Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

Or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to            

 

Commission File Number:  1-16129

 

FLUOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0927079

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

6700 Las Colinas Boulevard

 

 

Irving, Texas

 

75039

(Address of principal executive offices)

 

(Zip Code)

 

469-398-7000
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

 

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

As of October 27, 2017, 139,875,264 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 



Table of Contents

 

FLUOR CORPORATION

 

FORM 10-Q

 

September 30, 2017

 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

Part I:

Financial Information

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statement of Earnings for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of September 30, 2017 and December 31, 2016 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

 

 

Item 4:

Controls and Procedures

39

 

 

 

 

 

Changes in Consolidated Backlog (Unaudited)

40

 

 

 

Part II:

Other Information

 

 

 

 

 

Item 1:

Legal Proceedings

41

 

 

 

 

 

Item 1A:

Risk Factors

41

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

 

 

Item 6:

Exhibits

42

 

 

 

Signatures

 

45

 

1



Table of Contents

 

PART I:  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

 

UNAUDITED

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

TOTAL REVENUE

 

$

4,941,634

 

$

4,766,864

 

$

14,493,631

 

$

14,046,870

 

 

 

 

 

 

 

 

 

 

 

TOTAL COST OF REVENUE

 

4,720,071

 

4,729,637

 

14,090,091

 

13,505,572

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) AND EXPENSES

 

 

 

 

 

 

 

 

 

Corporate general and administrative expense

 

45,973

 

27,144

 

138,336

 

134,897

 

Interest expense

 

16,955

 

17,377

 

50,991

 

50,741

 

Interest income

 

(6,749

)

(4,643

)

(20,647

)

(12,312

)

Total cost and expenses

 

4,776,250

 

4,769,515

 

14,258,771

 

13,678,898

 

 

 

 

 

 

 

 

 

 

 

EARNINGS (LOSS) BEFORE TAXES

 

165,384

 

(2,651

)

234,860

 

367,972

 

INCOME TAX EXPENSE (BENEFIT)

 

52,495

 

(20,057

)

51,249

 

111,501

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

112,889

 

17,406

 

183,611

 

256,471

 

 

 

 

 

 

 

 

 

 

 

LESS: NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,426

 

12,602

 

52,562

 

45,531

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO FLUOR CORPORATION

 

$

94,463

 

$

4,804

 

$

131,049

 

$

210,940

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.68

 

$

0.03

 

$

0.94

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.67

 

$

0.03

 

$

0.93

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

SHARES USED TO CALCULATE EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

139,887

 

139,250

 

139,716

 

139,142

 

DILUTED

 

140,830

 

140,924

 

140,847

 

140,863

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.21

 

$

0.21

 

$

0.63

 

$

0.63

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

112,889

 

$

17,406

 

$

183,611

 

$

256,471

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

25,228

 

(23,227

)

63,115

 

(39,407

)

Ownership share of equity method investees’ other comprehensive income

 

6,485

 

2,748

 

8,409

 

3,114

 

Defined benefit pension and postretirement plan adjustments

 

1,026

 

1,289

 

2,936

 

(828

)

Unrealized gain (loss) on derivative contracts

 

(1,544

)

1,980

 

2,006

 

2,901

 

Unrealized gain (loss) on available-for-sale securities

 

31

 

(280

)

20

 

832

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

31,226

 

(17,490

)

76,486

 

(33,388

)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

144,115

 

(84

)

260,097

 

223,083

 

 

 

 

 

 

 

 

 

 

 

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

18,485

 

12,030

 

52,473

 

45,714

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO FLUOR CORPORATION

 

$

125,630

 

$

(12,114

)

$

207,624

 

$

177,369

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

 

UNAUDITED

 

 

 

September 30,

 

December 31,

 

(in thousands, except share and per share amounts)

 

2017

 

2016

 

 

 

 

 

 

 

ASSETS 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents ($522,002 and $439,942 related to variable interest entities (“VIEs”))

 

$

1,827,029

 

$

1,850,436

 

Marketable securities, current ($91,095 and $48,155 related to VIEs)

 

178,056

 

111,037

 

Accounts and notes receivable, net ($225,698 and $232,242 related to VIEs)

 

1,532,959

 

1,700,224

 

Contract work in progress ($95,652 and $124,677 related to VIEs)

 

1,326,791

 

1,537,289

 

Other current assets ($20,765 and $24,017 related to VIEs)

 

650,059

 

411,284

 

Total current assets

 

5,514,894

 

5,610,270

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

130,631

 

143,553

 

Property, plant and equipment (“PP&E”) ((net of accumulated depreciation of $1,196,283 and $1,122,191) (net PP&E of $41,638 and $53,728 related to VIEs))

 

1,080,175

 

1,017,223

 

Goodwill

 

563,440

 

532,239

 

Investments

 

847,055

 

740,385

 

Deferred taxes

 

294,382

 

454,109

 

Deferred compensation trusts

 

385,737

 

348,487

 

Other assets ($23,678 and $24,248 related to VIEs)

 

377,213

 

370,151

 

TOTAL ASSETS

 

$

9,193,527

 

$

9,216,417

 

 

 

 

 

 

 

LIABILITIES AND EQUITY 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Trade accounts payable ($206,635 and $221,601 related to VIEs)

 

$

1,398,182

 

$

1,590,506

 

Revolving credit facility and other borrowings

 

36,725

 

82,243

 

Advance billings on contracts ($308,667 and $263,393 related to VIEs)

 

970,338

 

763,774

 

Accrued salaries, wages and benefits ($29,998 and $35,573 related to VIEs)

 

714,895

 

734,649

 

Other accrued liabilities ($32,646 and $32,015 related to VIEs)

 

423,434

 

644,857

 

Total current liabilities

 

3,543,574

 

3,816,029

 

 

 

 

 

 

 

LONG-TERM DEBT DUE AFTER ONE YEAR

 

1,580,974

 

1,517,949

 

NONCURRENT LIABILITIES

 

635,086

 

639,608

 

CONTINGENCIES AND COMMITMENTS

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Capital stock

 

 

 

 

 

Preferred — authorized 20,000,000 shares ($0.01 par value); none issued

 

––

 

––

 

Common — authorized 375,000,000 shares ($0.01 par value); issued and outstanding — 139,902,454 and 139,258,483 shares in 2017 and 2016, respectively

 

1,399

 

1,393

 

Additional paid-in capital

 

77,449

 

38,317

 

Accumulated other comprehensive loss

 

(420,094

)

(496,669

)

Retained earnings

 

3,624,554

 

3,582,150

 

Total shareholders’ equity

 

3,283,308

 

3,125,191

 

 

 

 

 

 

 

Noncontrolling interests

 

150,585

 

117,640

 

 

 

 

 

 

 

Total equity

 

3,433,893

 

3,242,831

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

9,193,527

 

$

9,216,417

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

FLUOR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

UNAUDITED

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2017

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

183,611

 

$

256,471

 

Adjustments to reconcile net earnings to cash provided (utilized) by operating activities:

 

 

 

 

 

Depreciation of fixed assets

 

153,881

 

155,115

 

Amortization of intangibles

 

14,074

 

12,424

 

(Earnings) loss from equity method investments, net of distributions

 

(378

)

12,381

 

Gain on sale of property, plant and equipment

 

(11,740

)

(15,408

)

Amortization of stock-based awards

 

31,076

 

31,842

 

Deferred compensation trust

 

(37,251

)

(19,546

)

Deferred compensation obligation

 

35,988

 

25,213

 

Deferred taxes

 

99,763

 

58,772

 

Net retirement plan accrual (contributions)

 

(7,095

)

(7,880

)

Changes in operating assets and liabilities

 

86,815

 

(57,538

)

Other items

 

1,893

 

638

 

Cash provided by operating activities

 

550,637

 

452,484

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of marketable securities

 

(204,808

)

(279,387

)

Proceeds from the sales and maturities of marketable securities

 

150,857

 

415,862

 

Capital expenditures

 

(216,336

)

(165,514

)

Proceeds from disposal of property, plant and equipment

 

55,858

 

60,773

 

Investments in partnerships and joint ventures

 

(241,577

)

(518,009

)

Acquisitions, net of cash acquired

 

 

(240,740

)

Other items

 

(6

)

10,237

 

Cash utilized by investing activities

 

(456,012

)

(716,778

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Repurchase of common stock

 

 

(9,718

)

Dividends paid

 

(88,623

)

(89,026

)

Proceeds from issuance of 1.75% Senior Notes

 

 

552,958

 

Debt issuance costs

 

 

(3,513

)

Repayment of Stork Notes and other borrowings

 

 

(331,267

)

Borrowings under revolving lines of credit

 

 

883,288

 

Repayment of borrowings under revolving lines of credit

 

(53,455

)

(884,876

)

Distributions paid to noncontrolling interests

 

(23,842

)

(25,628

)

Capital contributions by noncontrolling interests

 

4,672

 

8,571

 

Taxes paid on vested restricted stock

 

(6,186

)

(7,006

)

Stock options exercised

 

8,803

 

3,315

 

Other items

 

(1,551

)

711

 

Cash provided (utilized) by financing activities

 

(160,182

)

97,809

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

42,150

 

(3,027

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(23,407

)

(169,512

)

Cash and cash equivalents at beginning of period

 

1,850,436

 

1,949,886

 

Cash and cash equivalents at end of period

 

$

1,827,029

 

$

1,780,374

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(1)                   Principles of Consolidation

 

The Condensed Consolidated Financial Statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States and, therefore, should be read in conjunction with the company’s December 31, 2016 Annual Report on Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended September 30, 2017 may not necessarily be indicative of results that can be expected for the full year.

 

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly its consolidated financial position as of September 30, 2017 and December 31, 2016 and its consolidated results of operations and cash flows for the interim periods presented. All significant intercompany transactions of consolidated subsidiaries are eliminated. Management has evaluated all material events occurring subsequent to the date of the financial statements up to the filing date of this Form 10-Q.

 

The Condensed Consolidated Financial Statements include the financial statements of Stork Holding B.V. (“Stork”) since March 1, 2016, the date of acquisition. See Note 18 for a discussion of the acquisition.

 

(2)                   Recent Accounting Pronouncements

 

New accounting pronouncements implemented by the company during the nine months ended September 30, 2017 are discussed below or in the related notes, where appropriate.

 

In the third quarter of 2017, the company elected to adopt Accounting Standards Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment” before its effective date. ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Management does not expect the adoption of ASU 2017-04 to have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2017, the company adopted ASU 2016-17, “Interests Held through Related Parties That Are Under Common Control” which amends the consolidation requirements that apply to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity. The adoption of ASU 2016-17 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2017, the company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU is intended to simplify various aspects of accounting for share-based payment awards, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. As a result of the adoption of ASU 2016-09, the excess tax benefits and tax deficiencies associated with option exercises and vested share awards are now recognized as income tax benefit or expense in the Condensed Consolidated Statement of Earnings instead of in additional paid-in capital. Additionally, the excess tax benefits are now presented as an operating activity on the Condensed Consolidated Statement of Cash Flows, rather than as a financing activity. ASU 2016-09 also changed the method the company uses to calculate shares for diluted earnings per share (discussed further in Note 7). The company adopted the provision of ASU 2016-09 on a prospective basis; therefore, these changes were effective beginning in the first quarter of 2017. The adoption of ASU 2016-09 did not have a material impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2017, the company adopted ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting” which eliminates the requirement to retrospectively apply equity method accounting when an investor obtains significant influence over a previously held investment. The adoption of ASU 2016-07 did not have any impact on the company’s financial position, results of operations or cash flows.

 

In the first quarter of 2017, the company adopted ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” This ASU clarifies that the novation of a derivative contract in a hedge accounting relationship does

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

not, in and of itself, require dedesignation of that hedge accounting relationship. The adoption of ASU 2016-05 did not have any impact on the company’s financial position, results of operations or cash flows.

 

New accounting pronouncements requiring implementation in future periods are discussed below.

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU amends the FASB’s hedge accounting model to enable entities to better portray their risk management activities in the financial statements. ASU 2017-12 expands an entity’s ability to hedge nonfinancial and financial risk components and eliminates the requirement to separately measure and report hedge ineffectiveness. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Management does not expect the adoption of ASU 2017-12 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and prospective application is required. Management does not expect the adoption of ASU 2017-09 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” For purchased callable debt securities held at a premium, ASU 2017-08 requires entities to amortize the premium to the earliest call date rather than over the contractual life of the instrument. Therefore, entities will no longer recognize a loss in earnings on the unamortized premium upon the issuer’s exercise of a call. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018. Management does not expect the adoption of ASU 2017-08 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires employers to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately from the service cost component. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect the adoption of ASU 2017-07 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect the adoption of ASU 2017-01 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” ASU 2016-18 requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect the adoption of ASU 2016-18 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 amends the guidance in Accounting Standards Codification (“ASC”) 230, which often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities and has resulted in diversity in practice in how certain cash receipts and cash payments are classified. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017 and should be applied on a retrospective basis. Management does not expect the adoption of ASU 2016-15 to have a material impact on the company’s cash flows.

 

7



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU replace the incurred loss impairment methodology in current practice with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Management does not expect the adoption of ASU 2016-13 to have a material impact on the company’s financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification,” which amends the existing guidance on accounting for leases. This ASU requires the recognition of lease assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted and modified retrospective application is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Management is currently evaluating the impact of adopting ASU 2016-02 on the company’s financial position, results of operations or cash flows.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to recognize any changes in fair value in net income unless the investments qualify for a practicability exception. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect the adoption of ASU 2016-01 to have a material impact on the company’s financial position, results of operations or cash flows.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 outlines a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards, and also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Major provisions include determining which goods and services are distinct and represent separate performance obligations, how variable consideration (which may include change orders and claims) is recognized, whether revenue should be recognized at a point in time or over time and ensuring the time value of money is considered in the transaction price.

 

As a result of the deferral of the effective date in ASU 2015-14, “Revenue from Contracts with Customers — Deferral of the Effective Date,” the company will now be required to adopt ASU 2014-09 for interim and annual reporting periods beginning after December 15, 2017. ASU 2014-09 can be applied either retrospectively to each prior period presented or as a cumulative-effect adjustment as of the date of adoption.

 

In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” which clarifies the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies how an entity determines whether to report revenue gross or net based on whether it controls a specific good or service before it is transferred to a customer. ASU 2016-08 also reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent.

 

In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which amends certain aspects of ASU 2014-09. ASU 2016-10 amends how an entity should identify performance obligations for immaterial promised goods or services, shipping and handling activities and promises that may represent performance obligations. ASU 2016-10 also provides implementation guidance for determining the nature of licensing and royalties arrangements.

 

In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which also clarifies certain aspects of ASU 2014-09 including the assessment of collectability, presentation of sales taxes, treatment of noncash consideration, and accounting for completed contracts and contract modifications at transition.

 

8



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which allows an entity to determine the provision for loss contracts at either the contract level or the performance obligation level as an accounting policy election.

 

In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies that the scope and application of ASC 610-20 on accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, applies only when the asset (or asset group) does not meet the definition of a business. ASU 2017-05, 2016-20, 2016-12, 2016-10 and 2016-08 are effective upon adoption of ASU 2014-09.

 

Management is currently evaluating the impact of adopting ASU 2014-09, 2016-08, 2016-10, 2016-12, 2016-20 and 2017-05 on the company’s financial position, results of operations, cash flows, related disclosures and internal controls. Adoption of these ASUs is expected to affect the manner in which the company determines the unit of account for its projects (i.e., performance obligations). Under existing guidance, the company typically segments revenue and margin recognition between the engineering and construction phases of its contracts. Upon adoption, the company expects that the entire engineering and construction contract will typically be a single unit of account (a single performance obligation), which will result in a more constant recognition of revenue and margin over the term of the contract. The company will adopt ASU 2014-09 during the first quarter of 2018. The company expects to adopt this new standard using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption.

 

(3)                   Change in Accounting Principle

 

In the third quarter of 2017, the company voluntarily changed the date of its annual goodwill impairment testing for all reporting units previously assessed as of March 1 to October 1. Prior to this change, goodwill impairment testing for certain reporting units was performed as of March 1, while goodwill impairment testing for certain recent acquisitions was performed as of October 1. This voluntary change is preferable as it better aligns the timing of the goodwill impairment testing with the completion of the company’s strategic and annual operating planning process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.

 

9



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(4)                   Other Comprehensive Income (Loss)

 

The tax effects of the components of other comprehensive income (loss) (“OCI”) for the three months ended September 30, 2017 and 2016 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2017

 

September 30, 2016

 

 

 

 

 

Tax

 

 

 

 

 

Tax

 

 

 

 

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

(in thousands)

 

Amount

 

(Expense)

 

Amount

 

Amount

 

(Expense)

 

Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

40,397

 

$

(15,169

)

$

25,228

 

$

(36,754

)

$

13,527

 

$

(23,227

)

Ownership share of equity method investees’ other comprehensive income

 

9,763

 

(3,278

)

6,485

 

4,086

 

(1,338

)

2,748

 

Defined benefit pension and postretirement plan adjustments

 

1,641

 

(615

)

1,026

 

2,062

 

(773

)

1,289

 

Unrealized gain (loss) on derivative contracts

 

(2,424

)

880

 

(1,544

)

3,032

 

(1,052

)

1,980

 

Unrealized gain (loss) on available-for-sale securities

 

50

 

(19

)

31

 

(449

)

169

 

(280

)

Total other comprehensive income (loss)

 

49,427

 

(18,201

)

31,226

 

(28,023

)

10,533

 

(17,490

)

Less: Other comprehensive income (loss) attributable to noncontrolling interests

 

59

 

 

59

 

(572

)

 

(572

)

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

49,368

 

$

(18,201

)

$

31,167

 

$

(27,451

)

$

10,533

 

$

(16,918

)

 

The tax effects of the components of OCI for the nine months ended September 30, 2017 and 2016 are as follows:

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2017

 

September 30, 2016

 

 

 

 

 

Tax

 

 

 

 

 

Tax

 

 

 

 

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

Before-Tax

 

Benefit

 

Net-of-Tax

 

(in thousands)

 

Amount

 

(Expense)

 

Amount

 

Amount

 

(Expense)

 

Amount

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

101,068

 

$

(37,953

)

$

63,115

 

$

(62,922

)

$

23,515

 

$

(39,407

)

Ownership share of equity method investees’ other comprehensive income

 

13,339

 

(4,930

)

8,409

 

5,106

 

(1,992

)

3,114

 

Defined benefit pension and postretirement plan adjustments

 

4,697

 

(1,761

)

2,936

 

1,445

 

(2,273

)

(828

)

Unrealized gain on derivative contracts

 

3,273

 

(1,267

)

2,006

 

4,480

 

(1,579

)

2,901

 

Unrealized gain on available-for-sale securities

 

31

 

(11

)

20

 

1,330

 

(498

)

832

 

Total other comprehensive income (loss)

 

122,408

 

(45,922

)

76,486

 

(50,561

)

17,173

 

(33,388

)

Less: Other comprehensive income (loss) attributable to noncontrolling interests

 

(89

)

 

(89

)

183

 

 

183

 

Other comprehensive income (loss) attributable to Fluor Corporation

 

$

122,497

 

$

(45,922

)

$

76,575

 

$

(50,744

)

$

17,173

 

$

(33,571

)

 

10



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in accumulated other comprehensive income (“AOCI”) balances by component (after-tax) for the three months ended September 30, 2017 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share of
Equity Method
Investees’ Other
Comprehensive Income
(Loss)

 

Defined Benefit
Pension and
Postretirement Plans

 

Unrealized Gain
(Loss) on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-Sale
Securities

 

Accumulated Other
Comprehensive
Income (Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2017

 

$

(248,362

)

$

(29,989

)

$

(165,757

)

$

(6,877

)

$

(276

)

$

(451,261

)

Other comprehensive income (loss) before reclassifications

 

25,169

 

6,485

 

 

(974

)

7

 

30,687

 

Amounts reclassified from AOCI

 

 

 

1,026

 

(570

)

24

 

480

 

Net other comprehensive income (loss)

 

25,169

 

6,485

 

1,026

 

(1,544

)

31

 

31,167

 

Balance as of September 30, 2017

 

$

(223,193

)

$

(23,504

)

$

(164,731

)

$

(8,421

)

$

(245

)

$

(420,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2017

 

$

(814

)

$

 

$

 

$

 

$

 

$

(814

)

Other comprehensive income before reclassifications

 

59

 

 

 

 

 

59

 

Amounts reclassified from AOCI

 

 

 

 

 

 

 

Net other comprehensive income

 

59

 

 

 

 

 

59

 

Balance as of September 30, 2017

 

$

(755

)

$

 

$

 

$

 

$

 

$

(755

)

 

The changes in AOCI balances by component (after-tax) for the nine months ended September 30, 2017 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share of
Equity Method
Investees’ Other
Comprehensive Income
(Loss)

 

Defined Benefit
Pension and
Postretirement Plans

 

Unrealized Gain
(Loss) on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-Sale
Securities

 

Accumulated Other
Comprehensive
Income (Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(286,449

)

$

(31,913

)

$

(167,667

)

$

(10,375

)

$

(265

)

$

(496,669

)

Other comprehensive income (loss) before reclassifications

 

63,256

 

8,409

 

 

2,151

 

(6

)

73,810

 

Amounts reclassified from AOCI

 

 

 

2,936

 

(197

)

26

 

2,765

 

Net other comprehensive income

 

63,256

 

8,409

 

2,936

 

1,954

 

20

 

76,575

 

Balance as of September 30, 2017

 

$

(223,193

)

$

(23,504

)

$

(164,731

)

$

(8,421

)

$

(245

)

$

(420,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(614

)

$

 

$

 

$

(52

)

$

 

$

(666

)

Other comprehensive income (loss) before reclassifications

 

(141

)

 

 

13

 

 

(128

)

Amounts reclassified from AOCI

 

 

 

 

39

 

 

39

 

Net other comprehensive income (loss)

 

(141

)

 

 

52

 

 

(89

)

Balance as of September 30, 2017

 

$

(755

)

$

 

$

 

$

 

$

 

$

(755

)

 

11



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The changes in AOCI balances by component (after-tax) for the three months ended September 30, 2016 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share of
Equity Method
Investees’ Other
Comprehensive Income
(Loss)

 

Defined Benefit
Pension and
Postretirement Plans

 

Unrealized Gain
(Loss) on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-Sale
Securities

 

Accumulated Other
Comprehensive
Income (Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2016

 

$

(239,217

)

$

(37,583

)

$

(164,647

)

$

(8,621

)

$

640

 

$

(449,428

)

Other comprehensive income (loss) before reclassifications

 

(22,545

)

2,748

 

 

1,233

 

(220

)

(18,784

)

Amounts reclassified from AOCI

 

 

 

1,289

 

637

 

(60

)

1,866

 

Net other comprehensive income (loss)

 

(22,545

)

2,748

 

1,289

 

1,870

 

(280

)

(16,918

)

Balance as of September 30, 2016

 

$

(261,762

)

$

(34,835

)

$

(163,358

)

$

(6,751

)

$

360

 

$

(466,346

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2016

 

$

354

 

$

 

$

 

$

(223

)

$

 

$

131

 

Other comprehensive income (loss) before reclassifications

 

(682

)

 

 

46

 

 

(636

)

Amounts reclassified from AOCI

 

 

 

 

64

 

 

64

 

Net other comprehensive income (loss)

 

(682

)

 

 

110

 

 

(572

)

Balance as of September 30, 2016

 

$

(328

)

$

 

$

 

$

(113

)

$

 

$

(441

)

 

The changes in AOCI balances by component (after-tax) for the nine months ended September 30, 2016 are as follows:

 

(in thousands)

 

Foreign
Currency
Translation

 

Ownership Share of
Equity Method
Investees’ Other
Comprehensive Income
(Loss)

 

Defined Benefit
Pension and
Postretirement Plans

 

Unrealized Gain
(Loss) on
Derivative
Contracts

 

Unrealized Gain
(Loss) on
Available-for-Sale
Securities

 

Accumulated Other
Comprehensive
Income (Loss), Net

 

Attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(222,569

)

$

(37,949

)

$

(162,530

)

$

(9,255

)

$

(472

)

$

(432,775

)

Other comprehensive income (loss) before reclassifications

 

(39,193

)

3,114

 

(4,617

)

(951

)

915

 

(40,732

)

Amounts reclassified from AOCI

 

 

 

3,789

 

3,455

 

(83

)

7,161

 

Net other comprehensive income (loss)

 

(39,193

)

3,114

 

(828

)

2,504

 

832

 

(33,571

)

Balance as of September 30, 2016

 

$

(261,762

)

$

(34,835

)

$

(163,358

)

$

(6,751

)

$

360

 

$

(466,346

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(114

)

$

 

$

 

$

(510

)

$

 

$

(624

)

Other comprehensive income (loss) before reclassifications

 

(214

)

 

 

156

 

 

(58

)

Amounts reclassified from AOCI

 

 

 

 

241

 

 

241

 

Net other comprehensive income (loss)

 

(214

)

 

 

397

 

 

183

 

Balance as of September 30, 2016

 

$

(328

)

$

 

$

 

$

(113

)

$

 

$

(441

)

 

12



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The significant items reclassified out of AOCI and the corresponding location and impact on the Condensed Consolidated Statement of Earnings are as follows:

 

 

 

Location in

 

Three Months Ended

 

Nine Months Ended

 

 

 

Condensed Consolidated

 

September 30,

 

September 30,

 

(in thousands)

 

Statement of Earnings

 

2017

 

2016

 

2017

 

2016

 

Component of AOCI:

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments

 

Various accounts(1)

 

$

(1,641

)

$

(2,062

)

$

(4,697

)

$

(6,062

)

Income tax benefit

 

Income tax expense (benefit)

 

615

 

773

 

1,761

 

2,273

 

Net of tax

 

 

 

$

(1,026

)

$

(1,289

)

$

(2,936

)

$

(3,789

)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

Commodity and foreign currency contracts

 

Total cost of revenue

 

$

1,346

 

$

(671

)

$

1,546

 

$

(4,555

)

Interest rate contracts

 

Interest expense

 

(419

)

(419

)

(1,258

)

(1,258

)

Income tax benefit (expense)

 

Income tax expense (benefit)

 

(357

)

389

 

(130

)

2,117

 

Net of tax

 

 

 

570

 

(701

)

158

 

(3,696

)

Less: Noncontrolling interests

 

Net earnings attributable to noncontrolling interests

 

 

(64

)

(39

)

(241

)

Net of tax and noncontrolling interests

 

 

 

$

570

 

$

(637

)

$

197

 

$

(3,455

)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

Corporate general and administrative expense

 

$

(39

)

$

97

 

$

(42

)

$

133

 

Income tax benefit (expense)

 

Income tax expense (benefit)

 

15

 

(37

)

16

 

(50

)

Net of tax

 

 

 

$

(24

)

$

60

 

$

(26

)

$

83

 

 


(1)            Defined benefit pension plan adjustments were reclassified primarily to total cost of revenue and corporate general and administrative expense.

 

13



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(5)                     Income Taxes

 

The effective tax rates for the three and nine months ended September 30, 2017 were 31.7 percent and 21.8 percent, respectively. The effective tax rate for the nine month period ended September 30, 2017 reflected a benefit due to a worthless stock deduction for an insolvent foreign subsidiary. The effective tax rates for the three and nine months ended September 30, 2016 reflected the favorable resolution of an IRS audit for tax years 2009-2013 and an increase in the research tax credit. All periods benefit from earnings attributable to noncontrolling interests for which income taxes are not typically the responsibility of the company.

 

The company conducts business globally and, as a result, the company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, the Netherlands, South Africa, the United Kingdom and the United States. Although the company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be materially different, both favorably and unfavorably. With a few exceptions, the company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2013.

 

(6)                   Cash Paid for Interest and Taxes

 

Cash paid for interest was $48 million and $55 million for the nine months ended September 30, 2017 and 2016, respectively. Income tax payments, net of refunds, were $168 million and $138 million during the nine-month periods ended September 30, 2017 and 2016, respectively.

 

(7)                   Earnings Per Share

 

Diluted earnings per share (“EPS”) reflects the assumed exercise or conversion of all dilutive securities using the treasury stock method. As a result of the adoption of ASU 2016-09, the excess tax benefits and tax deficiencies that were previously recorded to additional paid-in capital have been excluded from the hypothetical proceeds used to calculate the repurchase of shares under the treasury stock method beginning in the first quarter of 2017.

 

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Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The calculations of the basic and diluted EPS for the three and nine months ended September 30, 2017 and 2016 are presented below:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Fluor Corporation

 

$

94,463

 

$

4,804

 

$

131,049

 

$

210,940

 

 

 

 

 

 

 

 

 

 

 

Basic EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

139,887

 

139,250

 

139,716

 

139,142

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.68

 

$

0.03

 

$

0.94

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS attributable to Fluor Corporation:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

139,887

 

139,250

 

139,716

 

139,142

 

 

 

 

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

 

 

 

Employee stock options, restricted stock units and shares and Value Driver Incentive units

 

943

 

1,674

 

1,131

 

1,721

 

Weighted average diluted shares outstanding

 

140,830

 

140,924

 

140,847

 

140,863

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.67

 

$

0.03

 

$

0.93

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities not included above

 

5,045

 

4,097

 

4,639

 

3,977

 

 

During the nine months ended September 30, 2016, the company repurchased and cancelled 202,650 shares of its common stock under its stock repurchase program for approximately $10 million. No shares were repurchased during the three and nine months ended September 30, 2017, and three months ended September 30, 2016.

 

(8)                   Fair Value Measurements

 

The fair value hierarchy established by ASC 820, “Fair Value Measurement,” prioritizes the use of inputs used in valuation techniques into the following three levels:

 

· Level 1

quoted prices in active markets for identical assets and liabilities

· Level 2

inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly

· Level 3

unobservable inputs

 

The company measures and reports assets and liabilities at fair value utilizing pricing information received from third parties. The company performs procedures to verify the reasonableness of pricing information received for significant assets and liabilities classified as Level 2.

 

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FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The following table presents, for each of the fair value hierarchy levels required under ASC 820-10, the company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

Fair Value Hierarchy

 

Fair Value Hierarchy

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents(1)

 

$

14,775

 

$

7,387

 

$

7,388

 

$

 

$

21,035

 

$

21,035

 

$

 

$

 

Marketable securities, current(2)

 

75,911

 

 

75,911

 

 

54,840

 

 

54,840

 

 

Deferred compensation trusts(3)

 

37,846

 

37,846

 

 

 

37,510

 

37,510

 

 

 

Marketable securities, noncurrent(4)

 

130,631

 

 

130,631

 

 

143,553

 

 

143,553

 

 

Derivative assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

102

 

 

102

 

 

83

 

 

83

 

 

Foreign currency contracts

 

27,718

 

 

27,718

 

 

34,776

 

 

34,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

 

$

 

$

 

$

 

$

129

 

$

 

$

129

 

$

 

Foreign currency contracts

 

30,895

 

 

30,895

 

 

43,574

 

 

43,574

 

 

 


(1) Consists of registered money market funds and investments in U.S. agency securities with maturities of three months or less at the date of purchase. The fair value of the money market funds represents the net asset value of the shares of such funds as of the close of business at the end of the period. The fair value of the investments in U.S. agency securities is based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

(2) Consists of investments in U.S. agency securities, U.S. Treasury securities, corporate debt securities and commercial paper with maturities of less than one year that are valued based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

(3) Consists of a registered money market fund, a short-term bond fund and an equity index fund valued at fair value. These investments, which are trading securities, represent the net asset value of the shares of such funds as of the close of business at the end of the period based on the last trade or official close of an active market or exchange.

 

(4)     Consists of investments in U.S. agency securities, U.S. Treasury securities and corporate debt securities with maturities ranging from one year to three years that are valued based on pricing models, which are determined from a compilation of primarily observable market information, broker quotes in non-active markets or similar assets.

 

(5)     See Note 9 for the classification of commodity and foreign currency contracts on the Condensed Consolidated Balance Sheet. Commodity and foreign currency contracts are estimated using standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows.

 

All of the company’s financial instruments carried at fair value are included in the table above. All of the above financial instruments are available-for-sale securities except for those held in the deferred compensation trusts (which are trading securities) and derivative assets and liabilities. The company has determined that there was no other-than-temporary impairment of available-for-sale securities with unrealized losses, and the company expects to recover the entire cost basis of the securities. The available-for-sale securities are made up of the following security types as of September 30, 2017: money market funds of $7 million, U.S. agency securities of $10 million, U.S. Treasury securities of $75 million, corporate debt securities of $124 million and commercial paper of $5 million. As of December 31, 2016, available-for-sale securities consisted of money market funds of $21 million, U.S. agency securities of $11 million, U.S. Treasury securities of $87 million and corporate debt securities of $100 million. The amortized cost of these available-for-sale securities is not materially different from the fair value. During the three and nine months ended September 30, 2017, proceeds from sales and maturities of available-for-sale securities

 

16



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

were $34 million and $78 million, respectively, compared to $38 million and $252 million for the corresponding periods of 2016.

 

In addition to assets and liabilities that are measured at fair value on a recurring basis, the company is required to measure certain assets and liabilities at fair value on a nonrecurring basis. See Note 18 for further discussion of nonrecurring fair value measurements related to the company’s acquisition of Stork.

 

The carrying values and estimated fair values of the company’s financial instruments that are not required to be measured at fair value in the Condensed Consolidated Balance Sheet are as follows:

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(in thousands)

 

Hierarchy

 

Value

 

Value

 

Value

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash(1)

 

Level 1

 

$

1,060,967

 

$

1,060,967

 

$

1,133,295

 

$

1,133,295

 

Cash equivalents(2)

 

Level 2

 

751,287

 

751,287

 

696,106

 

696,106

 

Marketable securities, current(3)

 

Level 2

 

102,145

 

102,145

 

56,197

 

56,197

 

Notes receivable, including noncurrent portion(4)

 

Level 3

 

21,899

 

21,899

 

29,458

 

29,458

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

1.750% Senior Notes(5)

 

Level 2

 

$

586,607

 

$

612,877

 

$

523,629

 

$

551,582

 

3.375% Senior Notes(5)

 

Level 2

 

496,647

 

517,350

 

496,011

 

512,510

 

3.5% Senior Notes(5)

 

Level 2

 

493,080

 

515,920

 

492,360

 

508,230

 

Revolving Credit Facility(6)

 

Level 2

 

 

 

52,735

 

52,735

 

Other borrowings, including noncurrent portion(7)

 

Level 2

 

41,365

 

41,365

 

35,457

 

35,457

 

 


(1) Cash consists of bank deposits. Carrying amounts approximate fair value.

 

(2) Cash equivalents consist of held-to-maturity time deposits with maturities of three months or less at the date of purchase. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments.

 

(3) Marketable securities, current consist of held-to-maturity time deposits with original maturities greater than three months that will mature within one year. The carrying amounts of these time deposits approximate fair value because of the short-term maturity of these instruments. Amortized cost is not materially different from the fair value.

 

(4) Notes receivable are carried at net realizable value which approximates fair value. Factors considered by the company in determining the fair value include the credit worthiness of the borrower, current interest rates, the term of the note and any collateral pledged as security. Notes receivable are periodically assessed for impairment.

 

(5) The fair value of the 1.750% Senior Notes, 3.375% Senior Notes and 3.5% Senior Notes were estimated based on quoted market prices for similar issues.

 

(6) Amounts represent borrowings under the company’s €125 million Revolving Credit Facility which expired in April 2017, as discussed in Note 11. The carrying amount of the borrowings under this revolving credit facility approximated fair value because of the short-term maturity.

 

(7) Other borrowings primarily represent bank loans and other financing arrangements resulting from the acquisition of Stork. See Note 18 for a further discussion of the acquisition. The majority of these borrowings mature within one year. The carrying amounts of the borrowings under these arrangements approximate fair value because of the short-term maturity.

 

17



Table of Contents

 

FLUOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

(9)                   Derivatives and Hedging

 

The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility, may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally implements a hedging strategy utilizing derivatives or hedging instruments to mitigate the risk. The company’s hedging instruments are designated as either fair value or cash flow hedges in accordance with ASC 815, “Derivatives and Hedging.” The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The company also formally assesses, both at inception and at least quarterly thereafter, whether the hedging instruments are highly effective in offsetting changes in the fair value of the hedged items. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the effective portion of the change in the fair value of the hedging instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the effective portion of the hedging instrument’s gain or loss due to changes in fair value is recorded as a component of AOCI and is reclassified into earnings when the hedged item settles. Any ineffective portion of a hedging instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated or do not qualify as hedging instruments, the change in the fair value of the derivative is offset against the change in the fair value of the underlying asset or liability through earnings. The company does not enter into derivative instruments for speculative purposes. Under ASC 815, in certain limited circumstances, foreign currency payment provisions could be deemed embedded derivatives. If an embedded foreign currency derivative is identified, the derivative is bifurcated from the host contract and the change in fair value is recognized through earnings. The company maintains master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, the company reports the fair value of derivative instruments on a gross basis.

 

As of September 30, 2017, the company had total gross notional amounts of approximately $884 million of foreign currency contracts (primarily related to the British Pound, Kuwaiti Dinar, Indian Rupee, Philippine Peso and South Korean Won) and $0.4 million for a commodity contract outstanding related to hedging of engineering and construction contract obligations. The foreign currency contracts are of varying duration, none of which extend beyond December 2019. The commodity contract expires in December 2017. The impact to earnings due to hedge ineffectiveness was immaterial for the three and nine months ended September 30, 2017 and 2016.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of September 30, 2017 and December 31, 2016 were as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

September 30,

 

December 31,

 

Balance Sheet

 

September 30,

 

December 31,

 

(in thousands)

 

Location

 

2017

 

2016

 

Location

 

2017

 

2016

 

Commodity contracts

 

Other current assets

 

$

102

 

$

83

 

Other accrued liabilities

 

$

––

 

$

129

 

Foreign currency contracts

 

Other current assets

 

14,593

 

13,231

 

Other accrued liabilities

 

16,387

 

16,543

 

Foreign currency contracts

 

Other assets

 

8,967

 

21,545

 

Noncurrent liabilities

 

13,738

 

27,031

 

Total

 

 

 

$

23,662

 

$

34,859

 

 

 

$

30,125

 

$

43,703

 

 

The pre-tax net gains (losses) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2017

 

2016

 

2017

 

2016