there, that is $45 million and take the loss of 17. Are we talking about a $25 million per quarter run rate in I&I on a normal basis? I mean that is what it looks like if we add the losses back and on the two projects that was the run rate.

That is high, John. I don't think we have ever had a run rate like that in I&I.

Okay, okay. Can I assume that if you take $50 million of write-offs in just a bunch of projects that you have gotten the kitchen sink?

Let me say that we worked very hard this year to resolve a lot of disputes and legacy issues in I&I.

To clean it up in other words?

We put a new management team in, as Alan mentioned, and that management team was very diligent in trying to resolve a lot of legacy matters. As Alan also mentioned, we view ourselves better positioned going in 2006 than we have for quite some time.

And then on the Government, if I do the subtraction correctly, there was another $14 million of embassy write-off in the fourth quarter and was that on the two major projects that are still going on or I mean is everything done or is there more write-off coming in those damn embassy (indiscernible)?

You are correct. The $14 million was in the quarter and was embassies. Again, that is our best estimate of total cost, total loss on the life of those projects.

Are the two large ones done or how far along are they?

They are 60% to 70% --.

John, they are scheduled to be completed later this summer.

So there is some risk -- I mean if you look back -- I think it was Sanjay or somebody who asked the question earlier -- if you look back on it, when you did the $28 million on the California highway last year, you assumed you had gotten it all. Now you took 24, 25 million in the California highway this year and as you say, the projects got 16 months left; the embassies are 70% complete. I mean in your guidance, are you assuming anymore write-offs from the Washington group project or from the embassy project?

We are not assuming anymore. When we do an estimate, we do it for the total project, John, and that is the way that they have to be accounted.

You understand that for somebody just looking at it and you have the write-offs -- they just continue almost it seems like every quarter, you have to have some level of discomfort, right?

If you look at the embassies -- let just talk about that for just a second. We did an estimate in the previous quarter that we assumed had taken all of the issues but the one embassy that is over in the former Soviet Union had the worst winter in 40 years. So that we certainly hadn't anticipated that when we made that estimate. So we have made an estimate that we believe covers the costs to complete and with respect to embassies, those will complete this summer.

Okay. And on the California highway project, the same thing? In other words, the fact that we have now moved into the moving phase diminishes the risk?

It does. We have gone out and got quotes now for subcontracts and they have mobilized and so every bit of progress you make gives you that much more certainty as to what your costs are.

And the final question, if we take the government services at $34 million, add the embassies back, that is $47 million. I guess my question is that is up dramatically higher -- hell, that's what you earned in 2003. Is a lot of that that Katrina work? In other words, $12 million, $13 million -- in other words, if we assume a 4% margin on 300 million, that is $12 million. Is that the order of magnitude that Katrina added?

Well clearly you have Katrina but you also have the work in Iraq during the year.

But that was -- in the fourth quarter, that was only $85 million I think it said in the Q.

That's right.

That's correct. But it's generally -- it's at a higher level than what it will be in '06.

Well I guess my question is is there A) is there Katrina work that carries over on the same order of magnitude in '06 or what is the Katrina work in '06 relative to the $300 million in the fourth quarter and then secondly, give us just -- help us out because the government services bounced all over the lot.

John, you are right. The government services did have a significant one time event with the Katrina work for temporary housing with FEMA and to answer your question, that does carry over into '06. Our current scope of work takes us up through about May or June.

That's the same 300 million a quarter per rate?

Pretty strong, pretty strong continued rate.

So then can we look at 40 million a quarter? That just seems to me to be almost unbelievable, $30, $30, $40 million a quarter. I mean just can -- Mike, can you help us out as we try and model this thing?

No, there are some other moving parts in there, John, that make it a little more difficult --.

That's not a long-term run rate. The other thing that is happening is we are nearing a very successful completion of the cleanup of Fernald and that is enhancing our profitability as we move toward that very substantial cleanup of that.

Does that diminish in '06?

Yes it does.

And then final question, there was the $5 million write-off in Power. Was that in the fourth quarter?

There was an adjustment on a project in the fourth quarter, yes.

And that was the 5 million -- the 5 million is a 10-Q number?

Right.

And that was in the fourth quarter?

Right.

Tom Ford, Lehman Brothers.

Just two questions. Number one, Alan, you had talked earlier about Alaska. I'm just wondering when you had done the front-end work, was that for a government entity or was that for a corporate entity?

It was for a corporate entity.

And then the second question is anything with respect to -- I k now last time I think you had talked about it about Peabody, you are saying it is possible for year-end '05. Obviously that didn't happen but any idea there in terms of when that might happen in 2006?

I think, as I look at it now, we are continuing to work with Peabody. They have made some good progress with respect to their off-take agreements. They brought on additional partners on the investment side. But right now, as I say, I think this will become a full award in either Q4 '06 or Q1 '07 on the current schedule and I think that is indicative of just some of the challenges they have had in getting air permits and also just in equipment deliveries. So I think that is very likely though in that time frame. I don't think we will see much more in terms of delays.

Okay because you think that they have kind of got their arms around the issues that had been delaying it to this point?

Right. They got -- their preliminary EPA air permit is now going through the normal appeals process and that is really the major issue on schedule now.

So would that be the thing for the outsiders like us looking in -- what that be the thing for us to keep an eye on is that process?

It is. And I think the Peabody one, just because of where it is at and the nature of the project, it is a good project, but it has just got the challenges that probably are more involved than many other core projects would be.

And the other thing was just the award you guys made last night, the announcement, the 400, was that Newmont?

Yes.

John Rogers, DA Davidson.

A couple of things. First of all, looking into '06, you talked about the spending on the move, the incremental $20 million. Is that spread pretty well evenly through the year?

No, it is pretty much in the first part of the year.

So we should see [C&A] then dropping through the year.

Correct.

And then secondly, Alan, in terms of your Power backlog right now, can you give us a sense of a mix between scrubbers, new plants, gas versus coal?

Right now the only real coal work that is in that is the front-end work currently. So it is more on the scrubber and also on some of the other projects we are doing.

So the coal work, if it develops this year, would be all incremental.

That's correct.

Then just following up on the earlier question on the road projects. You mentioned that you start moving toward around but what percentage are you done with that project now?

I believe it is about 60% if memory serves me.

John, somewhere in the 60% to 70% range.

Your question just prompted a comment I need to make in our Infrastructure business, in particular in transportation. Our transportation business in its history has never had, prior to this project, a losing project. It is in fact -- on a significant basis, they have always done better than what they have sold them at. So it is a good group. What we did in this was a joint venture project that really kind of weakened our ability to execute. So that is another one of the changes we have made in our business model. We will not do that again. We are only going to take those in which we have control of the project.

Okay. And at this point, the way your accounting works, would the remaining 30% or 40% then all be booked at breakeven?

I'm sorry. Say that again.

Given that you have taken the hits to write down the cost or the profitability on this project, would the remaining revenue then on this be recognized at zero margin?

That's correct. As we recognize revenues, we complete the project. We will not be adjusting our profits.

Alex Rygiel, Friedman, Billings, Ramsey.

One quick follow-up question on the Power business. Understanding that it can be lumpy from time to time, particularly as it relates to your profit level, do you think we're going to start to see profit margins improving in '06 or should they likely stay steady for a period of time before they go up to the high single digits, low double digit range?

I think they will improve slightly in '06 but we are looking for some significant bookings obviously in '06 and the early part of those projects, we don't have significant take-up on profits. So I think you'll really see profit margins pick up in the '07 time frame in Power.

There are no further questions. Gentlemen, I will turn it back to you for any closing comments.

Thank you, operator. Let me just thank all of you for participating on this call today. You know Fluor did have a good year in 2005, but I am very excited about the considerable opportunities that we face in 2006. As we enter this year, we find ourselves in an extremely strong position. We have a very outstanding balance sheet. We have resolved a significant amount of legacy disputes during this last year, but most importantly are the prospects that we in front of us in the marketplaces that we address. They are extremely encouraging and we look to a very strong year of new bookings. Our capabilities and our diversity is unmatched globally and that is why I believe that our prospects and our potential have never been better. So again let me thank you and I hope that you have a very good day.

That does conclude today's conference. Thank you all for joining.